Author: Vedran Obućina

Analyst, journalist specializing in the Western Balkans and Middle East domestic and foreign affairs

Fintechs try to find a way out from crisis

Despite the increase in non-cash payments during the pandemic, the fintech sector generally did not record an increase in profitability. They face difficulties in financing and a turnover drop, as well as in number of customers who turn to traditional options.
Fintechs try to find a way out from crisis

(Investment Zen, CC BY 2.0)

However, some fintech companies saw a chance in this situation. Those who deal with online loans to small companies are in the lead, but some have come up with completely new ideas such as COVID-19 loans.

Fintechs are software and other modern technologies used by businesses that provide automated and improved financial services. At the same time classic financial institutions are the second-largest investors in fintech. Fintech is by nature a global business. Fintech start-ups strive for global scalability modelled on Big Tech. The EU is lagging behind the US and China in this process because a single market for financial services has not yet been achieved: only 3 per cent of European consumers use the services of providers from another Member State. However, fintech will be a catalyst for market arbitration and unification in the European Union. In the relations between classic banks, fintech, Big Tech and other financial institutions, they are all potential partners and competitors, especially in the field of mobile payments. The new look of the market will ultimately be decided by consumers. That game, as well as the profiling of new consumer habits, is not over yet, and in many segments, it is just beginning.

Pandemic is not a promised land…

During the pandemic, the number of those who, perhaps even against their will, used mobile and electronic banking services increased. It would be logical to assume that fintech companies also benefited from this change in consumer habits. However, according to the analysis of the market research platform CB Insights, the volume of financing of fintech companies by raising funds from venture capital in the first three months of this year fell by 45 per cent compared to the previous quarter. Deloitte said that many fintechs are currently under a great financial pressure. The crisis caused by the coronavirus has particularly affected fintech companies in the insurance (insurtech) and the real estate (proptech).

But those operating in other sectors also have problems, as many of them have had to resort to cost reductions, including layoffs. Fintechs, especially those at the first stage of development, are also facing a decline in investor confidence. However, as Deloitte’s analysts point out, even in this market turmoil, there is a chance for those who have good ideas. For example, since physical contact between people has been avoided, the use of digital financial services and eCommerce has grown.

Fintechs, unlike the traditional financial organizations such as banks, did not face the current crisis prepared. Even before the pandemic, many fintech companies did not operate profitably. And then pandemic turned the world upside down. The number of contracts concluded in the Q1’20 in the fintech industry fell by 22 per cent y/y, and this trend is very likely to continue. Fintech companies, as well as traditional players in the financial market depend on the state of the economy, which is assumed to suffer the consequences caused by the lockdown. According to data published in „McKinsey’s Global Payments Map”, in the coming period, consumption is expected to fall worldwide, and thus the use of fintech services. Revenues from payments or other types of transactions could fall by 8-10 per cent. If we add that in the future people will prefer to save in larger, well-known financial institutions instead of in small, exotic online „savings banks”, it becomes clearer what challenges fintechs face.

…but in some countries it is

However, not everything is so black in this sector. In some countries, the crisis caused by the pandemic helped fintechs. In Japan, small and medium enterprises turned to them to get the necessary funds in a faster and simpler way. In fintechs artificial intelligence calculates the client’s ability to repay the loan, which is often withdrawn from traditional banks, with which fintech companies have partnerships. Although some fintech start-ups see banks as a competition, but most have cooperated with the financial sector in developing products. Fintech platforms have also found their niche in the Japanese factoring industry — for now, ten of them offer this service to their clients.

In Latin America, the pandemic has also not caused much concern for the fintech sector. As a matter of fact there traditional but small banks began to seek help from fintech companies in digitalizing their business. Because in the new circumstances they were not able to go online fast enough, at least as fast as the market demanded. Also SMEs were seeking online loans but due to a great uncertainty, the conditions are no longer as favorable as before.

Fintech lenders had to tighten their credit policies to avoid the accumulation of NPLs. Latin America is not the only continent where the popularity of these fast loans is growing. In the UK several fintech companies have already applied to the British Commercial Bank for accreditation that would allow them to issue loans. Some of them have already received it, and they will be able to match the „big fish” in the British financial sea.

Innovative services

But fintechs are not mainly engaged in the banking business. Many of them tried their hand at socially responsible actions and came up with creative ideas on how to help their clients. For example, the company Frontend, together with the consulting company 11:FS and the Credit Kudos platform, which helps its customers to make easier decisions on choosing a loan, created „COVID credit” for the self-employed. Experts of these companies, through a joint work, managed to create a tool in just one weekend that creates an opportunity for five million self-employed Britons to get a loan. This solution collects data on the previous income of self-employed persons and calculates their losses during the coronavirus pandemic. Then banks will be able to assess which loan they can offer.

The British Starling Bank launched a „reserve” debit card in support of those who were in isolation during the pandemic. This tool allows users to link their own and someone else’s card, who does shopping instead of the quarantined person. Of course, the card has some restrictions to prevent abuse. It has its pin code and a limit of GBP200, which can be spent in stores.

On the other side of the Atlantic, in the USA, the largest digital bank Chime has started to pay its users the state aid of USD1,200 from its funds. The pilot project included its randomly selected 1,000 users, and if it proves to be successful, and if the funds are refunded to the bank, it will expand the program to its eight million users. The mentioned companies are not alone in their efforts to help not only themselves but also the community in which they operate. A large number of fintech companies are now devising innovative methods to facilitate and reduce the cost of doing business, raising loans, and expanding online stores. These efforts sometimes involve only time and sometimes financial resources, but at least the satisfied customers will surely remain loyal.

(Investment Zen, CC BY 2.0)