The world of fintechs is evolving amid the pandemic

From digital banking and contactless payments to buy-now-pay-later apps, new technologies have become a lifeline for many Americans during the pandemic.

“We’ve seen significant changes as social distancing measures and the coronavirus environment have shifted the way that we behave, spend and save,” said Craig Vosburg, Mastercard’s chief product officer at the company’s Virtual Fintech Forum last week. “Consumers are looking for digital-driven financial tools and services that solve real problems and needs.”

The one-day conference, which attracted startups, tech giants and finance industry heavyweights, focused on how COVID-19 is accelerating changes in consumer behavior and creating opportunities for a more inclusive digital economy. It helped underscore just how much has changed in society and the financial industry in a short time during the pandemic, and how much more work is needed.

The biggest takeaways: Spending will start to recover in certain areas, digital is a must-have and not nice-to-have, and inclusion needs to be more than a buzzword.

01
A story of two Americas

COVID-19 has dramatically changed how people spend their money, with customers, for the foreseeable future,  focusing primarily on the “two Hs” of health and home, according to Libby Rodney, chief strategy officer at The Harris Poll.

She referenced predictions of a K-shaped recovery, in which more affluent Americans with money saved up will start spending more as lockdowns ease, while less affluent Americans may face greater challenges.

“Those who are younger, who've had financial instability, who've had a job loss or furlough or lower income, they are now at the point where they're running out of their savings and their cash reserves,” she said. “Financial struggles and instability are at an all-time high.”

For the more affluent, many types of spending could help power the economy forward, including holding previously missed celebrations and events such as birthdays and vacations, and resuming dating, Rodney said. Travel firms, restaurants and bars would benefit from this change, and likely the jobs market would as well.

02
It's a good time to be a startup

Flush venture capital funds are looking to make investments in up-and-coming fintechs — especially those poised to benefit and grow during this phase of digital upheaval. The types of startups gaining attention include online buy-now-pay-later firms, new digital-first card issuers and companies bridging the gap between health care and financial services.

Focusing on diversity when making these investments has become increasingly important.

Dan Rosen, founder of Commerce Ventures, realized his company was doing a “terrible job” at making investments in diverse companies and needed to search for new deals outside of its established network.

“Since getting started in June, we’ve seen nearly 100 companies with either racially or gender-diverse founders, or both, and more importantly, have invested in four of those and committed to another,” he said.

03
Finding new ways to support small business

Going digital and tapping into fintech services have been vital for small businesses struggling to survive the pandemic. Many financially fragile small businesses need tools that can help them access loans or find ways to improve their cash flow.

More emphasis should be placed on getting fintech products to hard-hit Black- and woman-owned businesses, which traditionally have less access to financing, said Carolyn Rodz, founder of Hello Allice, a digital platform helping underserved communities build and grow their businesses.

“This whole fintech world creates an incredible opportunity to get capital into the hands of small business owners in much more efficient and effective ways,” she said. 

Showing the nearly third of all small businesses not yet online that it’s not hard to go digital can help them quickly pivot, connect to their customers and take advantage of digital tools that are helping to drive sales, Rodz said.

04
Open banking will happen – but trust is paramount

Open banking – where consumers can choose to make their financial data available to third parties to access new services – is poised to revolutionize the financial industry, but solid guiderails need to be in place to protect customers, according to Jeff Lewis, an executive at Sutton Bank.

Smaller fintechs and heavyweight industry players are both poised to benefit from sharing data that will help them to, among other things, provide more useful products and services to customers.

Protecting consumers and securing their data is paramount to create a trusted and successful environment for open banking, which needs to iron out some of the issues involving verification and liabilities before it can truly take off.

“Open banking is an opportunity to create a true value proposition,” Steven Smith, chief executive of Mastercard-owned Finicity, said at the event. “An industry-driven approach around technology and standards, together with regulators providing definitions and guide rails in the U.S., will really accelerate its success.”

The fintech advancements brought on by the pandemic are now expected to pave the way for the next round of innovations as both startups and mainstream players analyze how to offer new, increasingly integrated services to consumers, event participants said. 

“COVID largely accelerated trends, put tailwinds on things that were already happening anyway and gave them a kind of different curve to follow,” said Rebecca Kaden, partner at Union Square Ventures. “Nothing changes behavior like necessity.”