The effects of the ongoing coronavirus crisis are not limited to financial markets, but business operations across a widening range of industries and are also being felt in almost every sector. Fintech companies, meanwhile, are well-placed to deal with digital demand and remote working requirements, although some are facing funding uncertainty in a volatile period. Many are offering their services to consumers and businesses for free, or innovating to create new products that meet a specific need, while the coronavirus crisis is ongoing.
The coronavirus pandemic is affecting nearly every type of financial service provider (FSP), particularly those serving the most vulnerable populations: low-income households and micro-small and medium-enterprises (MSMEs). The fintech sector holds great promise and potential to move the needle on financial resilience, health, and other basic services for underserved populations. Through innovations in product design, distribution channels, and business models, these companies provide critical financial services to low-income households and MSMEs.
This is not the first nor the last global emergency. FinTech and banking companies of the 21st century need to be prepared to operate in such circumstances. As with any significant market pullback, opportunities will eventually arise amid the disruption.
How are Fintech responding to COVID-19
COVID-19 triggers the partial closure of economies, the demand for information on early-stage fintechs requires a more immediate response. These fintechs are innovating rapidly to meet the changing needs of their customer base, many of whom are low-income households and businesses, while simultaneously reconfiguring operating models, internal policies, and growth strategies.
A group of financial services startup companies and fintechs have developed a proof of concept app that will help self-employed people in the UK during the coronavirus crisis. The idea revolves around an app that allows sole traders to prove loss of income due to coronavirus isolation. Finextra said, the app uses Open Banking to collect banking data, thus proving income and predicting any future loss.
It will offer an origination and underwriting platform that allows banks and lenders to virtually and digitally deploy funds to businesses that are facing cash flow problems as a result of coronavirus. Finextra reported that the platform can support any type of term loans, invoice finance and asset finance and that funds could be deployed in days. Fintechs have acted quickly and in partnership to create novel solutions for personal and business customers, often for free.
Fintechs are responding by delaying new go-to-market strategies, reducing employee salaries, and looking for emergency grant funding to help stretch out their runway. Ultimately, early-stage inclusive fintechs are looking for support as they adapt to this new reality. The situation will require constant, careful handling from finance companies as they seek to reassure consumers, respond to their concerns, and earn their trust during this volatile period and a lot may depend on just how well companies’ digital infrastructure and services can handle the increased demand.
Negative Impacts of Coronavirus on Fintech
The impact of the coronavirus outbreak is impacting both financial markets and consumer behavior as never before. At least in the short term, there has been a significant flight to safer investments by consumers, which could negatively impact VC funding of existing and new fintech firms. Fintech start-ups and scale-ups are no exception. As VCs and investors liquidate their assets, fintechs will need to tighten their finances and cut costs to survive the drop. This potential drying up of financing to non-traditional financial services firms could force many firms to find collaboration or investment partners from traditional banking organizations. Some early-stage fintech firms may need to shut down.
Before the Covid-19 crisis, only a limited number of fintechs were breaking even, or profitable, and most firms were focusing on year-on-year growth operating on investor money. It has already been documented that fintech deals decreased sharply during Q1 of 2020 and the drop is expected to deepen in the next few months (CBInsights, 2020).
Also, on the negative side, especially for fintech firms in the payments sector, is the impact of the expected drop in transactions at all levels of the economy worldwide. Fear, panic, and quarantine measure heavily impact consumer spending. Canceled flights, closed stores, and social distancing are expected to result in a drop-in transaction volume at all levels of the economy. This means FinTech firms in the payments sector like Square, Stripe, or Chime will collect fewer fees, negatively impacting their profitability and valuations. Hardware shortages could also impact firms like Square, that rely on digital devices to support transaction processing.
In particular, fintechs that rely on cross-border transactions, e.g. from travel spending or international payments, will be more affected as travel is banned and commercial restrictions on international trade imposed. For publicly traded FinTechs, falling share prices mean an increase in the cost of capital. Combined with lack of funding, this may mean that several fintechs will fail or be acquired on a discount as fintech valuations decline. This kind of speculation may have knock-on effects as consumers will be less likely to hold their investments or savings with smaller institutions that are more likely to go bust leading to a “fintech run”.
