By Jeff Domansky, March 16, 2021
The payments and fintech world looks very different today after one year of Covid disruption.
The pandemic’s economic, work and health impacts created a perfect storm of challenges, business opportunities, and the financial industry. As a result of massive changes in consumer shopping habits and the fast adoption of new payment preferences, the Deloitte Center for Financial Services (DCFS) says challenges loom for the payments industry.
Sudden impact & momentum shift
In 2019, payment cards generated $6.7 trillion in consumer and commercial purchases, record levels of transactions, opportunities, and profitability.
By Spring 2020, point-of-sale transactions plunged as retailers closed, consumers worked from home, and shoppers turned online to buy many products and services.
In March and April last year, the JPMorgan Chase Institute reported a massive decrease of 40% in discretionary spending at point-of-sale (POS). The impact hit travel, entertainment, hospitality, and restaurants hardest.
As the year progressed, payment companies saw reduced fees and a jump in chargebacks. Banks and lenders experienced higher business bankruptcies. Suddenly, slow adoption disappeared, and consumers turned to contactless payments and digital banking at a pace no one anticipated.
Digital payments and apps growing fast
“In 2020, one in seven people in the US downloaded at least one finance app to their smartphone,” Gilles Giudicelli, head of research, insights, and marketing analytics at Criteo, noted in a recent report. Other highlights told a similar story:
- JD Power reported nearly 40% of Americans accessed their mobile bank apps more than ever during the pandemic
- digital transactions grew quickly; for example, Zelle processed more than 1 billion transactions in 12 months, with 323 million alone in Q3 2020
- EY found 43% of Americans changed the way they bank during the pandemic
- 15% to 20% of consumers expect to increase their use of digital channels once the crisis has passed, and 85% indicate digital was their preference for handling everyday transactions – even for those 65 and older, according to McKinsey.
Traditional barriers to digital transformation gone
Despite the challenges, there are opportunities ahead for payments leaders, fintech, and financial institutions. 35% of consumers increased their digital banking in every demographic.
Deloitte highlighted just a few of the sudden shifts that will impact payments and banking ahead:
- Visa saw 13 million Latin Americans make their first online purchase in March 2020
- MasterCard and 40% growth in contactless transactions by March 2020
- work from home jumped dramatically; for example, Bank of America and Wells Fargo had 150,000 (70%) of their employees working from home; Standard Chartered had 84,000 employees, and TD Bank 80% of its traders working from home
- Nationwide Insurance enabled 98% of its workers to work from home and just five days.
Many of these and other workers around the world will not work from the central office in the future.
Banks face increased pressure on profits from lower interest rates, reduced credit card spending by consumers, and new lower-cost, more efficient, digital competitors.
Opportunities for payments and fintech
Covid 19 has unlocked opportunities for payments, fintech innovators, and even traditional banks. “The bank’s sales jumped from 25% digital to nearly 75% digital during Covid 19, condensing ten years’ worth of changes in the two months,” William Demchak, CEO of PNC Bank, told CNBC.
The payback and survival depend entirely on how and how quickly the various FI players respond.
Deloitte notes that fintechs have several advantages as mobile-first channels such as strong presentation, onboarding, underwriting, data visualization, and transaction context skills.
Fintech’s biggest opportunities include servicing the unbanked and underserved population, empowering gang workers, harnessing the Internet of things, and partnering with traditional financial institutions and new industries such as insurance and wealth management.
Traditional bank opportunities
Deloitte says digital-only banks have an average cost-to-income ratio of only 47%, much lower than the 73% for less digitally-enabled banks. Banks need to up their digital game:
- key processes in their value chain must be digitized and transformed for efficiencies and to meet the new reality – think APIs, automation, AI, and cloud services
- creating new partnerships with fintech innovators; for example, PNC Bank partnered with OakNorth for scenario-based readings for its business loan portfolios
- reimagining work from home and workplace culture to accommodate both their staff and the needs of their customers for new and different services
- tackling current and future cyber insecurity issues in the new work and services environment
- embracing open banking and managing risk for customers and in new relationships with fintechs and other partners; companies are often at risk of data breaches by partners and service providers, for example, so a whole new security mindset is needed
- finding new ways to build loyalty and service to customers through hyper-personalized, advice-driven services, call center innovations,
- efficiencies and smart reinvestment in contactless, tap-to-pay, AML, KYC, AI, and other digital transformations.
The report concludes: “Looking ahead, organizations must harness these changes to culture and behavior brought on by the crisis to accelerate their digital transformation journeys and be careful not to fall back on existing patterns once the urgency subsides. Doing so will be essential to surviving – and thriving – in the new normal but is currently taking shape.”
Covid-19 created both the challenges and the opportunities for payment providers, traditional banks, and fintechs alike. The race ahead is for the innovators, disruptors, and the agile.
You can read more of Deloitte’s financial services insights and reports:
Beyond COVID-19: New opportunities for fintech companies
Realizing the digital promise: Covid-19 catalyzes and accelerates transformation in financial services
Other PaymentsNEXT stories on fintech and digital transformation:
Online transactions soared in 2020, fraud skyrocketed too
How have payments changed in the past 10 months?
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