2020 has been a huge year for fintech. As COVID-19 continually reigned chaos on the global economy, a wave of change and innovation has crashed over the industry.

After all, it had to: huge fluctuations in capital markets combined with lost jobs, social distancing, increased medical costs, shuttered businesses and many other things created a financial pressure cooker.

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Indeed, customers that previously accessed financial services in-person were suddenly forced to do so online. Individuals that lost their jobs suddenly found themselves looking for alternative sources of income on the internet; small businesses that were forced to close their doors eagerly sought funding from the government programs that were slated to help them, all through fintech platforms.

For the most part, fintech stepped up to the plate: while there were bumps in the road, fintech companies worked to scale their platforms for large amounts of new users. Fintech companies signed on to help governments distribute stimulus payments and loans; they added new features to accommodate new kinds of users.

At the same time, traditional banks and large financial institutions added and integrated fintech solutions that made their services accessible to users that were stuck in quarantine.

However, while a lot of things were accomplished in a short time, there are some ways in which the fintech industry, including large financial institutions, VCs that feed into fintech, and fintech companies themselves, could have done better.

#1: When It Comes to Digitally Serving SMBs, Banks Are Playing Catch-Up

One of the most important trends, if not the most important trend of the year as a whole, is the continuing movement toward digitization in financial services.

When social distancing began earlier this year, many banking customers who typically conducted their personal financial business in-person were suddenly forced to rely on digital platforms, some for the first time.

Scarlett Sieber, CCG Catalyst’s Chief Strategy and Innovation Officer, told Finance Magnates that “the banks who implemented digital capabilities early on had greatest success as more of their customers transitioned to online and mobile banking.”

However, Sieber pointed out that while banks charged ahead in terms of providing digital services for individual customers, small businesses may have been left in the dust: “many financial institutions fell short on meeting the needs of their small business customers,” she said.

“Products and services addressing the totality of small business needs are still lacking,” she continued. “Things like online and mobile account opening are still in their very early stages.”

Where Digitization Efforts by Larger Institutions Fell Short, Smaller Fintech Companies Have Stepped up to the Plate

Jorge Sun, LendingFront’s chief executive and founder, also pointed that large financial institutions’ apparent oversight of small and midsize business (SMB) clients could have dire consequences: “now more than ever, small businesses need access to capital, especially as many SMBs are overlooked by larger banks and may not have qualified for PPP loans.”

On the other hand, the gap in financial services for SMBs may have offered an opportunity for smaller fintech companies to step in. Jorge says that his company, for example, “works with banks, credit unions, payment processors, and alternative lenders to power their small business lending programs.

“The pandemic, in short, is keeping fintech very busy as more small businesses need loans processed quickly and efficiently.”

#2: A Lack of VC Funding Stymied Innovation by Smaller Fintech Firms

However, while many smaller fintech firms may have done a better job of serving SMB customers than their large banking counterparts, a lack of funding may have presented an insurmountable obstacle.

The fintech industry as a whole has been faced with a unique set of challenges earlier this year: on the one hand, platforms have been forced to innovate in order to accommodate new waves of digital customers and users. On the other hand, a lot of the VC funding that would have helped newer more innovative firms to get their feet off the ground simply was not there.

This lack of VC funding in fintech can be explained by the great threat of uncertainty that the pandemic posed to the global economy earlier this year. As the world enters Q4, the pandemic is still raging on, but now, at least, the nature of the beast seems a bit less mysterious.

Indeed, as the pandemic continued to rattle global society, fintech firms played an increasingly important role in distributing relief funds. Additionally, fintech companies were faced with swathes of new users.

Perhaps this is why now, VC funding for fintech firms seems to be on a bit of an upswing. CCG Catalyst’s Scarlett Sieber explained to Finance Magnates that “at the onset of the pandemic, funding dried up in the space, especially for early-stage startups.”

