COVID-19 has completely reframed the way we consume and interact. Extensive social distancing measures being taken across the globe and countries going under complete lockdowns have significantly impacted the world economy. Businesses are undergoing a severe shortage of capital and are struggling for survival.
The Fintech sector, in particular, has taken the impact both ways. It has faced some serious risks due to the global decrease in financial transactions and, at the same time, has acted as an enabler by providing digital solutions to industries on the verge of bankruptcy. Here is a detailed analysis of how COVID-19 has affected the Fintech industry across the world.
Enabling Virtual Transactions
While the emerging financial crisis plays its role in contracting the economic activity internationally, businesses across the world will continue to decline. The Fintech industry will act as a force of good in this crisis. The lockdowns imposed will force the consumers to shift to online channels to carry out their financial activities. Fintech will be providing digital financial services by enabling virtual transactions, and hence act as a natural remedy to the situation. This will also allow Fintech startups to be more agile and flexible and better prepared to handle any financial crisis in the future as well.
Financial Assistance Initiatives
In order to avoid going bankrupt, businesses will be looking for all kinds of credit and funding opportunities they could find. This is an opportunity for the Fintech sector to grow and increase its customer base. They can uniquely position themselves to facilitate credit requests from businesses and provide financial assistance to individuals.
A lot of Fintech startups have already started working on such initiatives; capitalizing on the situation while playing their role in helping businesses out at the same time. Greensill, a startup dealing in trade finance, already reported the demand for credit getting tripled as businesses started experiencing cash-flow constraints earlier in March. Another similar startup, Monzo, has offered a range of repayment options for their customers who hold overdrafts or loans, encouraging credit opportunities for businesses.
Automated Credit Worthiness Assessments
The use of technologies such as Artificial Intelligence and Machine Learning algorithms in their operations can put Fintech startups at an advantage as they will be better able to assess the creditworthiness of businesses seeking funding. Such technologies will automate the due diligence process and speed up the process of distributing loans.
Additionally, Fintech will enable credit assessment through alternative data or non-credit information, which some businesses might offer to seek funding. This way, these startups can serve customers that are excluded by conventional financial organizations such as banks due to lack of collateral. This brings about many opportunities for Fintech as most businesses seek funding to stay afloat amidst the economic crisis caused by COVID 19.
Digital Identity Verification Services
Since most companies have now gone digital to keep working despite the social distancing measures, a lot of interactions are now occurring on-screen rather than in-person. Identity verification is an important part of on-screen interactions, especially when sensitive financial information is to be shared. Fintech can be extremely helpful in such cases since digital identity verification is already being used in this industry to verify digital identities with physical identities when conducting any business online. Through the use of AI and machine learning algorithms, it can easily track and report any fraudulent activities and enable digital transactions that are completely safe.
Usage in Governmental Schemes
Governments across the world have introduced different financing plans and are working on injecting cash into the economy to help businesses survive. However, the handling of such large amounts of cash and that too in a limited time requires a strong financial infrastructure. Fintech has helped execute such schemes through its digital transactional and credit assessment services. The enforcement of Fintech through such schemes by the government itself has improved the trust people put into it and has helped overcome the psychological hurdle people face to try out digital financial services.
And then there’s the downside…
Decrease in Demand for Fintech Services
The use of financial technologies might have helped countries fight their financial crisis, yet the demand for Fintech services depends on the overall economic activity taking place across the world. The decrease in financial transactions and the drop in business revenues have slowed down cash-flows and consequently, the use of Fintech. Also, with travel bans imposed worldwide, Fintech startups operating in cross-border transactions have been particularly affected as no such transactions are taking place.
Investments Slowing Down
Considering the on-going situation, a lot of venture capitalists and investors have liquidated their assets, leaving Fintech startups with tight finances. This has particularly affected early-stage startups as funding has become scarce for them, yet the competition has not dropped one bit. According to CBInsights, Fintech deals have dropped sharply over the first quarter of the year and are expected to plummet even more over the coming months.
Shortage of Capital
Most of the Fintech companies which were not breaking even as yet, and were operating mostly on investor money are now on the verge of going out of business completely. The current Fintech funding situation has fallen back to 2017 levels, and as of yet, there are no chances of recovery.
Analysing both sides of the picture in a detailed manner, it is clear that despite the challenges it faces, Fintech has an important role to play in holding the world economy together and restabilizing it once we get out of this crisis situation. Unlike what has been observed till yet, this can be an ideal opportunity for VCs and investors to support these startups now and then yield results once we get back on track post-COVID 19.