While 2020 was without a doubt a very challenging year, it was also a time of incredible growth for payments and banking. It was a catalyst year for contactless payments, online banking, trading and investing, cryptocurrency, installment lending, and digital wallets. These solutions have evolved to provide more advanced ways for people to make transactions, save, invest and manage their money.
There are no signs of the momentum slowing down in 2021.
Below are five trends that best predict transformational moments in the year ahead.
Trend #1: Buy Now, Pay Later (BNPL) Will Rocket Higher
BNPL is a short-term loan offered to a customer during checkout and works just like other payment tender types. It enables merchants to be paid up front and gives customers the ability to spread the cost over weeks or months, often at zero interest (at least for some period), rather than just putting it all on a credit or debit card at once.
Its appeal has grown rapidly in recent years, including during the pandemic. Here are few key reasons why:
It’s a consumer-friendly, transparent alternative to credit cards and provides a line of sight to paying down balances, low to no fees, and works just like a subscription payment.
It’s deeply integrated into the shopping and checkout journey, which helps merchants close a sale. On average, merchants have seen an incremental bump of 20% to 30% in sales. And lately there’s been a shift in integrating BNPL into the ‘pre-purchase’ phase of the consumer journey as opposed to only ‘checkout,’ with anecdotal data suggesting this increases conversion rates by an additional 2x to 3x.
It’s a customer acquisition tool. During the pandemic, merchants subsidized BNPL loans for high-margin items, particularly electronics, jewelry and cosmetic procedures. The shift may represent a semi-permanent change in how merchants acquire customers in the future, making BNPL table stakes as a consumer product offering. The market currently is dominated by fintechs such as Affirm and Klarna, but several large financial institutions have joined the fray, including Chase and Citibank.
In the U.S, merchant penetration with BNPL is still low (less than 5%) and the market is growing. A November 2020 Bank of America analyst note estimated global volume could grow to be $650 billion to $1 trillion by 2025, roughly 10 to 15 times the current market.
2021 will see greater merchant and customer adoption of BNPL solution with many merchants offering more than one BNPL option to customers at checkout. Also look for BNPL solutions for small businesses.
Trend #2: Venmo Will Emerge as a New Type of Payment Tender
Customers demanded, and CVS and PayPal listened!
During the pandemic, consumers asked merchants to accept Venmo and CashApp (Square’s P2P product). They wanted additional options to pay beyond a credit card, debit card, prepaid or gift cards. PayPal and CVS seized the opportunity announcing CVS as the first national retailer to offer support for Venmo QR codes at more than 8,200 retail stores in the U.S., marking a new inroad into traditional bank and credit union payment revenue streams.
Here is why I believe in 2021, PayPal will continue to forge similar partnerships, turning Venmo into a new payment tender type:
Customer demand. Customers — particularly younger consumers — will ask merchants to accept Venmo. Merchants will have no choice but accept the P2P app or risk losing customers.
A rewards program to attract more retailers. The Venmo rewards program offers cash back to customers at select merchants. Cash can be used with the retailers in-app or transferred to a customer’s account or debit card. No points — simple cash that customers prefer, making Venmo even more attractive for merchants to adopt.
Riding the contactless payment wave. According to AT Kearney, Visa and Mastercard, digital payments will reach about 50% of contactless penetration by 2021. Venmo is expected to replace cash usage on small-ticket items, particularly in mature markets with high card penetration.
Trend #3: Embedded Banking Will Grow Faster as More Institutions Offer Banking Capabilities to Non-Banks
Banking-as-a-Service (BaaS), Banking-as-a-Platform (BaaP), Fintech-as-a-Service (FaaS) — collectively known as Embedded Banking — are all different ways to enable non-bank firms to offer banking products faster, cheaper and on-demand to customers. Although, there are a some differences with each.
Embedded banking companies either provide a layer of the banking stack (e.g., compliance, card issuing, or payment processing) “as a service” or “white label” or a banking capability (e.g., loans, deposits, trading etc.) to non-bank firms. Aspects of embedded banking have existed for years, namely in credit cards and point of sale credit. However, the rise of neobanks, cryptocurrencies and payment services has made the service popular among banks, tech firms, and fintechs that want to offer products to customers without a banking license or seek additional paths for revenues. Below are a few recent examples of embedded banking partnerships:
BaaS: Stripe/Shopify (merchant accounts); Affirm/Walmart (BNPL).
