Fintech innovation accelerates to lightning speeds

By Dan Perlin, RBC Capital Markets, LLC
Published June 25, 2020 | 5 min read

Our fifth annual Fintech Conference went virtual, as firms shared their view of a rapidly changing industry. Existing trends have been accelerated by the COVID-19 pandemic and new imperatives have sprung up as companies strive to succeed in a shifting world.

This year’s Fintech conference saw over 500 participants take part in a series of virtual fireside chats to reflect on the new pace of change that is transforming the industry. What we see in this snapshot, as economies start to emerge from mandatory COVID-19 lockdowns, is a sector which is monitoring payment volumes to define the shape of the recovery.

The world of Fintech has had to pivot harder towards ecommerce and omnichannel, embracing the contactless payments and QR codes as consumers become more health-conscious about how they interact with payments in a post-COVID climate. Several key themes emerged through the conference, as recent trends pointed towards encouraging signs of recovery.


Turning up the payment volume

In these unprecedented times, spending continues to decline, but economies are slowly stirring back into action. So far, the evidence shows that when countries have started to reopen after lockdown, the change has been rapid.

“New Zealand, for example, is getting close to back to normal as it relates to domestic spending, although the borders are pretty much closed,” says keynote speaker and Visa President Ryan McInerney. “And you look at the change in spending that happened when they opened up, it was dramatic. We saw growth improve by 60 percentage points up, and the spending levels remain elevated through the back half of May. So, it gives us some indication of what can happen when things really start to open up.”

Even in the US, where states are still easing out of lockdowns, spending has improved in the month of May. “In the US, May was 13 percentage points better than April. So spending is steadily improving,” adds McInerney.

Some of this spending has been fuelled by government stimulus funds, demonstrating that consumers are still being careful with their dollars. Debit continues to outperform credit as people are spending what they have rather than borrowing, with spending reducing on big-ticket and luxury items in favour of non-discretionary retail.


Commerce floods online

Whatever the dollar amount, when people are spending, they are spending more online. For Visa, that has meant card-present spending was down 50% year-over-year in April (it was still in decline in May, although recovered somewhat to the mid-20s).

“The shift from physical to digital continues,” says McInerney. “I think what people lose track of sometimes is just how much runway remains in ecommerce. Ecommerce is still only 14% of global retail spending right now. So, even though we think of ourselves as a digital society, at this point there’s still a ton of opportunity.”

“I anticipate that this momentum will continue,” says Jim Magats, SVP of Omni Channel Payments at PayPal. “For a lot of customers, once they go digital, they're not coming back and we will see a further erosion of cash holistically.”


Contactless transactions

This push towards digital payments is also powered by health-conscious shoppers, who see the benefits of contactless payments and QR codes in a world where human interaction has to be limited.

“We're seeing sellers enable tap to pay around the world,” says McInerney. “If you exclude the US, 60% of all face-to-face transactions are tap to pay. It's really a staggering number if you think about where we were just a few years ago.”

“Not only are we displacing cash, which is a big benefit of tap to pay, but there are other benefits. It's a habit-forming behavior – you tap in the transit system, you tap in the 7-Eleven – but it’s also such a frictionless experience.”


An omnichannel world

This new digital world of frictionless payments is not without physical needs, however. It may be digital-first, but physical stores continue to have value as showrooms and pick-up locations. Omnichannel is increasingly important for both businesses and banks, on a global scale.

“We’re seeing merchants coming to us and asking about how they can rethink physical world checkout,” says Magats. “It’s taking that great experience in online and mobile checkout and transferring it to an omnichannel solution that requires scale and efficiency.”

The transformation has been sharp, explains Dan Perlin, lead Fintech research analyst at RBC. “The pace of change is unprecedented. We’re seeing physical stores pushed towards distribution and delivery points as we adapt to a digital first retail environment. The demand for safer payments is also creating opportunities for new technologies and previously under-utilized technology like QR codes.”

“QR is generating a lot of interest,” says Magats. “We envision it working for two different segments. You have your casual sellers – think of your food truck, your farmers market – being able to take the power of hundreds of millions of consumers that exist within the PayPal and Venmo ecosystem and allowing them to use a safe QR code method of payment and not having to pass cash back and forth. But we’re also talking about bringing QR capabilities into more mainstream physical stores to  reimagine their physical checkout experience.”

The opportunity for QR now just goes to show that the climate has to be right for technology to succeed. “What's different now? Well, we have a bigger critical mass of consumers. We have a bigger critical mass of merchants. People are wanting safe payments, wanting to rethink how they're doing checkout. And obviously mobile technology has evolved. QR hasn’t really taken off in other markets. And we think it's something that can take off here in the US and the other markets that we're operating in.”


Accelerating technology cycles

Of course, all this digitization has to be powered by the right technology, particularly in a pandemic lockdown – and that’s what’s driving adoption ever faster for banks and retailers. In many cases, digital channels are the only way customers can interact with their financial institutions as branches remain closed.

“The current environment is acting as a catalyst, and it's exposing a lot of the vulnerabilities that the current tech stacks and platforms that banks have relied on have,” says Perlin.

Customer expectations are changing. The closure of branches has seen many digital resistors starting to use digital channels and increasingly looking for those to be robust and secure. What they also want is for those interactions to integrate seamlessly with the transactions they’ll do in branch when they reopen. So omnichannel is just as important as in the retail space.

Meeting customer demand through enhanced technology can also intersect with lowering institutions’ own risk. The adoption of more automated cloud-based solutions offers greater flexibility and is of growing interest to bank executives.

“A lot of these discussions around large scale cloud-based implementations were happening pre-COVID, but this is certainly going to act as a big compression cycle around technology for financial institutions,” says Perlin.


The best position for the future

These trends mean that the structural winners post-COVID will be those on the right side of the digital shift, benefitting from the growth that will happen around this accelerating change. Fintech companies and investors need to consider ecommerce and omnichannel solutions that can scale holistically. They also need to integrate payments and recognize the rise of contactless and QR codes – without ignoring the physical side of the equation.

Dan Perlin

Dan Perlin
Managing Director – Payments, Processors and IT Services Research, RBC Capital Markets
RBC Capital Markets, LLC

COVID-19CoronavirusDigital PaymentsFintechOmni Channel PaymentsPayPalPaymentsVisa