Headline Diplomat eJournal – Issue 1
The perilous lenses of COVID-19: The impact on the economy
Writes Tayo Williams, Journalist, Headline Diplomat, LUDCI.eu
The coronavirus pandemic has brought the global economy to a standstill. With several governments enforcing varying degrees of lockdown. Businesses, including financial institutions, were shuttered to prevent the spread of the novel virus.
While we do not have a complete picture of the impact of the crisis on the global economy yet, isolated data and trends from individual industries are beginning to emerge.
The Fintech industry has since the outbreak of the virus come under intense stress. Though, it is not all bad news for the financial subsector.
The current challenge is an opportunity to go mainstream. The need for social distancing and increased demand for cashless transactions mean fintech companies can step in to fill the gap.
Here’s where contactless payment technologies that have been tested over the years by these fintechs can help.
Fintechs’ innate agile nature gives them a competitive edge over traditional financial institutions. Reuters, reports Nigel Morris, founder of QED Investors “The pandemic is accelerating the trend as more customers look to pay without contact and use banking services without stepping into branches.”
Most fintech startups are built to swiftly respond to changes. Unlike conventional financial institutions with legacy technologies, fintechs can move faster to ship solutions that help customers.
Social restrictions equally mean that customers are reluctant to step into banking halls. Fintech’s agility is a factor that can drive mass adoption of digital payment solutions.
Still, the road to success is not all sunshine. Impact of COVID on the fintech sector is nuanced. Even within the same verticals, we are seeing that different trends emerge.
In the payment sub-sector, fintechs serving restaurants, travels and hotels companies are heavily affected. Those in the e-commerce space are recording spikes in transaction volumes.
Payment fintechs in the B2B, and insurance verticals are experiencing an upswing in adoption and overall growth. While those in the banking and lending verticals are recording slowdowns because of the crisis.
These differences for each sub-sector are due to several reasons. The crisis, however, brought them to the fore. For example, with consumers turning to online shopping, payment processors and fintechs enabling the e-commerce sector will see a significant upswing.
On the downside, fintechs in the banking and lending space have tighter waters to navigate:
a. Increasing credit crunch in the short term.
b. The prospect of higher default rates in the long-term.
c. Selective COVID policies prioritise traditional lenders.
These are challenges that shake up the lending fintechs.
Financial Times covering Ravi Anad, Managing Director of ThinCats highlights “We will find out the men from the boys. No doubt there’s going to be some casualties, where credit [decisioning] wasn’t robust enough or funding sources weren’t stable enough. But the ones who come out will be stronger and will get a bigger market share.”
Investors are cautiously monitoring the industry
Investors in the fintech space are monitoring development in the sector as total deals and funding fall. Most investment decisions are on hold as venture capitals wait to see how the crisis plays out.
The result is an increasingly challenging environment for Fintechs to raise needed funding.
According to a CBInsights first quarter ‘State of Fintech’ reports that “Fintech deals have fallen for eight straight months since January 2019.” The report found that the number of fintech deals is falling across geographies. With North America, Europe and Asia set to see the lowest number of deals since 2017.
Despite that, the fintech sector saw lower deals compared to previous years. Matured Fintechs keep raising capital. For instance, investment platform Robinhood raised $320M in June to take its valuation to $8.6B.
The online payment company Stripe in a Series F round raised $600M in May. The takeaway here is that while investors shun early-stage Fintechs, those in the lending sector are willing to bet on already proven startups. This is a safe choice, but not the one that will bring the return of investment earlier. The best choice is somewhere in the middle – investing in 2 proven startups, while going for 5 new ones.
An opportunity to focus on a healthy balance sheet and cash flow
While the current industry landscape presents a tough challenge for early-stage fintech startups, we would recommend the opposite. For sure, this is an opportunity for consolidation, especially for well-established, well-funded Fintechs, which presents an opportunity to support newly stage startups as well.
Nevertheless, a tougher and more competitive funding opportunity means Fintechs would have to look inwards to navigate through this crisis.
Fintechs will need to reimagine their model. A shift in focus from growth and customer acquisition is most certainly needed to improve profitability and positive cash flow if they are eager to build resilience.
Cost-saving strategies like the one implemented by Monzo are expected to help manage cash flow. Monzo, the UK based digital bank recently announced plans to furlough up to 295 employees as part of a move to reduce monthly cash burn.
Tom Blomfield, Monzo CEO would forgo his salary for the next 12 months. Other senior executives will see a 25% cut in their pay – the Telegraph reports.
In parallel, innovating new, customer-focused solutions will have to take center stage. For example, as work from home becomes the new normal, Fintechs can begin to look for opportunities to serve the gig economy.
As the COVID unleashes the new normal, there will be losers and winners. In the end, the fintech sector will see losers and winners emerge from this crisis. Some companies are better positioned to emerge stronger than others. In contrast, others will, unfortunately, go under before this crisis is over.
A good indicator to know which fintech would survive and one that would get back up is the company’s ability to bolster its cash reserve or maintain a positive balance sheet. How? a. By unlocking new streams of revenue; b.Cutting back on overhead costs; c. By focusing on profitability – all of which are proven strategies that fintechs can deploy to navigate through this unchartered territory.
Conclusion
The pandemic will accelerate digitisation in the financial sector. In fact, it has already accelerated and transformed entire industries, pushing many people to adopt digital solutions both in the short and long term.
However, fintechs, especially, early-stage startups will come under intense pressure. But, only well-managed, customer-focused, and fully-funded companies will likely make it to the other side. We say – give it a chance to newly made Fintechs, but equally continue investing in some of the most resilient players. In the end, every challenge is an opportunity and every opportunity brings in growth.
