2021: The year Fintech came of age


A year in Fintech

Now that we have settled into 2022, it is a great chance to look back and reflect on how far we travelled over the previous 12 months, but 2021 felt like a seismic shift in the world of FinTech.

For all the ups and downs that the world faced, this was the year that FinTech showed what it can really do – and things may never be the same again!

The Pandemic Was A Watershed Moment For FinTech

FinTech was already one of the most exciting technology sectors long before we ever heard of Covid-19, but the pandemic felt like a watershed moment when the theories behind many unproven startups were finally put to the test.

As the world closed down, tech startups rushed to meet the needs of consumers who could no longer conduct their daily lives in the physical spaces of before. And perhaps more importantly, regular non-tech-y people were forced to embrace online technology for almost all aspects of their lives, whether that was shopping, entertainment, personal finance, or banking.

People who had never previously shopped online signed up with Amazon and Instacart. Others who had never even seen a webcam before learned how to create a virtual background for their Zoom calls. And large portions of the general public who had never made a single bank transaction outside of their brick-and-mortar branch finally created accounts with their bank’s websites, however reluctantly.

While this digital revolution may have been only begrudgingly accepted at first by many, it was soon adopted with enthusiasm as people realized all the things they could now do from the comfort of their own home. Whether it was online shopping, online meetings, online banking, or online anything else, the comment that I heard most often from those around me, even the least tech-savvy people, was: “I can’t believe I didn’t do this sooner”.

Even the most set-in-their-ways sceptics’ began to realise that, not only did they not have to go to a physical bank branch or storefront to conduct their business, but it was often far easier to do it online.

Just as excitingly, people who had already embraced electronic money management before 2020 found themselves looking for new online services beyond their everyday bank accounts. Finding digital tools for their insurance, mortgages, investing, and budgeting needs (to name just a few) proved that this was the moment that FinTech really came of age.

We don’t know what the future will hold as the world continues to move online, but having come this far, I don’t think we’ll be turning back.

FinTech Has Become The Hottest Sector In The Market

With this generational shift online came a rush from within the FinTech world to figure out how to meet people’s needs and make the most of the opportunities that were suddenly being created. This in turn created a swarm of investors stampeding into FinTech and pouring money into the sector at unprecedented rates.

Big problems require big solutions. And big solutions often require big money when it comes to investment.

FinTech quickly became the hottest sector in the industry as it raised $132 billion in 2021 and accounted for 21% of all venture dollars, according to MarketWatch. And while FinTech is this hot, nobody wants to miss out. Values continue to rise and money continues to be poured into the sector, creating one of the most vibrant investment arenas we’ve ever seen.

As with any market that sees such rapid expansion, there are naturally some voices of caution who have expressed concern that FinTech is growing too fast, and that some of these valuations are being driven as much by a sense of FOMO (“fear of missing out”) as by careful due diligence as investors compete to get ahead of their peers. Whispered quietly, some commentators have even claimed that this could be another bubble in the vein of the 2000 .com bubble or the 2008 housing bubble.

Far be it from me to disagree with the experts, but I believe that there are some fundamental differences from those examples. The money being invested throughout FinTech is indicative of the fantastic expansion in this sector, much of which is borne out by real statistics. Its growth curve has skewed upwards more quickly than expected over the last couple of years as the pandemic gripped our daily lives, but that was because we needed solutions – and quickly – and FinTech was able to step up and provide them.

Covid-19 didn’t create FinTech, but it certainly woke people up to how it can be helpful. The accelerated industry growth in 2021 might make it resemble a bubble to some, but in most cases, we’re not dealing with junk bonds, sub-prime mortgages, or empty websites and domain names. FinTech is solving real problems and answering a genuine need, and most of its startups have at least some intrinsic value. Dismissing this as a bubble undermines the incredible work that FinTech founders have put into their businesses to respond to the rapidly-changing demands of a pandemic-hit and increasingly tech-savvy global demographic.

Of course, this doesn’t mean that we should just throw caution to the wind and assume that the FinTech sector can maintain this level of growth indefinitely. But while we don’t know how the market will react, nor whether valuations will even out or investment will slow down (as sometimes occurs in hot markets), there is real substance behind the excitement that surrounds all things FinTech right now.

There’s a good reason why investors are betting on FinTech going into 2022, and that seems unlikely to change any time soon.

There’s Still Enormous Growth Potential, Especially For Challenger Banks

For all the growth and engagement that we’ve seen in this sector over the last two years, there’s also a sense that we’ve barely scratched the surface.

I watched a lot of TV during the pandemic (and I mean a lot). Naturally, this meant that I saw a lot of ads too. And there were times when it felt like every ad was for some new FinTech or another offering to solve problems for me that I didn’t even know I had. It felt like FinTech was everywhere, and that this was the generation that was finally embracing it.

That’s true, but the figures are also illuminating. It’s estimated that more than 250 neobanks or challenger banks have so far been launched globally. The biggest US neobank is Chime, which “only” boasts 13 million users, while Revolut, one of the biggest neobanks in Europe, claims 15 million. The year-on-year growth of their user bases has been extraordinary, but these figures are also a drop in the ocean compared to the potential market.

What does this mean for the FinTech sector? This growth provides evidence that these challenger banks (and FinTechs in general) work and are providing the right solutions. But the figures also indicate that there are still huge swathes of the global population that can be tapped, with ABI Research estimating that neo/challenger banks will add another 435 million new accounts over the next 5 years.

Just as excitingly, the strides made in the acceptance of open banking, data sharing, cryptocurrencies, and APIs have signalled a new collaborative relationship between FinTech startups and the big banks, traditionally seen as arch-rivals. The result is that, between the challenger banks and their traditional counterparts, the reach of this sector is almost limitless.

So, whatever anyone might think about higher valuations or unprecedented growth rates, FinTech is surely the right place to be to impact a huge number of people and improve their day-to-day lives with services that some may view as a luxury today but which we may soon see as essential.

No wonder investors are running not walking towards FinTech.

Looking Forward

2021 was the most eventful year in FinTech that I’ve seen in a long time, setting us up for an intriguing 12 months ahead. We’ll be waiting with baited breath to see what the rest of 2022 brings…

For more information about ARIE Finance go to www.ariefinance.com

By Ricky Margolis, Market Analyst, ARIE Finance