We could easily argue that 2020 was a year to remember, especially when it comes to digital transformation. Pre-pandemic, digital strategies were already on the agenda for most companies, but the need for business continuity in some cases has led to big jumps towards digital revolution. 2020 was the year of milestones as more of everything moved online. One of the most revealing examples is IKEA’s decision to discontinue its catalog, a 7-decade tradition and one of the world’s biggest annual publications, after it reached a peak in 2016, with over 200 million copies distributed to more than 50 markets.
As 2021 is already unfolding and some businesses prepare to take advantage of the digital transformation, it’s encouraging to have a look back at what 2020 had in store for the payments and banking ecosystem. For this reason, we have put together a list of some of the most important news and developments that hit the headlines in this space:
More entities joined the Central Bank Digital Currencies (CBDC) bandwagon
According to a survey from the Bank for International Settlements (BIS), 80% of the central banks worldwide are working in some way on CBDCs, while 40% have moved beyond conceptual research to experimentation. After in 2019 People’s Bank of China and the US Federal Reserve started exploring the replacement of physical cash with a digital analog, at the beginning of 2020 it was European Central Bank’s turn to show interest in expanding its role in developing central bank digital currencies. In October 2020, a report compiled by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank, and the BIS highlighted the key principles for a CBDC (coexistence with cash and other types of money in an innovative payment system, among them). More dialogue and problematic aspects are expected to be tackled, as the parties involved will explore open questions around CBDC and other topics, such as cross-border payments.
Commercial entities have also joined the global CBDC initiatives. In September, Mastercard announced that they built a virtual testing platform to help central banks assess and explore national digital currencies. Through this platform, the card company aims to enable the simulation of issuance, distribution, and exchange of CBDCs between banks, financial service providers, and consumers.
A major fintech acquired a bank
We could argue that 2020 marked the tipping point for fintech movement into the regulated banking space and the first-ever instance of a major fintech acquiring a bank. In February, LendingClub announced the acquisition of Radius Bancorp. If approved by regulators, the takeover would allow LendingClub to fund its own loan warehouse with deposits, bringing more flexibility and reduce costs, as compared to borrowing from bank lenders. Another most probably forefront decision was the approval by the Federal Deposit Insurance Corporation of Varo Money’s application for deposit insurance to start a bank.
SWIFT gpi’s Universal Confirmations became mandatory
The new service from the interbank co-operative that enables consumers and businesses to send tracked payments in seconds across borders comes after a two-year phase-in period. SWIFT remained firm on the deadline for banks and corporates to adopt gpi’s Universal Confirmation, allowing for tracking and confirmation of payments in real time, thus streamlining the cross-border payments. In December, Lloyds Bank became the first bank to switch on Swift gpi Instant.
New payment giants accessed China’s payments market
In 2019, the acquisition by PayPal of the Chinese licensed payment company GoPay was approved, a deal that signaled PayPal’s official entry into China’s USD 27 trillion domestic payments market. Through the acquisition, PayPal became the first foreign payment platform to provide online payment services in China. Although local players such as Alipay and WeChat Pay dominate this market, there’s still room for it to grow. In June 2015, the Chinese government allowed foreign bank card clearing providers to obtain licenses by setting up units or acquiring a local company, ending a monopoly by state-run China UnionPay. Last year, American Express was accepted its application to start a bank card clearing business while Mastercard won the approval to begin formal preparation for an institution with a similar purpose.
The consolidation of payment companies into mega fintechs continued
Last year, the payments services industry continued its process of integrating vertically, horizontally, and geographically with the mission to enhance capabilities and build strong ecosystems. Following the trend of previous years, the consolidation was accelerated in the payments sector in 2020, as technology investments were needed to achieve scale. The largest M&A deal of 2020 was Worldline’s acquisition of Ingenico for USD 7.8 bln, which led to the creation of the largest European payments company in a sector dominated by US and China-based giants. Another deal that hit the headlines was Mastercard’s announced takeover of the data-focused fintech API startup Plaid. However, the Department of Justice filed suit to block the deal in November, stating that the new entity would “eliminate a nascent competitive threat that would likely result in substantial savings and more innovative online debit services for merchants and consumers.”
The Wirecard saga
In June 2020, Wirecard announced that it was unable to locate USD 2 bln worth of cash in its trust accounts, causing the company (once valued at USD 13 bln) to collapse into bankruptcy. Currently, administrators have already sold or are in the process of selling off parts of the company, with dozens of entities having shown interest. The scandal around the missing amount has led to numerous discussions around the regulations in the fintech sector. Chris Skinner argues that even though adding more regulation to the system would seem a viable solution, the actual need might rather be connected to more granular regulation. The micro regulation concept would imply the existence of regulations that work at process levels rather than at entity levels, and accountability that is settled at the process level not at the entity level.
In 2021, new strategies and business decisions that might have been taken in response to the pandemic will continue and will have multiple implications for businesses and consumers. Forward-thinking organizations in the payments and banking space will maintain focus on the fundamentals necessary to survive and thrive in these uncertain times.
At Maxcode, we’re open to discussing upon your projects related to digital transformation and innovation journey and provide technical know-how and support. Contact us to learn more on how to offer smarter and relevant solutions to your clients or consumers.
9 November 2023
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