Positive Impact of Coronavirus on Fintech
Whilst we’ve seen many negative impacts recorded in the fintech sector, at the same time we have also seen some companies benefiting from. It’s encouraged many companies to adopt fintech for the purpose of their business. Alternatively, consumers desire for digital banking services will most likely increase, forcing many traditional financial institutions to fast-track digital innovation efforts. As a result, many legacy banks and credit unions may look to fintech firms for assistance in bringing better digital banking solutions to the marketplace. This increase in demand for digital solutions could provide a lifeline to fintech firms at a time when VC funding may not be an option.
As expected, better capitalized and profitable fintechs that recently received funding will have an advantage, but early-stage companies will suffer more as funding becomes scarcer and competition for cash intensifies. digital financial services will thrive and fintechs will be seen as the natural remedy. After all, the fintech revolution did emerge partially from the ashes of the previous global financial crisis, so fintechs are used to being agile, flexible and faster in responding to uncertainty.
Fintech firms globally also benefited from more flexible regulations in both emerging and mature countries, as organizations sought to improve financial inclusion and serve a broader digital economy. According to a report from Ecosystm, there were five key trends that were expected to shape the Fintech market during 2020. These included:
· Greater investment in platforms supporting financial inclusion.
· Increased collaboration and investment in fintech firms by traditional banks.
· Awareness of Asia being the center of the fintech universe.
· Rise of importance of advanced data and analytic start-ups.
· Regtech firms providing improved automation of compliance.
Over the past few weeks, it is clear that there is another major trend that will impact investment in fintech firms while also driving greater digital banking usage.
Conclusion
Living through dark times is half the way since it will be up to financial management teams to analyse the situation, draw conclusions, and adjust their business playbook accordingly. It’s clear that the outbreak is having major impacts on several aspects of business. What was seen as a revelation when fintech was introduced as a technology, we’re now seeing the possibility of having no use in this difficult period. However, we have seen that with the right application and making the most of opportunities, there is a possibility to adapt methods to keep afloat and tackle coronavirus.
The contrast with fintechs is stark, with several partnering to offer simple solutions to COVID-related business problems. TrueLayer, for example, is offering free, automated information retrieval and compliance services, which will help with securely verifying individuals and their bank accounts for existing contracts involving payments.
Finally, for those fintech, regtech and advanced data and analytic firms that can weather the current coronavirus storm, more venture funding will most likely be available. According to many reports, private equity and venture capital firms have significant cash available once the market stabilizes.
Simon Pearson is an independent financial innovation, fintech, asset management, investment trading researcher and writer in the website blog simonpearson.net.
Simon Pearson is finishing his new book Financial Innovation 360. In this upcoming book, he describes the 360 impact of financial innovation and Fintech in the financial world. The book researches how the 4IR digital transformation revolution is changing the financial industry with mobile APP new payment solutions, AI chatbots and data learning, open APIs, blockchain digital assets new possibilities and 5G technologies among others. These technologies are changing the face of finance, trading and investment industries in building a new financial digital ID driven world of value.
Simon Pearson believes that as a result of the emerging innovation we will have increasing disruption and different velocities in financial services. Financial clubs and communities will lead the new emergent financial markets. The upcoming emergence of a financial ecosystem interlinked and divided at the same time by geopolitics will create increasing digital-driven value, new emerging community fintech club banks, stock exchanges creating elite ecosystems, trading houses having to become schools of investment and trading. Simon Pearson believes particular in continuous learning, education and close digital and offline clubs driving the world financial ecosystem and economy divided in increasing digital velocities and geopolitics/populism as at the same time the world population gets older and countries, central banks face the biggest challenge with the present and future of money and finance.
Simon Pearson has studied financial markets for over 20 years and is particularly interested in how to use research, education and digital innovation tools to increase value creation and preservation of wealth and at the same time create value. He trades and invests and loves to learn and look at trends and best ways to innovate in financial markets 360.
Simon Pearson is a prolific writer of articles and research for a variety of organisations including the hedgethink.com. He has a Medium profile, is on twitter https://twitter.com/simonpearson
Simon Pearson writing generally takes two forms – opinion pieces and research papers. His first book Financial Innovation 360 will come in 2020.