BaaP: Goldman/Apple (credit cards), Google/Citi (checking account), BankMobile/T-Mobile (checking account).
FaaS: Stripe/Doordash/Instacart (payments), Riskified/GOAT/Prada (online fraud).
According to Lightyear Capital research, embedded banking is set to explode, reaching over $230 billion in revenue across four banking verticals (wealth management, consumer lending, insurance and payments) by 2025. Of the four, payments will see the most growth. Lightyear estimates embedded finance revenue in that sector will grow from $16.1 billion in 2020 to $140.8 billion in 2025.
Embedded banking companies that can offer partners an effective toolkit to connect with core systems and configure financial elements into their customer experiences will see their total addressable market expanded materially. For now, the partnership model is out of the gates with a lot of momentum with both financial institutions and fintechs aggressively embracing the business model. In 2021, we’ll see more of both parties announce partnerships.
Trend #4: Digital Currencies and Stablecoins Will Gain Major Traction
The pandemic has accelerated the development of digital currencies, or cryptocurrencies, as it has prompted millions of consumers to turn to cashless payments. This has prompted central banks around the world to ramp up their efforts to develop central bank digital currencies (CBDCs) — digital versions of paper currency such as Sweden’s eKrona and China’s digital yuan. The use case for CBDCs includes both wholesale payments (between central banks and banks) and retail payments (consumers and merchants).
Another CBDC tipping point in 2020 was Facebook’s efforts to launch its Libra cryptocurrency (since renamed Diem), raising the prospect of a technology company competing with traditional currencies and taking control away from governments.
As a result, governments across the globe have begun experimenting with CBDCs. China is currently carrying out a lottery to give away 10 million digital yuan to consumers to spend at over 3,000 merchants, including Walmart and JD.com (China’s Amazon) that accept the digital yuan.
While many questions remain, at least 36 governments have either published research, completed a pilot or have one underway regarding digital currency. In the U.S. the Federal Reserve Bank of Boston is actively collaborating with MIT to test a digital dollar for wide scale use.
The case with Stablecoins is similar, but more centered in the private sector. Stablecoins are digital currencies designed to minimize the price volatility of the underlying digital currency, relative to some stable asset or basket of assets. Some common use cases include money transfers, trading, mobile payments, securities issuance and clearing.
2020 was a record year for Stablecoins with assets growing from less than $5 billion at the beginning of the year to over $25 billion by December. We should expect this momentum to continue in 2021 with more applications in money movement and cross border payments.
Several stablecoin initiatives are already operating and 2021 could see Stablecoin-based banking applications hit their stride. Besides, the industry may have found an ally in Acting Comptroller of the Currency Brian Brooks, who has a crypto background and is likely to push for friendlier crypto regulations, if he remains in place in the Biden administration. Back in September, OCC allowed banks to begin offering Stablecoin issuers banking services.
Bonus prediction: Traditional financial institutions will fall in love with Bitcoin. Already Quontic Bank, a New York-based digital bank, has launched Bitcoin Rewards Checking, where customers can earn 1.5% Bitcoin back on eligible debit card purchases.
Trend #5: There Will Be More Financial Institution Mergers in 2021
Banks and credit unions are facing major challenges and may not be able to cope with them alone. Shrinking margins, lower market share as a consequence of digital innovation, urgency to accelerate digital transformation efforts, tougher regulation and rising costs are forcing financial institutions to look for targets and partners they can build into competitive players.
In 2020, we saw some major deal activity in the space. During the first 11 months of 2020, the industry saw 100 deal announcements worth an aggregate $21.51 billion, compared with 235 deals worth $54.23 billion over the same period in 2019. Most prominently, PNC agreed to buy BBVA (US) for more than $11 billion, making it the largest U.S. bank deal since BB&T Corp. and SunTrust Banks.
This trend is expected to continue in 2021.
According to a survey by Bank Director, more than one-third banking executives say their institution is likely to purchase another bank by the end of 2021. We could even see some large cross-border bank mergers for better geographical or product diversification.