What’s next for financial services post pandemic?

In 2020, the Covid-19 pandemic hit the business world hard, and the following restrictions to travel and work led to hard times for many industries. However, the pandemic hit different industries in different ways, and for some, the effect was positive.

Fintech was one of the biggest winners of 2020 and 2021, as the industry grew in importance and size as financial services institutions hastily deployed digital transformation plans. The growth was global, but the effect was more pronounced on the growing markets.

A joint study by the World Bank, World Economic Forum, and other institutions gathered data from 1,385 fintech firms in 169 countries regarding growth in the first half of 2020. According to the study, digital asset exchanges, payments, savings, and wealth management firms reported a 13 percent growth in transaction numbers, and an 11 percent growth in transaction volumes in H1 2020 compared to the same period of 2019.

Regionally, the Middle East and North Africa region saw the highest growth of any region, growing 40 percent within the year between H1 2019 and H1 2020. Yet, there is a lot of growth potential in the area, as a Deloitte study reports that only 20 percent of the region’s banks deploy fintech to either differentiate or win. Furthermore, most ME banks still hesitate about partnering with fintech firms.

Fintech taking the world by storm

Covid-19 fears and restrictions made people hesitant to visit physical branches of banks or do business in person. Yet, the demand for financial services stayed steady and even grew in some areas. Thus, many banks and financial firms saw the opportunity and started to invest in their digital offerings.

Financial institutions with already solid digital offerings were the top-performing when the pandemic hit, while the more traditional ones had to quickly deploy digital solutions to avoid their customers migrating to their competitors.

Crypto front and center

By early 2020, most people saw the cryptocurrency craze of 2017 as a thing of the past. Yet the cryptocurrency market broke all previous records growing to all-time highs.

In 2020, many big-name companies like MicroStrategy, Tesla, and Square began investing in cryptocurrencies giving them more legitimacy. Later, PayPal announced support for select cryptocurrencies as payment options, and many digital stores began accepting crypto.

All of that pushed the crypto market to over $2 trillion market capitalization, and even with steep fluctuations, the market is still way higher than its 2017 high-point.

Cash is shrinking, and digital payment is to blame

Cash has already been on the decline in recent decades, as alternative payment methods started replacing it. Yet, 2020 was a special year. Statista estimates the size of global digital payments grew from $4.7 trillion in 2019 to $5.43tn in 2020. Furthermore, the field is set to grow further to $6.75tn in 2021.

Digital payment companies saw great success in the pandemic era, as electronic payment companies like PayPal and Square more than doubled their stock price in 2020. The digital payment space is quickly saturating as innovative companies conquer markets. Thus, new and established finance firms are in a global race to be at the forefront of payment technology.

STC Pay, a spun-off subsidiary of the telecommunication giant STC, was a major success story in 2020. It started 2020 with half a million users, but by October of the same year, it served 4.5 million users becoming the largest digital payment provider in Saudi Arabia, according to Analysys Mason’s Connected Consumer Survey.

The growth of STC Pay set the pieces in place for Western Union to buy a 15 percent share in the company for $200m, making it the first Saudi company to achieve unicorn status. The Western Union push in the Saudi market signaled that it is a great destination for fintech investments, and in 2020 the Saudi fintech sector garnered $347m in funding, according to Fintech Saudi.

A new form of digital currencies

In July 2021, the People’s Bank of China (PBOC) released the first whitepaper regarding the “Digital Yuan” after domestic trials in 11 Chinese cities and a pilot program. That is the most advanced digital non-crypto currency project as of now, but it’s far from the only one.

The United States, European Union, and many other countries like Saudi Arabia and the UAE have shown interest in developing their own CBDCs. In reality, 80 percent of world central banks are interested in CBDCs, while 50 percent are already in the experimental or pilot phase, according to the Bank of International Settlement.

The idea of a CBDC owes a lot to the success of cryptocurrencies. Recently, The pandemic made the advantages of developing a CBDC more apparent. Now many governments are researching it, and experts see it as a major future development for finance.

The path forward

A report by ResearchAndMarkets forecasts the global fintech sector to grow to $190bn by 2026, with a 13.7 percent CAGR. That puts fintech firmly in the lead regarding future growth.

The growth forecasts rely on an apparent reality: most customers prefer digital financial services after trying them, and even as pandemic restrictions lifted everywhere, the demand for e-finance didn’t slow its growth.

As fintech flourishes further, financial institutions that resisted the transformation will have to catch up. But even though traditional finance is still viable, the writing is on the wall: the future is digital.