When the fourth quarter of 2019 was coming to an end, a global pandemic that quarantined people creating havoc in the entire economy and causing financial markets to plummet was hardly expected in the near future. While the lockdown is essential to contain and potentially reduce the spreading of the virus, it has threatened global trade, stifled e-commerce fuelling the fear of a possible international recession.
With the escalating spread of the Coronavirus which has infected more than 2 million worldwide so far, consumers inevitably have reduced fundamental transactions. This caused a chain reaction for financial companies including low profits, uncertainty in investors and, as a result, lack of funding. Silicon Valley-based VC firm Sequoia warned startups to “brace for turbulence” and that “companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider.”
A report by data firm CB Insights said that fintech funding has fallen to the same figures as 2017 and, in particular, for early-stage startups, it could be a herculean task to attract investors. It also detailed the total deals in the fintech sector which are down “month-over-month, quarter-over-quarter, and year-over-year.” In January 2019 the number of global deals which stood at 295 plunged to a mere 142 in March 2020.
Ultimately, in a frozen economy, fintech companies will have serious financial challenges ahead if they are unable to reduce costs or rely on their balance sheets,” the report said.
In the words of CEO and co-founder of TransferGo Daumantas Dvilinskas:
We’re operating in unprecedented circumstances and all aspects of fintech will undoubtedly experience some, if not significant, levels of turbulence as we all adapt to the new normal.”
Fintech startups such as Square and Stripe, which help businesses set up recurring billing and receive credit card payments, witnessed sharp downturns where the former even noted a 25% decline in its processing volumes compared to last year.
Startups are hardly alone. Big players such as Mastercard and Visa warned stakeholders of a lower year-on-year revenue compared to 2019. Both the payment companies estimated a steep slump in cross-border business caused due to a lack of travel-related payments and a drop in profits by 2-4%.
We anticipate that this deteriorating trend has not bottomed out yet,” Visa said in a regulatory filing.
Similarly, due to the decline in e-commerce traffic, PayPal witnessed a 1% reduction in its year-on-year revenue on a foreign currency neutral-basis. Talking to TechMeru, John Maxwell, managing director, Constellation Partners explains that challenges in the current situation might make it harder to “[access] capital and [have] financial constraints as companies try to manage expenses, retain employees and work from home while keeping their business and customers satisfied and engaged.”
Will Contactless Payments Become More Mainstream?
Despite the pandemic having an inconceivable effect on all sectors, some say it poses an opportunity for fintechs. Given that the World Health Organization has now encouraged consumers to resort to online payments to prevent the spread of the virus, it’s easy to see how the traditional mode of payments will be disrupted.
For instance, Rizal Commercial Banking Corporation (RCBC) recorded a 259% increase in the number of new registrations on its online banking service in March alone. Lito Villanueva, RCBC’s executive vice-president said in a statement:
Our customers can now bank from home using all our digital channels offering free fund transfers through InstaPay and PESONet including send cash function for their beneficiaries without bank accounts.”
Clearly, fintech companies which capitalize by improving their digital applications will not suffer. Maxwell says:
We see the pandemic to permanently and structurally change the momentum away from traditional banking toward an accelerated acceptance and reliance on fintech.
“The promise of digital technology to become mainstream may finally have reached a tipping point of adoption.”
Consequently, countries such as South Korea and China are easing their regulation on fintech. Research by financial advisory deVere Group showed that COVID-19 accelerated the use of fintech apps by 72% in Europe alone.
“Since the 2008-2009 financial crash, fintech has been filling the void left between what traditional financial services companies are offering and what clients are now expecting, especially in terms of customer experience,” James Green, deVere Group’s Divisional Manager of Europe said in a statement.
“It can be expected that due to the Coronavirus pandemic and the steps being taken to combat it, this move towards fintech will be significantly accelerated.”
Due to health worries caused by Coronavirus, cash is no more the king. TransferGo CEO Dvilinskas says:
Online remittances have seen a marked increase as people use digital-first money transfer services to stay in touch and support their loved ones.”
Along with consumers choosing contactless payments and even cryptocurrency due to non-availability of cash, Dvilinskas said entrepreneurs too would be compelled to make the much-needed digital shift. “One of the silver linings of Coronavirus is that for the fintech sector it creates an opportunity to re-think our working practices,” he adds. “While this is more than just about how quickly firms can enable working from home, there’s an argument that at the other side of this we’ll have a better understanding of what the most efficient working practices are.”
Echoing a similar sentiment, Maxwell says:
Fintech companies will need to focus immediately on balance sheet and cash flow management.” Citing a study done by Goldman Sachs in March 2020, which said that 51% of small businesses will have less than three months of cash reserves, he said: “thus, those companies able to become lean and mean will not just survive but thrive”.
How Can Fintech Businesses Pivot in a Post-COVID-19 Era?
Maxwell says that going forward opportunities in B2B cross-border payments is especially strong in emerging markets and in particular blockchain, the distributed technology that underpins digital currencies, could have a meaningful and important impact across industries.
Alongside blockchain technology, a report by Finch Capital emphasized that financial institutions will increasingly require to rely on artificial intelligence (AI), IoT, and SaaS to handle large transactions.
AI is projected to reduce bank operating costs by 22% around 2030. That could mean savings to the tune of $1 trillion ahead,” Maxwell continues.
However, it’s important for a business to ensure the transformation from offline to online is permanent. “No one predicted it would take a black-swan event such as the pandemic that quarantines people globally to be a catalyst,” Maxwell concludes. “Thus, the real question is whether the pandemic pushes digital transformation to become more than several month spikes, but rather has a long-lasting business and financial boom for the fintech industry.”