Financial technology startups will enter the next decade with a little more street cred than the last time around.
Nearly 60 upstarts focusing on financial services -- from Stripe Inc. to Chime Inc. to Plaid Inc. -- have garnered valuations of more than $1 billion in recent years, according to CB Insights. Personal loans -- a category popularized by fintechs like GreenSky Inc. or Affirm Inc. -- are now the fastest growing form of debt in the U.S., Experian data says. And Robinhood sparked a movement toward free stock trading that has shaken the business models of the likes of Charles Schwab Corp. and E*Trade Financial Corp.
Still, analysts and experts say there’s more to come. Sweeping mergers and acquisitions have transformed some of the industry’s largest incumbents in payments, who are gearing up for a bigger fight for market share with newcomers. And regulators are looking to have more say over how technology companies venture into financial services.
Here’s our annual list of the most important trends, challenges and companies to watch in the New Year.
Exit StrategiesMergers and acquisitions have historically been small and rare in the fintech space, but that changed in a big way in 2019. Fiserv Inc., Fidelity National Information Services Inc. and Global Payments Inc. did a series of deals that transformed payment processing in the U.S. More recently, PayPal Holdings Inc. made its largest acquisition ever and Charles Schwab announced it would buy TD Ameritrade Holding Corp. for about $26 billion. That frenzied pace of deal-making might continue through (at least some of) 2020.

• Lindsay Davis, senior intelligence analyst, CB Insights: “Wealth management will likely see more consolidation from incumbents, who are under pressure to compete for next-gen customers and an army of virally growing fintech apps who have abstracted the client relationship away from the old guard. Charles Schwab buying TD Ameritrade is just the beginning of more strategic consolidation to come.”
• Matt Harris, partner, Bain Capital Ventures: “I think there is a window during the first half of the year for IPOs, but once summer hits people will be fundamentally distracted by the election. I certainly don’t think it will be fast and furious.”

Regulatory ScrutinyMemorably, in 2019 Mark Zuckerberg defended Facebook Inc.’s plan to overhaul the world banking system in front of Congress. (Legislators were not amused.) Our experts think there’s plenty more government scrutiny ahead for financial technology players. That’s even though regulators including the Federal Reserve and the Federal Deposit Insurance Corp. have sought to encourage banks to work with newer technologies like alternative data in their underwriting in an attempt to bring more people into the financial services ecosystem. Companies will need to adjust their strategies accordingly.

• Alyson Clarke, principal analyst, Forrester: “Regulators are going to start taking a closer look and scrutinizing artificial intelligence. The whole Apple Card and the supposed gender bias -- I think we’ll see more things like this surface. Transparency in AI is critical and ethics in AI is critical and it needs regulatory oversight.”
• Vanessa Colella, Chief Innovation Officer, Citigroup Inc.: “We want to make sure the people who are transacting are who they say they are. As we get to 40 billion devices online, you can see it’s not just about KYC, or Know Your Customer, it’s KYM, or Know Your Machine -- and being sure that, as these transactions are happening at the edge, that you’re able to validate what the machine is, and whether the machine has the permission and the capability to make that transaction.”

The Rise of Digital BanksChime, the leading U.S. digital bank, is now valued at $5.8 billion. That makes it more valuable than some of the country’s largest banks, including New York Community Bancorp, CIT Group Inc. or Synovus Financial Corp. It’s part of a new class of entrants, known as “challenger banks” or “neo-banks,” that’s raised more than $3 billion in venture funding in the first three quarters of this year. With that has come millions of customers. Will they remain loyal? Or will traditional lenders be able to win them back?

• Frank Rotman, founding partner, QED Investors: “While these neo-banks can’t yet match the complete suite of banking products that a traditional branch-based bank can, this doesn’t matter to the typical consumer because they rarely, if ever, use any of the hundreds of products that are in a bank’s arsenal. So we’ll be talking about challenger banks in 2020 and in 2021 and in 2022 and eventually the ‘challenger’ title will be dropped because they’ll be major players in the ecosystem.”
• Mitch Siegel, principal, KPMG: “I do believe 2020 is an arms race: You’re going to see a lot of people launching digital banking initiatives. Personalization is what’s changed that game. Cross-selling without personalization seems sleazy but if you can personalize offers, and give me things that are high probability that I actually want them, I’m OK with you trying to sell me other products and services. Make it easy. Know me. Value me. Protect me.”

