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2020: Digital Finance Officially Goes Mainstream

In a recent interview with Ivo Jenik from CGAP (the Consultative Group to Assist Poor), we discuss how years of digitization have been condensed into months on account of the global pandemic. The future of finance seems to be firmly digital:

Due to the health dimension of the current crisis that comes with social distancing and growing awareness of health risks associated with in-person social interactions, we’ll see a boost in customer preference for remote means of doing finance. And that means digital.”

What exactly, though, does our new digital “future” of finance look like? Recent developments over the last three months offer a glimpse:

1. Record-breaking digital usage

Money transfer, digital wallets, and payment platforms are among areas seeing explosive growth. Square’s Cash App, for example, increased its direct deposit volume 3x; the total value of all balances (equivalent to deposits) increased 37% to a record $1.3B in April. The CEO of PayPal, Dan Schulman, which is the owner of Venmo, said that Venmo had “become much more central to people’s management and movement of money instead of just being a social payment [service].” Other payment services, such as Zelle, which is operated by a consortium of banks, have reported similar jumps.

These companies have all benefited from a sharp shift in behavior away from cash toward digital. Consumers are now more likely to tip service workers, fundraise and donate to religious organizations, or pay local businesses using digital payments. The Federal Government has also hastened this shift: in a move to get stimulus payments out as quickly as possible, digital wallets with direct deposit capabilities were tapped to help.

Industry analysts now foresee the current growth in digital wallet adoption to be faster than social media adoption back in its heyday in the late 2000s and early 2010s.

Digital-first neo-banks are also seeing supercharged growth, including Varo Money, Chime, and Current. These digital-first banks have added millions of customers by offering compelling mobile-based products with intuitive user interfaces and without many of the fees as branch-based incumbents. Chime claims 8 million accounts, up from 1 million in 2018. It’s “SpotMe” feature allows customers with a debit card and direct deposit to overdraft without incurring the $35 fees typical of banks. Current, meanwhile, added 100k new customers in both April and May, bringing its total to 1 million active accounts.

2. New digital offerings

Companies smell opportunity in light of this new digital wave. This is coming to the forefront in auto and investing most immediately. These are areas where in-person interactions have historically been the norm.

On the investing front, Vanguard introduced a new robo service called Digital Advisor aimed at younger investors. This is on the heels of many other robo-advisor services previously introduced including Fidelity Go, SoFi Invest, Axos Invest, T. Rowe Price ActiveEdge, and Merrill Edge Guided Investing. Wealthfront, a prominent fintech and one of the original robo-advisors to gain in popularity, is expanding into checking accounts. Robinhood and Betterment have also expanded their banking offerings.

The car experience, meanwhile, seems to also be getting a digital makeover. Some 81 percent of franchised dealerships had a digital-buying option in place as of May 31 vs. just 66 percent as of early April, according to a Cox Automotive survey.

At the same time, banks and fintechs have proven adept at developing new products with speed and accuracy at scale as evidenced by the industry's Paycheck Protection Program (PPP) roll out. The PPP experience provides a glimpse into a financial future where technology enables speed, scale, and safety at unprecedented levels.

The global perspective

The latest global e-commerce numbers reveal the magnitude of this next jump in digital finance. April e-commerce sales surged 209% year-over-year and surged by 81% in May. These represent millions of first time users joining in. As finance goes digital, we are likely to see even more of these headlines in the months to come.

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