In an interview with Finance Magnates earlier this year, fintech influencer, Spiros Margaris predicted that small fintech startups would suffer: while big firms get bigger, “smaller players, small fintechs, a lot of them will disappear” because of COVID, he said, in addition to “the fact that a lot of them disappear anyway because that’s the nature of the startup business.”

The greater consequence of all of this, Spiros said, is that “innovation will go down because if there’s less competition out there, there isn’t a need to innovate as much.”

Funding Is Returning to Fintech, but VCs Are Wary; the Focus of VC Firms Has Changed

However, now things may be changing. Sieber said that “we are seeing that the hot deals are oversubscribed with high valuations. Money continues to pour into the neo-bank space,” she said, pointing specifically to Chime’s ‘explosive growth’ over the last 18 months.

Still, VCs are more wary than they were in the pre-COVID era: Lindsay Davis, leading fintech analyst and Director of Intelligence at Caliber Corporate Advisers, told Finance Magnates that “right now, we’re seeing VCs have the capital to deploy and have been hesitant at current valuations.

“There is still a glut of fintech companies valued at $1 billion+, but investors want to see liquidity. We’re in a period where there are record low interest rates so raising capital is cheap.”

As funding is returning, there are some changes in how it is being allocated: for example, “more startups are focusing on niche customers,” Scarlett Sieber told Finance Magnates.

Moreover, Lindsey Davis sees the focus of fintech VCs shifting: “in Q4 and beyond, funding to early-stage startups will pick up as entrepreneurs build products to solve for the new market realities of COVID-19 and the industry re-organizes its priorities in terms of what needs to be done, such as end-to-end digitization for customer onboarding.”

#3: Has Fintech Has Been Overly-Focused on Millennials? User Bases in Older Generations May Be Neglected

Indeed, this shift in focus highlights another important fintech trend as the year draws to a close: customization and transparency.

While much of the innovation that has occurred throughout the year has been about simply building the rails to accommodate financial services customers online at a very basic level, there has also been a notable increase in interest in fintech platforms that provide a specific set of products and services to a specific sets of customers.

Rhian Horgan, chief executive of financial wellness platform, Silvur, said that one of the most popular examples of this is platforms, like Robinhood and YNAB (You Need a Budget), in other words, platforms that target millennial and GenZ users.

“Personal finance platforms and other tech-enabled wealth management or consumer finance platforms have focused on acquiring customers early, typically targeting millennials that are beginning to build wealth,” Horgan said.

However, Horgan argues that while fintech’s focus on younger generations has been profitable and productive, fintech has yet to tap into possible user bases that are currently in their later years.

“While there is a need to serve those cohorts — and companies benefit from supporting consumers early and creating trust — that focus has also meant a lack of attention paid to older (and already wealthier) generations,” she said.

VCs Should Focus on “Untapped Opportunities for Fintech Startups to Better Serve the Changing Customer Landscapes.”

“Today, baby boomers are the primary customers of traditional register investment advisors (RIAs). Many believe that they are not open to more technologically enabled solutions,” Horgan continued.

“However, there is a shortage of fintech that will match their user-design needs — despite an increase in technology adoption over the last 10 years with 67 percent of Baby Boomers owning a smartphone, 52 percent own a tablet and 57 percent are active on social media. As Boomers enter retirement, this lack of offerings becomes even more apparent.”

Mike Novogratz, the founder of cryptocurrency merchant bank, Galaxy Digital, also pointed out this phenomenon earlier this year when he announced the launch of two new cryptocurrency funds targeted specifically toward older, wealthier Americans that while crypto and other newer investment products may initially be more appealing to younger generations, failing to tap into older generations could represent a missed opportunity of considerable size.

“Boomers are also spending more than their predecessors during retirement and control about 70 percent of all disposable income in the US,” Horgan said.

“As retirees continue to take advantage of their newfound time and freedom, spending on travel and consumer goods — especially with a health and wellness focus — has significantly increased. VC funds should view both of these dynamics as untapped opportunities for fintech startups to better serve the changing customer landscapes.”

What are your thoughts on the fintech ecosystem’s changes throughout 2020? Let us know in the comments below.