Fintech, a sector already experiencing explosive growth over the last year, is in the spotlight once again as the COVID-19 pandemic heightens the urgency for more online banking and financial services. Innovators in the fintech space have an unprecedented opportunity to leverage their technology to meet current challenges and to position themselves as indispensable tools for consumers and financial institutions.

Fintech first gained traction after the 2008 recession with apps geared toward peer-to-peer lending and other services not provided by institutional banks. As the industry grew more robust, fintech has also become a useful tool for large financial institutions that want to offer more online services and attract new customers with easy-to-use apps. As COVID-19 started to severely limit options for in-person financial services, fintech startups and big banks moved quickly to shift even more in-person services online and strengthen their collaborations. Today, you can manage most of your banking, from check deposits to investments, from a smartphone app or website.

Going cashless

Before the COVID-19 pandemic forced many bank branches to close or limit their brick-and-mortar services, cashless banking, e-commerce, and app-based transactions were already transforming how we use and exchange money. With coins becoming scarce and cash serving as a convenient vehicle for transmitting COVID-19, the race to increase the accessibility of cashless banking options is more important than ever. Though no society has gone completely “cashless,” the use of cash has declined dramatically in some countries. In Sweden, just 1% of that country’s 2019 transactions were made in cash. Around the world, Google Pay saw its user base grow most in Russia and France, with Cash App, Zelle, and Venmo seeing their biggest gains in the U.S. In China, where mobile phones are ubiquitous and distances between rural areas and urban centers can be prohibitive, cashless commerce and mobile transactions have become a way of life. Try buying some fruit from a street vendor and you’ll likely need to pay using the WeChat app. In 2017, almost half of all digital payments were made in China. By combining e-commerce, payments, and social media into the same apps, Chinese tech companies found a hugely successful formula.

A rush to digitize

The transition to digital banking services gained new urgency this year as consumers found themselves faced with bank closures and stay-at-home orders. In Europe, fintech app use rose by 72% in March alone; in the U.K., more than 6 million people downloaded digital banking apps for the first time. As people seek to conduct more of their day-to-day tasks online, digitizing services is more crucial than ever for companies that want to stay relevant to consumers.

For big banks, fintech tools offer a cost-effective way to integrate the mobile and digital services that their consumers demand without reinventing the wheel. In 2018, major banks participated in 45 equity deals with fintech companies. Institutional players like Goldman Sachs and Citigroup are making active investments in fintech, particularly apps that focus on real estate, payments and blockchain, and data analytics — sectors that play into the big banks’ future development strategies. Startups such as Square provide valuable connections to small businesses and individual consumers. These consumer-focused apps can transform big banking operations and provide avenues for improved services with low overhead and reduced onboarding costs. For their part, fintechs benefit from big acquisitions and the opportunity to disrupt from within.

According to an April report from Liftoff and App Annie, the conversion cost (getting a user to install the app) dropped by a whopping 76%, while registration rates went up by 71% in 2019 — before the pandemic. Since March, people are spending even more time actively using and engaging with their financial apps.

Fintech for small businesses

When it comes to small and medium-sized businesses, fintech innovations have proved invaluable in helping them keep operating during the pandemic, providing services that are traditionally too expensive for small businesses. For many who don’t have the resources to shift to online services, new fintech apps with low onboarding costs can make the difference in their ability to reach customers.

Individual consumers can benefit from fintech apps too — from automating bills and savings, to getting help with budgeting and investing, dozens of apps offer services that make it easier for people to organize, understand, and manage their finances.

Challenges and opportunities

New financial technology has the potential to speed up the economy’s recovery rate and help small businesses keep their overhead costs low and stay competitive. The agility and flexibility of fintech startups gives them a major advantage, as they can easily pivot their products and services during unexpected crises. However, with investors tightening their purse strings and hedging their bets more carefully, encouraging new investment can be a tough sell. New startups must seize the attention of investors and project more credibility than ever before. Their consumers, facing massive financial uncertainty, are asking for relief and support, which puts fledgling companies in a precarious position. And while app-based finance has grown exponentially, the fintech revolution leaves out large portions of the population who lack broadband, bank accounts, or a fixed address.

Analysts anticipate accelerated partnerships between fintech startups and financial institutions, pairing the agility and digital solutions of fintech with the capital, access, and infrastructure of big banks. If they can rise to the challenge, these partnerships will offer impactful, innovative solutions to individual consumers and small businesses.

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