Crypto to credit: What’s ahead for digital banking?

This article was first published by Medici.

2020 was a banner year for digital banking, challenger banking, and the fintech community overall. The 20 largest challenger banks are now valued at over $73 billion and serve over 130 million customers. Over the past year, companies were forced to rethink how they bring products to the market and address the needs of their consumers in the face of a pandemic.

Looking ahead, here are the top five digital banking predictions:

1. Challenger banks need not be “everything to everyone” to win

With more than 250 digital banks now launched globally, the obvious question is whether they will all be able to scale successfully. The banks likely to come out on top are those that solve significant pain points, many of which might not be apparent. More banks that are focused on smaller segments and serving them well will likely succeed.

2. Traditional players’ partnerships with Big Tech will provide another source of competition and innovation in the space

With Big Tech dipping its toes into digital banking via partnerships, legacy banks may have found a way to level the playing field against challenger banks. Legacy financial institutions will continue to remain relevant by partnering with digital-savvy and data-savvy players to future-proof their businesses. The Citi Plex Account by Google Pay is a great example of how partnerships between traditional banks and Big Tech can benefit both sides. We expect to see more partnerships in the future that give traditional players access to far-reaching digital acquisition channels.

3. Digital banks could help make plastic disappear

This prediction will last well beyond 2021, but COVID-19 has certainly accelerated its trajectory. COVID-19 persuaded millions of consumers to adopt digital payment methods that minimized physical contact. Without physical branches, digital banks are heavily investing in seamless onboarding experiences. Many will embed these types of experiences across their overall offerings, including payment cards. However, digital banks won’t make plastic disappear on their own; merchants need to participate as well. More retailers are adopting digital and contactless payment methods at the point of sale and online to accommodate customers. With multiple advancements in payment technology and changing consumer expectations, physical wallets may soon become a thing of the past.

4. Credit cards will become the focus of many product roadmaps

Most challenger banks have focused their initial offerings on innovation around bank accounts and debit cards. However, with a need to expand their product portfolios and diversify revenue, credit products will start to dominate many fintech product launches. Credit cards serve as a cornerstone of daily spending habits, constituting 55% of purchase volume in the US.* And there’s also more opportunity to differentiate with credit card features such as rewards compared to debit cards that tend to earn a lower interchange rate. The key for fintechs will be having the right technology partner that enables them to create customized credit products for their user base.

5. Cryptocurrencies will become more accessible via digital banking

Cryptocurrencies have typically been thought of as an investment play for a very niche audience. However, more fintechs are starting to look at how they can incorporate cryptocurrency into day-to-day banking offerings. Going forward, more fintechs will start to innovate around cryptocurrencies and incorporate them into everyday digital banking, bringing them to a mainstream audience.

*2020 Nilson Report, June 2020