The Bank of Apple? Big Tech Moves InIf you’ve read this annual post before, you’ll be no stranger to predictions that the technology giants of the world will move deeper in to finance. The pace of those moves accelerated this year, however, with Apple launching a credit card with Goldman Sachs Group Inc., Alphabet Inc. announcing a checking product with Citigroup, and Facebook attempting to make a new global currency.

• Matt Harris: “I think this is inevitable. Tech companies, large and small, will be looking to incorporate payments, lending and insurance in their business models in the coming years, and the smartest and most capable banks will want to be part of that movement. I do think this raises the stakes for pure fintech startups.”
• Frank Rotman: “The trend is broader than ‘tech getting into finance.’ It should be seen as ‘customer-facing organizations’ offering their customers banking products. Many customer-facing organizations have built up trust with their customers -- as evidenced by high engagement and high net promoter scores -- but don’t want to, nor see the need for, officially becoming a bank. Instead, they can partner with banks that are willing to co-brand or white label their services and offer great banking products to their loyal customers.”
• Lindsay Davis: “Netflix could also leverage financial services to compete and enable gig-economy workers and freelancers in the film and TV industry, which have been traditionally too niche to serve, and have a unique set of pain points.”

By
Julie Verhage
and
Jennifer Surane

Roisin Levine, Head of Banks at Flux, discusses the importance of collaboration between fintechs and incumbents in 2020Legacy financial institutions and fintechs are often pitted against one another, with the former represented as being slow and resistant to change, while newer upstarts are classified as disruptive, but struggling to find profitability or become mainstream.
Like almost all stereotypes, there are some truths in these assertions. But the scale offered by incumbent banks that can provide distribution to tens of millions of customers means that, for fintechs looking to reach mass market quickly these collaborations, when approached with the right outlook, collaboration between the two is undeniably a match made in heaven. 
Everyone benefitsIncumbent banks know that in order to stay ahead of the curve - and provide the best service to customers - they need to select the right vendors and partners. It is impossible for them to innovate on every front, and partnering with fintechs can provide a quick way of adding a new customer centric feature or service without building it from scratch.
This collaboration benefits everyone - fintechs are able to vastly increase their audience, banks can accelerate their own digital transformation, and (hopefully) customers get access to a new feature that’s both secure and useful.
It is fascinating to now also see the incumbent banks emulate their fintech rivals by launching their own standalone digital banks, with features clearly influenced by the successful mobile-first challengers. Imitation is the sincerest form of flattery, and ultimately the end users, consumers or SMEs, will benefit from the increased competition and relentless race to optimise our banking experiences. 
Incumbents turn challengersOver the last year RBS and HSBC have both created their own challenger banks in Bo, Mettle and Kinetic. These new banks may soon introduce their own marketplaces or simply become easy integration platforms for third party services delivered by other fintechs.
Building these as greenfield projects creates an opportunity for incumbents to be more agile, deliver and test partnerships quickly and deploy new features at pace. Often the challenge for large banks is the sheer scale of their operations - multiple stakeholders, legacy systems and rigorous procurement processes can make partnerships difficult to implement, whilst newer banks have the benefits of being API driven and ready made for collaboration.
You only have to read some of Monzo’s early blogs outlining their vision of API enabled, intelligent interactions between bank accounts and other services to see how they looked at banking differently. Open Banking in the UK helped accelerate this concept and made this incredible foresight a reality for others. 
Meaningful engagementFintech and bank partnerships have been encouraged and celebrated over the last few years. But Fintechs have a duty to make these collaborations more frequent and appealing by listening to the incumbent banks that they wish to partner with to understand their medium and long term objectives.
It is easy for fintechs to often assume a bank should know why a partnership or technical innovation could be beneficial, but meaningful engagement requires an easy to understand product or service, with a very clear demonstrable benefit to customers. Fintechs that pitch broad and over complicated proposals create drawn out conversations with banks and projects that ultimately never find their key sponsor. 
When the right product, feature or service is available and articulated correctly the appetite for collaboration is clear. Incumbent banks have spent millions of pounds overhauling legacy systems, building vast digital teams, and giving freedom to their venture arms to identify fintechs worthy of strategic investments and long term partnership initiatives.
For this reason, banks and fintech collaborations are set to continue through 2020, but the real measure of success won’t be the PR announcements that excite just industry press and fintech advocates. It will be the partnerships that put true financial control and opportunities into the hands of millions of normal banking customers via seamless user experiences. 

By MATT HIGH . Dec 29, 2019, 10:22AM FINTECH MAGAZINE