Markos Zachariadis, Professor in Fintech and Information Systems at Alliance Manchester Business School, on the impact of Covid-19 on fintech startups
COVID-19 has brought the global economy to a standstill. With limited capital, SMEs across the UK are particularly vulnerable and fintech startups are no exception.
As venture capital funds and investors liquidate their assets, fintechs will need to tighten their finances and cut costs to survive the drop. So what does the future have in store for the industry?
Profitable enterprises and those backed by funding will have the upper hand, whereas early-stage companies may suffer as the competition for cash intensifies.
The impact of COVID-19
Before the current crisis hit, only a limited number of fintechs were breaking even or profitable, which could pose a problem for the sector. The volume of global fintech deals also already decreased sharply during the first quarter of 2020 - in February, transactions were down 22% on the year before.
This drop is highly likely to deepen in the coming months.
Added to this, while the fintech ecosystem has proved to be transformative for finance, demand for its services is dependent on economic activity across the globe.
Payment revenues worldwide are forecast to drop by as much as 8-10% as spending decreases, which is equivalent to a reduction of $165bn to $21bn, according to McKinsey’s Global Payments Map.
This will affect the business model of many fintechs, who relied on scaling up their customer base and making small profit margins from money transfer and payment services.
In particular, fintechs that rely on cross-border transactions - such as travel spending or international payments - will be more affected by the restrictions on travel and international trade.
Combined with a lack of funding, this may mean that several businesses will fail or see their valuations decline. Consumers are also less likely to hold their savings with smaller institutions that are more at risk of going bust in these difficult times, so any kind of speculation may lead to an exodus from the market.
Continuing the fintech revolution
For fintech, the crucial question is whether digital financial services will thrive in an environment that forces consumers to switch to online channels.
The fintech revolution emerged in part from the ashes of the previous global financial crisis and its startups have a track record of being agile, so it’s likely they will be quick to respond to uncertainty.
There are numerous ways their innovative approach could provide a fillip to the economy’s recovery.
In order to avoid companies defaulting, the UK government is rushing to inject cash in the economy and to capitalise businesses and the self-employed through financial aids. The circulation of large amounts of cash through the Coronavirus Business Interruption Loan Scheme (CBILS) in such a short amount of time is a difficult exercise that requires a solid financial infrastructure and supply chain.
In that respect, fintechs are uniquely positioned to step in and facilitate credit requests from businesses and funding to individuals.
Machine learning algorithms can also put fintechs like Funding Circle or OakNorth at an advantage, as they are called to assess credit worthiness of businesses and distribute loans rapidly by automating the due diligence process.
Fintechs may be able to serve customers that are usually excluded by the traditional banks due to lack of collateral or other factors. Bigger and older financial institutions that operate with legacy technologies and models may struggle to work at this pace. Considering that most of the SMEs have limited liquidity, time is of the essence.
Fintech as a force for good
It’s important to acknowledge the ways that the fintech community has been a force for good already during this time.
As one example, members from the UK fintech community, led by Credit Kudos, Fronted and 11:FS, recently came together to create a digital solution for the self-employed to prove a loss of income via open banking and be eligible to apply for government for fiscal support.
Incredibly, this was developed over the space of a weekend. Greensill Capital, meanwhile, has provided its salary finance platform at no cost to allow NHS workers to be paid sooner.
It’s time to boost investment and bring these vital services to the forefront of the sector. The historic challenge for the fintech market has been growing customer bases, largely due to customers’ lack of trust in new players in the data-sensitive industry.
If fintech solutions are incorporated into formal government schemes like the CBILS, the psychological hurdle can be overcome more rapidly, which will in turn boost the digitalisation of the financial services sector.
A digital future
As high-street banks close more branches, customers will increasingly rely on digital solutions in the future.
This means that now is the time for many types of fintechs to prove their value, utilising their advanced algorithms for the benefit of customers who need better money management, access to credit and benefits, digital identity services and quick fund transfers.
This also means that, despite the economic hardship that will inevitably follow the Covid-19 crisis, it’s time for investors to support fintechs whose services can increase customers’ financial wellbeing.
The crisis has already proven that digital financial services are the future and are more necessary than ever in an increasingly digitised world.