The dotcom crash of the early 2000’s led to the creation of tech giants like Google; the global financial crisis of 2008/09 saw the emergence of fintech itself. What might the COVID-19 pandemic lead to, and what might it mean for fintechs operating today?
What we learn from momentous events of the past is that they galvanise people to innovate their way out of problems and create new models fit for a new reality. I have little doubt that we will see the same phenomenon here.
Already, the outbreak is greatly accentuating the importance of digitization. The use of ATMs and cash has significantly fallen; bank branches are closed or operating on reduced hours, and footfalls may not return to their previous levels.
Fintechs are well placed to weather the storm due to their lean operating models and structures. The total cost of operation for a fintech may be as much as 70 percent lower than for a legacy bank with a large branch network. Their systems are cheaper to run, more flexible and are built to be able to scale resiliently.
All of these factors play strongly to the fintech model and as a result we can expect to see demand and interest in the cloud enabled, agile services they offer across the financial services ecosystem rising strongly. The legacy banks themselves have perhaps realized through this period that they are not as digitally enabled across the enterprise as they would like: some have struggled to originate SME loans at pace and scale, for example, finding it hard to deploy the APIs needed to pull information out of other systems or upload accounting data out of accounting systems. It commonly takes over a week to complete a loan, whereas some challenger or neo banks are able to do this in just hours.
Before COVID-19, we were already seeing an increase in the corporate venture arms of the large banks actively buying up promising fintechs and start-ups. As we emerge into the recovery and beyond, we can expect this to accelerate. The incumbent giants are likely to acknowledge that they need a greater degree of scaled collaboration with fintech players to bring more digitized services and benefits to their customers.
However, the fallout from the pandemic is certainly not without its challenges for fintechs. We are likely to see some casualties due to the array of pressures that are forming.
In banking, we can expect to see something of a ‘flight to quality’ as customers become more risk-averse and place their deposits with familiar names who are perceived to be a safer bet in challenging times. Income from areas like transaction interchange and foreign exchange are also expected to fall; those neo banks who are not well-diversified could take a hit.
Meanwhile, we also expect to see significant rises in credit impairments and bad debt, which could be another significant drag on neo banks as well as point of sale credit providers and peer-to-peer lending platforms. The platforms are also likely to see a reduction in in-flows from investors as they naturally become more cautious; volumes of business will likely drop.
At the same time, we will see some potentially major changes in the investment landscape. The venture capital (VC) and private equity (PE) houses that are invested in fintechs can be expected to continue to support the businesses in their own portfolios – but are likely to become much more cautious about supporting new ventures with seed funding or early series raises. The emphasis is expected to very much shift to funding rounds for later stage enterprises. Valuations – which had become eye-watering in some cases – are likely to reduce significantly too. Investors will likely become much more stringent in their assessments. The froth in the market may well and truly be blown away.
These factors mean that we can expect to see some consolidation in the fintech sector. But sound players with strong propositions should survive and then thrive. New research by KPMG in the UK, shows that around half of fintechs believe they have enough cash and working capital for the next 18 months in any case, if they cut costs by 25 percent, even with a 50 percent income drop.
Once we begin to emerge into the recovery, there will be huge amounts for fintechs to play for. Pockets of the market like digital payment and e-wallet services are expected to boom, while players offering digital identity and Know Your Customer (KYC) services will likely be set to prosper too. The virus has brought a rise in fraud and cyber security incidents as fraudsters seek to exploit lockdown, meaning that businesses offering new tech solutions in that space could also thrive.
With so much heightened awareness of the importance of health and wellbeing, I believe we will also see increasing links between financial services and healthcare, with customers looking to safeguard and provide for themselves and their families. This could be another fruitful area for fintechs and insurtechs with smart new solutions.
It won’t all be smooth sailing. Some players in certain segments of the market may feel the strain and fall by the wayside. But with digital and ecommerce solutions set to become more in demand than ever before, the opportunity is there for fintechs to play a leading role as financial services transforms itself.