Throughout recent history, financial institutions are on a rollercoaster of fleeing from paper-based mechanisms to computerization, with the rise of the internet and the shift to digital banking technology. It’s hard to realize that the first ATMs and the establishment of SWIFT happened in the 70’s. Current society requires 24/7 services with customers bringing in new needs each day. No wonder that European fintech is smoking hot and raised more capital in 2020 than any other industry vertical (a hefty 20 billion USD invested into European fintech startups in the last two years).
During the current pandemic financial institutions were confronted with even more urgent needs. Cybersecurity issues multiplied with hundreds of millions suddenly working at home. As cash is king during crises, the need for loans exploded with lacking outdated know-your-customer (KYC) systems. And generation gaps complicate ‘granny proof’ services to all. To make things more difficult, the new tech kids on the block are forcing traditional banks to speed up even more innovative products. The rise of (already 70+) fintech unicorns creates all kinds of lending and payment platforms that offer efficient and smooth interactions, and is putting laggards under severe competitive pressure. They demonstrate the success of all-in platforms, with a broad scope of on demand driven services, preferably in one neat environment. Bank-fintech startups partnerships will thrive further in 2021, with the first still dominating data, banking expertise and legacy-systems, and the latter offering user friendly tech.
The pandemic is sharpening tech competition. Startups, with an impacted runway, can tackle actual challenges: instant and detailed cash flow management, liquidity solutions, invoice protection and will be in pole position during the recovery phase as well. The same goes for insurtech, with plenty of (fraudulent) claims, revenue losses, shutdowns, supply issues, employee compensations, etc. following the pandemic increases and cyber insurance, with remote working creating further risks of hacking and cyberattacks.
When it comes to technology, financial institutions are realizing that startups not only can deliver nice-to-have front-end services but can modernize or integrate the more essential back-end operations, still very cumbersome projects in connecting different internal silos. In addition, strategically banks and insurers find it difficult to define which (delicate) back-end challenges should be prioritized, often resulting in projects that already are fixated too much on hyped technology instead of starting from the nature of the challenge. Blockchain and other ledger technology is a good example of tool-fetishism where other technology can easily provide alternative tools.
On macro-economic level Europe is under pressure as the global fintech benchmark, with Covid shortening the runway for many fintechs, and posing a serious threat to the sector. The Asian scene, apparently ahead in crisis recovery, has been picking up rapidly with younger demographics, less regulation, top-down efforts from government and financial institutions, and digital savvy citizens, boosting both the entrepreneurial scene and investment side. It will be interesting to see how cross continental fintech ties will develop further, with Asian investors investing into European fintech at record levels.