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2021 Trends in Fintech

December 8, 2020

This post is part of G2's 2021 digital trends series. Read more about G2’s perspective on digital transformation trends in an introduction from Michael Fauscette, G2's chief research officer and Tom Pringle, VP, market research, and additional coverage on trends identified by G2’s analysts.

Fintech Trends in 2021

Last year I took a look at some of the 2020 fintech trends that I expected to shape the financial services industry. This year, I’m looking ahead to 2021 and the trends that will drive the industry forward.

Financial data APIs drive digitization

Financial data APIs are at the heart of the techfin expansion. On G2, we saw a 133% increase in traffic to the Financial Data APIs category from December 2019 to July 2020. Our Digital Banking Platforms category has also seen record traffic over the past few months. This increased interest in solutions geared towards digitizing the financial services product portfolio has been accelerated by the current pandemic. 

Financial services’ customers increasingly exist online, and financial institutions need to meet them where they are if they want to maintain market share in the face of a wave of game challengers in neobanks and fintechs that are looking to take it from them. One way to stay in the game is to partner with tech companies that excel at creating customer-centric digital experiences. These partnerships typically involve the tech company using a bank’s API to host the desired financial product within their application. Banks get access to the companies’ customer base, and the tech companies get to offer their customers financial services, often white labeled.

Big tech companies in particular are making a significant splash when it comes to expanding into financial services. Google recently announced an expansion of their banking partnership network as they leverage those banks’ licenses and customer networks to offer their Google Pay customer base digital checking and savings accounts. I expect banks to continue to expand their partnerships with third parties in 2021. 

In Europe, PSD2 has directed the opening of banks’ data sets to qualified third parties, typically neobanks, fintechs, and financial data aggregators. I don’t expect to see similar regulations passed in the US, but I do expect banks to continue to open their systems to qualified third parties out of necessity. Incumbents need to offer their customers well-crafted digital solutions, and these API-driven third party connections are the way to do so. They are leveraging their banking licenses to take advantage of the innovations of fintechs and tech companies.

Related: The API-driven Expansion of Banking

Continued proliferation of artificial intelligence (AI)

AI-first fintechs and challenger banks (digital-first and digital-only banks), who have baked AI into their product offerings from the start are in an advantageous position to gain digital-first customers. Fintechs and neobanks offer better crafted digital experiences with more personalization. While the products they offer, like data-fueled robo advisors, may be somewhat innovative, it's the well-crafted user experience and ease of use that draws many customers to their services.

According to a study by the Economist Intelligence Unit (EIU), 85% of financial services executives plan to increase their AI spend through 2025. AI investment is key to fueling an omnichannel, digital-first strategy for financial services companies, who already have massive amounts of the customer financial and user behavior data necessary to fuel AI solutions. AI-powered solutions like robo advisors and intelligent virtual assistants are a way for financial institutions to provide value to customers and will become increasingly important as fintechs and techfins start to offer robust financial products with a well-built user experience by leveraging their partnerships with incumbent banks. 

Related: AI in Fintech: Use Cases and Impact

AI-powered tools are implemented to save on operational costs, reduce risk, automate credit decisioning, detect fraud, offer predictive analytics to improve trade decision making, and reduce overhead. Each area presents a significant opportunity as well as a challenge. 

G2’s AI market research analyst, Matthew Miller weighs in on how banks can start to successfully implement AI solutions: 

“As companies shift to a digital-first strategy, the amount of data at companies’ disposal will be immense, and the potential to mine and extract this data will be exciting. However, it is key that first and foremost businesses focus on the quality of this data, spending a significant amount of time preparing and cleaning it. Only with a properly prepared input can they ensure an accurate and successful output.

Once this is achieved, businesses can begin to experiment with machine learning. It is best to start small and test, before jumping into the deep-end. As such, businesses can first try to use an off-the-shelf natural language understanding algorithm on their text data. Through testing and tweaking they can slowly but surely see results.”

Implementation of AI solutions in a legacy environment that was designed to work more or less in a bubble can be difficult. This difficulty in adopting the technology necessary to become more agile and leveraging all of the considerable technological tools at financial institutions’ disposal, has driven another industry trend—mass migration to cloud environments. Migration to the cloud frees the data that has been locked away in the dusty, inaccessible legacy systems. Easier access to the massive troves of data that incumbents have means more opportunities to use that data to fuel AI-powered solutions.

Financial institutions increase cloud spend

Cloud spend among financial institutions has been on the rise and will continue to increase at an accelerated rate. Finservs are typically using a mix of public and private clouds to facilitate their shift in strategy, with 18% of financial companies already running hybrid clouds. In order to manage services across multiple public and private cloud environments, companies are turning to hyperconverged infrastructure solutions (HCI), which unify infrastructure management across disparate environments. 

