In 2020, as the COVID-19 pandemic caused massive disruption to all industries — including the financial sector — more people turned to apps and non-traditional means of managing their finances than ever before. For example, in the United States, 59% of Americans use more fintech apps now than they did prior to the pandemic.
As the demand for innovation continues to increase and people become more comfortable with fintech apps, 2021 will see the rapid evolution of this industry. We can expect intuitive new solutions from disruptive startups set to revolutionize how people conduct their financial affairs.
With all these changes happening, what fintech trends will shape the financial sector in 2021? Let’s find out.
FinTech Trend #1: A Focus on Financial Literacy
Financial literacy is the ability to conduct effective personal financial management and make healthy financial decisions about debt, budgeting, and investing.
Many people struggle with financial understanding, which contributes to poor decisions that impact their lives continually for years or even decades.
Why is financial literacy important?
Put simply: Financial literacy is the essence of your relationship with money. Your success on this lifelong journey of learning dictates whether or not you — and potentially your family — will struggle or succeed with financial matters.
A recent survey revealed that over 70% of Gen Z respondents believed knowing more about finances could have helped them manage their money better throughout the pandemic.
How are FinTech start-ups supporting financial literacy?
Right now, most K-12 schools offer little if any financial literacy education. Fintech startups are wise to the problem and are taking action.
In the past five years, at least $535 million has been invested into 89 deals, with fintechs that provide savings platforms — mostly for children and young people. One of the leading startups in this trend is Greenlight Financial Technology, which guides parents to teach their children how to save using its app and debit card products.
What types of financial literacy apps are available?
Allowance apps enable parents to manage allowances, where children can earn rewards for tasks like completing chores or getting good grades. These apps typically provide prepaid cards for the kids so that parents can load them with money from their checking account.
An example of these next-gen apps is FamZoo, a virtual family bank that gives everyone in the family their own bank account. The app positions the children as customers and parents as bankers, enabling them to create budgets, set up automated allowances, and provide loans.
As more fintech startups aim to appeal to the mobile-first generations, we’ll see many financial apps that use gamification to reward users and encourage better financial management.
Financial literacy in 2021
There's mounting evidence that higher financial literacy is directly linked to a person's ability to overcome economic difficulties, such as the financial crisis in 2008 or the recent COVID-19 pandemic that threatened many people's jobs and livelihoods.
A recent study found that 55% of people believe they lack sufficient funds to cover all their needs. In 2021, we will see greater investment in financial literacy apps, as people of all ages want to develop a better understanding of finances to improve their standard of living, now and in the future.
FinTech Trend #2: Expanded Contactless Payment Options
The COVID-19 pandemic brought contactless payment mainstream. Handling cash or even inserting cards is no longer desirable as consumers look to minimize contact with public EPOS systems and ATMs.
MasterCard reported a 40% increase in the use of their mobile wallets during 2020, and we can expect this trend to continue in the future.
As lockdowns ease and people return to brick-and-mortar stores, contactless payments will dominate. There are several types to look out for in the months ahead, including QR code, peer-to-peer, and NFC payments.
What are QR code payments?
QR is the short form for Quick Response, which is a square, matrix barcode that contains information, like a web address. You can scan QR codes with a smartphone to perform tasks, like paying for items, placing orders, or verifying a location.
The key benefits of QR codes include:
- Stores a large volume of data.
- Enables users to scan codes from a screen or paper.
- Remains readable even if part of the code is damaged.
- Provides greater security through encryption.
What are peer-to-peer payments?
Peer-to-peer payments, or P2P payments, are transactions between two people using apps such as PayPal, Google Pay, and Venmo from mobile devices via a linked card or bank account. You can connect with other people for payments by searching for their username, email address, or phone number.
Common examples of peer-to-peer transactions include grandparents sending money to their grandchildren or people at a dinner party sending their share of the bill to one friend who picks up the tab.
What are NFC payments?
NFC payments are encrypted, highly secure transactions that use Near Field Communication (NFC) technology to transfer data between payment devices such as Google Play and Apple wallets.
While the mobile phones don't need to touch the payment terminal physically, they must be within a few inches to transfer information through close-proximity radio frequency identification.
NFC payments are increasingly common. Merchants who haven’t already done so should get a specialized card reader such as one offered by PayPal or Square to accept NFC payments.
Contactless payments In 2021
In 2018, just 3% of payments in the U.S. were contactless. Compare that finding to an NRF survey that claims 57% of people will continue using contactless payments after the pandemic is over.
The adoption of NFC payments and QR codes will increase as consumers prefer to pay in more secure and hygienic ways.
FinTech Trend #3: Enhanced Autonomous Finance
Autonomous finance is algorithm-driven financial management technology, which uses artificial intelligence (AI) and machine learning (ML) to make financial decisions on behalf of consumers without direct human input.
Considering that 68% of people agree that the pandemic elevated their expectations of digital capabilities on offer from companies, we expect autonomous finance to be one of the leading fintech trends that will transform how people and businesses interact in 2021.
How Autonomous Finance Works
Autonomous finance uses automation to provide personalized, optimized experiences tailored to specific financial processes. Through AI and ML, you define some preset rules and goals, and then a virtual private banker takes charge of your financial decisions.
Think of it as putting your finances in a “self-driving” mode with the virtual banker determining the best way to get to your destination.
Robo-advisors like Wealthfront or Betterment are good examples of autonomous finance at play. These algorithm-driven investment tools can collect information from customers about their financial situation and future goals and use the data to give advice and automatically invest in client assets.
How do businesses use autonomous finance technology?
Businesses use autonomous finance for various processes, from risk management to fraud prevention and process automation.
