N’Gunu Tiny, Emerald Group founder, fintech expert and investor on how COVID-19 is impacting fintech.
COVID-19 is causing chaos around the world. From plummeting financial markets to collapsing businesses and entire countries under state mandated lockdown, the world is in the middle of an unprecedented crisis. And while it’s not possible to predict with 100% what any industry sector will look like when the pandemic has passed, it’s useful to speculate on the potential effect it will have on the fintech industry.
Of course, we’re not just collectively fighting a virus pandemic, but also the proliferation of false information about COVID-19. The spread of misinformation, whether deliberately or otherwise across multiple communication channels has changed consumer and investor behavior.
The effect of COVID-19 on the fintech sector and wider markets
Panic is easy to spread in an online world, and according to insurance company Euler Hermes, trade losses in the US from the pandemic could reach $320 million each quarter. However, we must remember that this is not the first, and most certainly will not be the last, global emergency that has a huge impact on markets.
Banks, financial services companies, tech developers and fintech companies must be prepared to pivot in order to continue operating under immense challenges like this. Any major market pullback will always present certain opportunities for those in a position to grab them.
In the last few weeks, since the impact of the virus began to be felt in countries outside of China in particular, panic, fear and mass quarantine has inevitably changed the way consumers spend money. With retail outlets closed, flights grounded, holidays cancelled and the many other major changes the virus has inflicted on consumer spending, the economy is experiencing significant falls in transaction volume.
Negative effects of COVID-19 on some financial services
This is, of course, also affecting fintech companies, particularly those that provide online payment services. Companies such as Square and Chime will be collecting fewer fees, which will adversely affect their valuations.
Mastercard and Visa have both issued statements to shareholders saying that they expect a significant slowdown in travel-related spending and cross-border business. This will cut their expected sales to 4% from 6%. We can expect a lot of venture capital investment in new start-ups and existing companies to drop off too, as investors seek out safer assets.
Various central banks, including the Bank of England in the UK and the Federal Reserve in the US, have slashed interest rates to try and stall a global recession. And, as demand continues to drop off, commercial banks will receive less income from transaction fees and business clients. It’s very likely that banks will delay any major spending decisions as they gear up for the potential downturn.
Banks shifting away from contaminated cash to online transactions
However, for those who are on top of the situation and can empathize with consumer needs when in crisis, there are opportunities. For example, contactless payments are being actively encouraged by the World Health Organization. There is evidence to show that physical money bills could be a cause of the virus spreading, and central banks have been quarantining bills when they come in from smaller banks. Therefore, there has been a significant push for contactless payments, and I expect these will significantly increase as we move through this pandemic.
Banks and payments businesses will be fast-tracking digital development in this area, if they weren’t already doing so before the crisis. COVID-19 is forcing innovation among companies that have been lagging behind the curve on integrating fintech solutions into their offerings.
Increase in online banking
Banking online is also increasing significantly, as branches follow government orders to shut down. Keeping customers out of physical branches is now necessary, and while many banks postponed the shift to online banking due to a strong economy before the pandemic, now is the time they will be overhauling outdated and old-fashioned banking practices.
During the last couple of years, traditional credit unions and legacy banks have been losing customers due to challenger banks offering superior digital services. This has forced these legacy businesses to catch up with adding digital functionality to their products, and in turn has pushed them to work with fintech businesses all around the world. This demand will only increase during the pandemic as banks rush to ensure they can continue to provide the services consumers expect. And this increase in demand for digitized functionality could be the boost fintechs need at a time when other funding becomes more difficult to obtain.
Governments around the world are also actively encouraging fintech partnerships, as they do everything they can to mitigate the economic fallout of the pandemic. For example, reports from China show that coronavirus has actively driven the regtech (regulatory tech) and fintech industries in particular. Similarly, the South Korean authorities are easing regulatory barriers to fintech adoption as a direct result of the crisis.
We’ve been through economic downturns and global recessions before. And while we don’t know yet quite how much COVID-19 will cost the world’s economies, fintech companies are in a promising position to adapt to the evolving market conditions and outperform bigger and more established businesses.
Founder Dinis Guarda
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