Fintech to infinity

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May 12, 2021


Fintech was heating up long before the pandemic, bridging the gap between Silicon Valley and Wall Street. But because it was conveniently positioned for lockdowns, it saw an even greater acceleration throughout 2020, according to James Boyd, portfolio manager of the Mellon Opportunistic Midcap Strategy.

As businesses and consumers relied on virtual interaction, one area that saw a rise in adoption was digital payment apps. This was partially driven by the substitution of traditional shopping experiences for e-commerce, according to Boyd.

“Digital payments were already taking share from cash and checks, but this took a major leap with the pandemic when people were forced to consume products differently,” Boyd says. “The adoption of business to business [B2B] digital payments had been relatively slow, but all of a sudden, with people working from home, we saw a sharp acceleration there too.”

On the consumer end, digital payments underwent a noticeable surge. One online payment company revealed a tripling in profits and it added 16 million new accounts in Q4 2020. Similarly, a separate person-to-person [P2P] payment app saw a 32% increase in its accounts.1 Yet B2B payments have been slow to assimilate to a cashless world. In 2019, physical checks still accounted for 42% of B2B transactions.2 But since the start of the pandemic, this number has come down as small businesses faced an existential level of disruption, including mandatory work-from-home, according to Boyd.

While a number of solutions already existed to facilitate electronic B2B invoicing and payment acceptance, some businesses were reluctant to transition because of fears there would be a lack of visibility and control; but disinclination to change played a part too.3 Even so, one online payment solution provider said it saw an eightfold increase in digital invoicing with an embedded payment link from March to December 2020. That same company estimates the global B2B payment processing market to account for USD$127 trillion in volume worldwide.4

“In the past when small businesses had to pay suppliers, they did it by check. Because many offices migrated to a remote infrastructure, it was hard to write a check, pick up the mail and send invoices, so a lot of them decided to go digital,” says Jonathan Piskorowski, research analyst on the Mellon Small-Mid Cap Equity team.

Similarly, Piskorowski adds, many financial institutions worked on improving their digital banking infrastructure.

“It’s sort of mandatory to have a great digital banking experience. Banks that weren’t doing it before the pandemic have decided it’s absolutely table stakes and began investing more in that part of the business,” Piskorowski says.

As Piskorowski says, the pandemic made it necessary for banks to provide clients with a digital option. According to TIME personal finance hub, Next Advisor, there was a 200% increase in mobile banking registrations in April 2020, accompanied by a 50% drop in branch bank traffic.5 In Europe, where banks initially had trouble steering retail customers to digital platforms, COVID-19 restrictions helped boost online banking usage by 3% in 2020, according to S&P Global Market Intelligence. And—particularly noteworthy—Spain and Germany saw a 7% and 4% year-over-year increase, respectively.6


While digital transactions and mobile banking saw a surge in usage, one fintech area that hasn’t seen the same tailwinds is investment management software. “Believe it or not, it’s probably the most stagnant part of all innovation taking place,” Piskorowski says.

Boyd adds, “When you think about the pandemic, technologies that saw the most growth provided solutions to traditional areas that were undergoing disruption. But analysts working from home largely use the same systems they did in the office. So that aspect of fintech didn’t necessarily see an uptick in adoption or innovation.”

That’s not to say investment-focused fintech was entirely void of growth. The pandemic coincided with a notable surge in retail investor participation due to reduced barriers of entry made possible by mobile investment apps. This partially explains large increases in average daily trading volumes, from 7 billion in 2019, to 10.9 billion in 2020, and 14.7 billion by early 2021.7 Because they offer commission-free trading and allow users to buy fractional shares, the apps have found success in introducing a new demographic to the market. The low costs for the end user results from the apps’ ability to generate income via payments for order flow, which means they’re paid for directing orders to large market makers to execute trades.

While the cost-conscious model was already appealing to millennials, the pandemic created a perfect storm of conditions for these apps to further grow their userbases. For example, one well-known app, which has over 13 million users, says three million of them signed up in the first four months of 2020.8 Likewise, its revenues from directing order flows increased from US$90min Q1 2020 to US$220min Q4 2020.9

“Retail trading largely depends on how much money is in people’s pockets. When the pandemic hit, people were getting stimulus checks and were stuck at home, creating an impetus to sign up for these services and start trading,” Piskorowski says. “However, there’s a secular aspect to it too. The fractionalization of shares helps. I think the uptick in engagement we’ve seen has legs.”

At the end of the day, both Boyd and Piskorowski are excited for the future of fintech. Whether it be digital payments coinciding with the growth of e-commerce, the ongoing digitization of B2B transactions, or even the evolution of online and mobile trading platforms; they believe fintech is an essential component of the changing world.

“The innovation has been remarkable, not only from well-known names that touch the consumer; but it’s the entire fintech ecosystem, almost like arms dealers to ordinary corporations,” Boyd says. “When you look at the sector, there’s going to be another US$500bn to US$1trn of public market cap coming over the next few years. It’s a really dynamic space and a lot of fun to cover,” he concludes.

1 Forbes: The time is now for electronic B2B payments. April 8, 2021.

2 Forbes: Checks remain relevant—even in a digital payments world. March 1, 2021.

3 Payments Journal: Why B2B is losing the ePayments race. April 12, 2018.

4 Digital Commerce 360: Covid-19 pushes B2B shift to digital invoicing. December 2020.

5 Next Advisor: How the pandemic pushed a generation of Americans to discover the perks and risks of online banking. January 8, 2021.

6 S&P Global: Covid-19 push to online banking gifts lenders progress in laggards. April 19, 2021.

7 CNBC: Trading volume is up from 2020’s breakneck pace as retail investors jump in. January 22, 2021.

8 Bloomberg: Robinhood’s addictive app made trading a pandemic pastime. October 20, 2020.

9 TechCrunch: A fraction of Robinhood’s users are driving its runaway growth. February 19, 2021.


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