Financial institutions are making the jump to the cloud, despite the data security risk and the cost associated with it, because they have to. The security risk occurs because of the increased attackable footprint as data travels to and from the cloud and the potential vulnerabilities of applications hosted in cloud environments, which give bad actors more opportunity to attack.

Aaron Walker, G2’s research principal of cybersecurity, weighs in on security challenges for financial institutions moving to and operating in cloud environments. 

“I see two big challenges for FSIs. Micro-segmentation will help simplify access control, but maintaining visibility in a hybrid or multicloud environment is very difficult, especially for companies hoping to achieve zero trust. Each segment, role, privilege, etc. requires unique configuration and continuous monitoring that many companies do not have the staff to support. 

The other issue comes from end users. Phishing is the most common form of cyberattack and FSIs are the most frequent targets. Aside from managing actual security, companies have to bolster security training and develop a frictionless user experience to prevent social engineering attacks without putting the onus on the user.”

Agile competitors, fintechs and techfins, are cloud native and reap the benefits of increased maneuverability and rapid product development and deployment that come with being born in the cloud. Migrating to and operating in the cloud, particularly in multiple public and private environments, brings a new batch of security considerations. Incumbents making the jump need to understand the shared responsibility model and what portion falls on them. Additionally, connecting with multiple third parties (fintechs and financial data aggregators) and handing those third parties customer data increases the attackable footprint for financial institutions.

Incumbents need to make the shift to a cloud-centric infrastructure in a studied way with security and privacy considerations baked in. Cloud providers are already starting to offer financial services-specific infrastructure services with financial services security and compliance features. I expect even more robust, financial services focused cloud offerings to pop up as finservs increase their spending and migrate more of their operations to various cloud environments.

Banks shift to a digital-first strategy

60% of banks have either shortened opening hours or closed physical branches entirely, according to a Deloitte study on digital banking maturity. Customers live in the digital world, and banks need to meet them where they are to be successful going forward, as banks that champion digital solutions perform better on return on equity and cost/income ratio. 

With in-person visits expected to drop significantly in the next few years (even without taking the pandemic into account), digital-first and digital-only challenger banks are going to be in an advantageous position to gain market share. Incumbents will accelerate their digital product strategy to capitalize on the shift taking place amongst their customers. Consumers are using digital financial applications at an increasing rate, and the current pandemic has accelerated this trend. According to a study commissioned by Plaid, 59% of adults are using more fintech apps to manage their money than before the COVID-19 pandemic. Banks will need to adapt and offer a robust slate of digital products with customer-centric design in order to compete. 

Switching costs for financial services users are lower than ever as digital customer onboarding solutions automate know your customer (KYC) compliance hurdles and challenger banks tout account opening times of a few minutes. The competitive moat of a government-issued banking license is wide, which gives incumbents some room, but they will continue to shift to a digital-first strategy, primarily through connections and partnerships with third parties. 

Our analysts reveal what's big right now in their 2021 Digital Trends reports.     See our predictions here →

Shift from competitors to partners

For a long time, incumbent financial institutions looked at fintechs as a threat to their long-standing, relatively unchallenged dominance. Now, fintechs have come to the realization that they cannot circumvent the regulations of the financial services industry, and incumbents have realized that the threat presented by digital-first banks and fintechs is not going away; both sides need to work with one another. 

Fintechs need the banking license that incumbents provide, and incumbents need the digital prowess of fintechs and tech companies looking to offer financial services. Incumbents are investing significant sums in early-stage fintechs even as VC funding has slowed significantly during the pandemic. 

The reasons for doing so are twofold:

  1. They have early access to fintechs creating new technologies that they may adopt or leverage their investment to partner with.
  2. Their investments can act as a potential mergers and acquisitions (M&A) pipeline, depending on the success of the fintech they’ve invested in. 

As fintechs look for partners in a post-COVID-19 world in which funding has dried up and incumbents look for help reaching digital-first consumers, a partnership model makes increasing sense for both sides. 

Looking forward

The financial services industry is changing in significant ways. Financial institutions are migrating to the cloud and opening their data sets via APIs to facilitate connections with fintechs and third-party financial data aggregators—they need to do so in order to stay relevant in a world filled with legitimate threats to their market share. AI will play an important role in reducing costs and improving product lines as well as back office efficiency. 2021 will see the acceleration of the digitization of the financial services industry, and customers will benefit from cheaper, more robust offerings. 

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