State of Fintech: post-COVID-19

 At the beginning of the year no one suspected that in just a few months, the whole world will face the same problem, nevertheless of nationality, race, or religion. 

At one moment, we are celebrating New Year’s Eve, flying back home to visit relatives, and looking forward to new beginnings. In the next one, we are locked out, travel plans are put on hold, and masks are a commonality. Even though the economy took a hit, it is logical to assume that some industries will benefit from the current situation and expand their businesses. Some of those industries are e-commerce, online retailers, and banks. It is due to the belief that paper money is “dirty” and helps spread the virus, and social distancing measures introduced in virtually every country. This article will explore how did the global pandemic affects fintech businesses and what can we expect in the future for them.

 

Before the deep dive, it would be beneficial to take another look at how the household consumption shifted and what are the trends. Based on the following research which provides a real-time view of behavioral shifts, it can be concluded that households are showcasing stockpiling behavior and that movement restrictions benefit online shopping platforms. N26 conducted a survey and found out that 10.000 of the survey participants 73 percent adapted financial priorities, with 65 percent of the total number increased monthly savings (around 177 euros).

 

The more time people spend home, the more they will spend online? Not really, one paper argues that based on their empirical analysis, with the introduction of COVID-19, expenditure declined, which is logical due to economic shock and uncertainty. However, an increase of transactional values in the last months of the study suggests that due to the government’s measures there is a positive trend and that it is expected to positively influence fintech business in the future period. Ultimately, COVID-19 accelerated the adoption of fintech and mobile banking, but favorable regulatory measures should follow to mitigate the negative effect of the slow-down.

 

But what is the picture like if we look at more countries? How do demographical factors and market size affect trends? By looking at both gross and relative numbers for 74 countries (72 had positive COVID-19 cases and 68 introduced lockdown measures) it can be inferred that after the first case confirmed there was an estimated daily increase of 88.000 fintech app downloads and 76.000 downloads after entering a lockdown. In relative terms, it represents approximately an increase of around 32 percent and around 24 percent after the first confirmed COVID-19 case and introduction of country-wide lockdown, compared to prior trends, respectively. Factors such as demographics, country development level, market size, or accessibility are good for predicting the widespread of fintech. Bigger markets have the bigger impact of COVID-19 therefore the magnitude of the sudden interest in fintech is also at a higher rate compared to smaller markets, while aging populations are negatively correlated with the dissemination of fintech. Ultimately this is consistent with the previous research, meaning that there is an increase in demand for mobile banking due to the world pandemic.

 

After an overview of how COVID-19 impacted one of the most important parts of the fintech business model, demand, and expenditure, we will move on to other challenges these businesses are facing. First, even though there is a consensus about fintech being agile, there are still some hurdles to be crossed, one of which is the business model. If the volume of transactions or cross-country transactions are the staple of your business, you will be affected more by the crisis since before mentioned stockpiling behavior and travel bans are affecting you more. 

In that regard, CB Insights propose characteristics of most resilient players:

a) Lots of capital (i.e. Revolut or N26),

b) A loyal base of primary banking customers that link direct deposits, and

c) Durable, multi-product offerings (Stash, Moneylion, etc.)

 

Furthermore, newer businesses are more susceptible to failure due to a shortage of cash and investments with the decrease in market activity. Therefore, established players are more likely to survive the initial hit and pray on low-cost acquisitions of newer companies. For example, Monzo, UK based internet bank, will have their CEO, Tom Blomfield, forfeit 12 months’ worth of pay as well as one-fifth of the company will have to take a voluntary unpaid leave of absence to survive the coronavirus hit on the economic activity. Finally, with an increase in the popularity of online payments, an increase in phishing and fraudulent activities follow, therefore companies need to address the issues to not lose the trust of clients. Some companies such as Revolut battle issues like fake news and fear-spreading by providing regular statements. After an overview of additional challenges, we will take a look at a few silver linings as well. One of which is the tech-savviness of fintech, which allows for a smoother transition to out of the office work model. Another one is the urgency of governments to not relive another economic crisis, therefore injections of cash in the industry alongside with looser legislation for business is expected to have an impact on SMEs, especially financial ones, which are most likely to first get help due to an increase in demand for crediting, online payments, and socially distant banking.

 

With all previously being said it is important to underline few things. First, we are still in the early stages of the coronavirus, the actual impact will be more visible after the collection of better data which will come in a timely manner. Second, whether the impact will be positive or negative on fintech business is yet to be determined as multiple forces are influencing the outcome, some being negatively correlated and others being positively correlated. Third, as the world seeks for a solution, it is fintech’s opportunity to respond and prosper by innovation and provide a solution to everyday life.