For instance, banking apps use AI to assess lending risk as it provides a quicker, accurate assessment of a potential borrower, leading to more informed, data-driven decisions. Plus, AI uses sophisticated rules to determine a customer’s credit score, helping distinguish between high-risk and credit-worthy applicants.
How do consumers use autonomous finance technology?
Consumers can benefit from autonomous finance through personalized banking and data-driven investments. People can use these intelligent systems to track income, recurring expenses, and spending patterns and create an optimized plan along with financial tips.
For instance, in banking, AI-powered chatbots offer detailed self-help solutions, allowing customers to resolve issues without calling the helpdesk. In addition, apps provide advice geared towards helping individuals achieve their financial goals, such as retirement investing and rebalancing their accounts.
What tools can consumers use for autonomous finance?
Here are some popular autonomous finance tools consumers can use to stay on top of their finances, from spending habits to investing and trading:
- J.P. Morgan Wealth Management
Autonomous finance In 2021
Autonomous finance will take center stage this year, with financial processes outsourced to tools, helping people automate recurring tasks such as bill payments, subscription renewals, and insurance.
Ultimately, this trend will save people time and provide a smoother, more convenient financial management experience.
FinTech Trend #4: More Payroll Options
Every week in the U.S., around $100 billion of earned but unpaid income is held by employers, much of it from hourly workers who live paycheck to paycheck. But fintech could change that.
Now, workers can get paid in real-time whether they’re a freelancer paid on a gig basis or a salaried employee who normally receives wages at the end of the month.
Here are a few emerging payroll methods:
On-demand pay is a payment system that allows employees to receive their wages as they earn them. Fintech companies using this model team up with employers, payroll systems, and human resource software solutions to enable employees to get paid before their regularly scheduled payday.
With on-demand payroll, employees feel more connected and valued by their employers, leading to higher employee engagement, productivity, and job satisfaction. And with those improvements, companies can increase employee retention rates.
Under this payroll system, employers allow employees to take a portion of their salary before payday. The idea is to enable employees to get through to payday without expensive payday loans.
An excellent example of a business that uses this model is PayActiv. The company gives salary advances to its employees at no extra charge as long as they get paid through a PayActiv Visa debit card.
A crypto-powered payroll enables employers to pay workers through various cryptocurrencies. Companies may offer to pay all or just a portion of the salary in cryptocurrency, attracting an increasingly tech-savvy workforce.
Receiving wages in cryptocurrency gives employees more freedom over their funds and encourages investments — albeit speculative ones in the notoriously volatile crypto market.
This payroll option also helps employers make fast global payments without any intermediaries causing payment delays.
Payroll fintech in 2021
This year, there will be an increase in payroll fintech as companies edge toward letting employees decide how they receive their salary.
By leveraging various payroll options, businesses will provide greater autonomy for their employees, helping them get their wages on their own terms and offering them more financial flexibility and security.
On top of that, integrating fintech into a payroll system makes paying employees a seamless, hassle-free process for employers and workers.
FinTech Trend #5: Digital-Only Banks
Digital-only banks, also known as neobanks, offer banking services via digital platforms such as mobile devices. Unlike traditional banks, neobanks don’t have brick-and-mortar offices where customers can walk in and conduct their financial business with a teller. Instead, people perform all transactions remotely.
The adoption of digital-only banks is on the rise. According to the Evolution of the US Neobank Market survey, 89% of Americans use mobile banking services, with 70% saying mobile banking is their preferred way of accessing their account.
How are neobanks different from traditional banks?
The most apparent difference between digital-only banks and traditional banks is the lack of a physical location. As they’re entirely online-based, digital-only banks provide financial services in the most simplified fashion, using real-time data, electronic documentation, and automated processes.
Other fundamental differences between the two are that neobanks:
- Aren’t subject to federal or state regulations like traditional banks.
- Don’t offer credit facilities such as overdrafts.
- Team up with traditional banks to provide federal insurance for customer deposits.
- Focus primarily on providing seamless financial services and processes for mobile devices.
What are the pros of neobanking?
The main advantages of digital-only banks include:
- Low startup costs – Neobanks don’t require a lot of money to start, thanks to fewer regulations.
- Quick processing times – Many neobanks skip the rigid, time-consuming processes involved in loan applications. By leaning toward innovative strategies, they can quickly evaluate credit and approve credit loans within minutes.
- Convenience – Customers can operate their neobank accounts from the comfort of their homes or wherever they are, even outside traditional banking hours.
What are the cons of neobanking?
Disadvantages of digital-only banks include:
- May not suit people who aren’t tech-savvy – Customers who aren’t comfortable with technology or who don’t keep up with fintech trends may have a hard time setting up and operating neobank accounts.
- No physical address – With a lack of branches and personal advisors, neobanks may not appeal to customers who prefer face-to-face banking services.
- Fewer regulations than traditional banks – Lack of stringent regulation measures means customers don’t have any legal remedies if they run into problems such as fraud or loss of money due to using neobanks.
Neobanking in 2021
Even though neobanking may not entirely replace traditional banks, it will change the financial services scene significantly. In 2021, we will see more people and businesses sign up for neobanking, especially for tasks that don’t require visiting a traditional bank, such as money transfer or paying employees.
These fintech trends re-emphasize the need for financial institutions to invest in innovation and new technology in the years ahead.
PayPal is currently building a “super app” that will allow people to shop at millions of merchants while completing financial processes usually offered by their banks. When you consider this development alongside the rise of neobanks, it’s clear that traditional banks must rethink their operations and how they can meet the modern customer’s needs in the fintech era.
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About the Author
Robbie Richards is an expert contributor to the MassChallenge blog for over two years. He writes on innovation approach, entrepreneur resources, and business and marketing trends. He has been published in Forbes, Ahrefs, WordStream, and many more.