Even before the pandemic, FinTech had been critical in bridging the gap in the delivery of financial services, and the crisis triggered by COVID-19 made its role even bigger. These are the findings of the latest World Bank Study, conducted in collaboration with the World Economic Forum and the Cambridge Centre for Alternative Finance. The study has also found that digital finance has shown resilience and quick adoption when faced with the challenges of the pandemic and that twelve out of thirteen sub-sectors even managed to grow in the first half of 2020. Not only does this show that the digital innovation behind FinTech has great potential in a time of crisis, but also that providers have learned to adapt their services amidst shifting customer preferences, which ultimately lead to higher adoption rates. Although FinTech adoption, with all its sectors, isn’t homogenous throughout the world (mostly because of regulatory hurdles), estimates are extremely positive, pointing to a growth in influence.

How did technology address the financial challenges encountered during the pandemic?

In general, the FinTech market was very responsive to the challenges posed by the pandemic, and companies issued solutions as quickly as they could. That included the following:

• FinTech companies made changes to their products and services to better cater to consumer needs. The study found that two-thirds of FinTech companies had already made these changes, and the remaining third was in the process of doing so. Most changes were made to reduce commission fees and make payments easier.

• FinTech companies added new products and services to their portfolio to stay relevant, such as the addition of new payment channels.

• More attention was paid to information services. Since the pandemic was associated with a future economic crisis, consumers wanted to know more about how they should save money, invest, and manage their funds. Platforms such as räntefonder.nu answered the demand, sharing up to date tips and tricks on topics such as interest funds.

• FinTech companies addressed the higher cybersecurity risks. As more people started using FinTech services, and FinTech workers themselves were working more from home, there was an increase in phishing attacks. To combat this, 28% of FinTech companies deployed advanced cybersecurity features.

FinTech companies in emerging markets reported higher growth and transaction volumes.

During the lockdown, the number of people who used FinTech services instead of going to the bank grew constantly. In countries such as Norway, China, Sweden, the US, and the UK, where FinTech already had a high adoption rate, that didn’t come as a surprise. Overall, the FinTech sector grew by around 13%. However, it was emerging markets where FinTechs showed the highest evolution. Here, the FinTech sector grew by up to 50%, especially in the sub-sector of digital payments. Moreover, growth also seemed to be proportional to the stringency of lockdown measures. Thus, the countries with the promptest response to COVID-19 also reported the highest increase in FinTech transactions. However, it should also be pointed out that developing countries encountered the biggest operational challenges because of unclear regulatory environments.

Changing consumer attitudes towards the digitization of financial services

When FinTech rose as an alternative to traditional financial services ten years ago, the general sentiment was that of skepticism. However, that quickly changed and, in 2020, according to McKinsey research, consumer sentiment was at an all-time high:

• In the US, it is estimated that 40% of financial decision-makers have at least one FinTech account. States in the South have the highest degree of FinTech adoption.

• During the COVID-19 crisis, all FinTech sub-sectors have grown at the same rate.

• The use of FinTech products is more common among Millennials and Gen Z customers. The biggest growth was reported in the Gen Z sector, where 27% more people joined the trend. But, contrary to popular belief, older generations do not reject FinTech either. Although market penetration has been somewhat slower here, 26% of baby boomers have a FinTech account, which goes to show that the alternative has now become mainstream. One major difference between the way young and senior generations interact with FinTech services is in the number of accounts they open: if, on average, 29% of Gen Z users have more than one account, 65% of baby boomers only have one.

• FinTech appeals to users of all incomes. The belief that FinTech services are only suitable for affluent individuals is a myth. On the contrary, data from McKinsey revealed that, during the pandemic, people from all income levels opened FinTech accounts, and the ratio is quite balanced: 45% of FinTech users have average annual incomes of over $100,000, and 41% earn below $45,000.

• FinTechs now have the same level of customer trust as banks. Around 30% of users say that they trust their FinTech provides, which is roughly the same level as banks. This is a major achievement, since lack of trust used to be one of the main obstacles to mainstream adoption. But, even if they rank the same as banks in terms of trust, they seem to have surpassed them in other categories. For example, users said that they prefer FinTechs to banks when it comes to convenience, information, and the overall experience.

Overcoming potential threats

The ascension of FinTech services is not without its challenges. Although this sector has grown considerably in the past year, the industry as a whole must find ways to address the biggest challenges: the regulatory landscape and high operational costs. While some countries have agreed to provide emergency regulatory relief to FinTech companies as a crisis response, costs may prove somewhat harder to manage. Due to the higher influx of customers, FinTech companies reported an 11% rise in data storage costs, an 8% increase in onboarding costs, and a 5% increase in failed transactions compared to the same time last year. But, despite these challenges, most FinTech companies expect to reach their financial targets for this year and even maintain an 8% annual growth rate.