Before I (and Fintech Takes) take a break for the holidays, I wanted to offer my small contribution to the grand tradition of new year predictions. For this year, I decided to pour the majority of my energies into a single prediction for the coming decade that I feel really confident in and then round that out with 19 quick and (possibly) ill-considered guesses for what else might happen in the 2020s.
Fintechs will come to love (or at least quietly appreciate) regulations over the next decade. This is the big prediction that I feel good about. My full reasoning for this prediction can be found here — Dr. Strangelove or: How Fintechs Will Learn to Stop Worrying and Love Regulation.
Banks will get more creative in their approach to creating digital spin-offs. Cute names and emojis will give way to more structurally interesting strategies. My favorite so far is Surety Bank in Florida, which is launching three different digital-only bank brands targeting three different niche markets (including one focused on professional athletes and their fans).
More companies will test out subscription models in banking. MoneyLion already uses a subscription model, with a free tier and a paid tier. Other challenger banks (and maybe a few established banks) will dip their toes in the water.
Gen Z will become the new obsession of bank marketers. To paraphrase a favorite movie quote of mine:
(It’s depressing to realize that most Gen Zers won’t get that reference)
Regulators will become fierce advocates for anti-money laundering (AML) technology and analytics. Regulators are conservative by nature and a lot of things they allow banks to experiment with come with lots of boundaries and cautions (a good example of this yellow light approach is alternative data). Following massive scandals in Europe and Australia, regulators will give banks the greenest of green lights to banks experimenting with new solutions for AML (especially machine learning) because our current 99% failure rate is utterly unacceptable.
Collections will become an area of focus for fintech investment and bank-fintech partnerships. If you’re a fintech (or an investor focused on fintech) and you’re looking for an area of banking that is inefficient, exceedingly frustrating for customers, and in desperate need of innovation, look no further than debt collection. As I’ve argued before, it’s time for digital transformation to hit collections.
More examples of embedded financial services will appear and they will be extremely difficult to predict. The cool thing about Matt Harris’s (@mattcharris) thesis about fintech becoming an ingredient used in other technology businesses (read part 1 and part 2 if you haven’t already) is that, if true, a whole bunch of niche financial services providers may start randomly popping up. My favorite example from Mr. Harris’s essays is Quip selling dental insurance.
POS lending will continue to eat into credit card. According to Visa, 5% of the credit card market is now being disintermediated by fintechs offering point-of-sale and installment lending. This trend will accelerate in 2020, helped along by the continued shift from brick and mortar to E-commerce.
Established fintechs will jump into the credit card business. Fintechs that have succeeded in building up a user base will turn their attention to profitability and will thus become enamored with lending (particularly credit card).
Community banks and credit unions will see major declines in their credit card portfolios. Between fintechs, large tech companies like Apple, and the big issuers already in the market, there is very little room for smaller FIs to distinguish themselves in credit card. This problem is compounded by the fact that credit card customers are generally motivated by things (rewards, digital capabilities, etc.) that community banks and credit unions already struggle with.
Community banks and credit unions will start to turn the tide in small business lending. Small business owners are generally more satisfied working with smaller FIs, according to the Federal Reserve. The problem has been that those institutions haven’t been able to deliver the fast and seamless lending experience that SME borrowers strongly prefer. This will begin to change as fintech lending capabilities become increasingly available to community banks and credit unions via partnerships, acquisitions, and white label offerings focused on tier 2 and 3 FIs.
The ethics of fintech investments will be under more scrutiny. The inclusion of the names of specific venture capital firms in mainstream press stories about the bad deeds of fintechs and their leaders is something I don’t recall seeing much, until recently:
Consumers in Indonesia, another market primed for fintech growth, last year complained about the aggressive collection tactics employed by a lending startup then called Rupiah Plus, backed by the prominent Silicon Valley venture-capital firm Sequoia Capital.
This level of public scrutiny will hopefully put more pressure on fintech investors to encourage/enforce ethical behavior within the companies that they are invested in.
The experience for existing bank customers opening up new accounts will get significantly better. Banks will continue to trail fintechs and big tech companies in digital account opening overall, but the account opening process for existing bank customers will improve as banks come to rely more on cross-sell to drive portfolio growth.
The conversation about loyalty, attrition, and switching banks will evolve. Consumers have more choices than ever before, but most consumers still don’t switch primary banks. What does that mean? Does it even matter in the age of paycheck motels? (copyright @rshevlin). Expect a more interesting and nuanced discussion around these questions in 2020.
Fintechs will begin to bring innovation to mortgage servicing. It’s the lowest of low hanging fruit, from a fintech’s perspective. Terrible customer experience. Almost no competition. Potential for long-term, data-rich relationships. Someone will start trying to fix this in 2020.
Forward-thinking banks will deploy strategies to create new proprietary data that they have no immediate ideas how to leverage. In the age of AI, generating more proprietary data than your competitors is more important than knowing exactly how that data will be used.
Algorithmic fairness will become a data management problem. Ensuring that algorithms are making fair, unbiased decisions will obviously be a huge priority in the 2020s. This will necessitate working backwards from the algorithms themselves to the data that was used to train them. Companies will need to be able to explain exactly where the data came from and what biases may or may not have gone into generating it. Call it algorithm supply chain management.
Behavioral biometrics will realize its potential. Need (frictionless, digital identity authentication) will meet opportunity (ubiquitous smart devices that can capture behavioral data and sophisticated ML algorithms that can efficiently build and continuously update identity profiles based on that data).
Banks will start to think about cost reduction as a sustainable competitive advantage rather than just a short-term mechanism to manage profitability. I haven’t been able to get this Chris Skinner (@Chris_Skinner) blog on WeBank running customer accounts for 50 cents per year out of my head since I read it.
Quantum computing will take the title of “Most Frequently Cited, but Least Understood Technology that will Definitely Maybe Change Banking Forever”. Blockchain, you had a good run.