Photo by Jonas Leupe on Unsplash
Technology is transforming the landscape of the financial industry, expanding access to financial services in profound ways. This sector has been slowly digitizing traditional financial processes in countries around the globe. The emergence of COVID-19 caused many industries to decline, while at the same time, it created new opportunities for the fintech industry.
A Tale Of the Chocolate Factory Owner
Somewhere central in a developed country, a chocolate factory owner was put in a tight spot before the winter holiday season. One of their critical machines broke down suddenly. Consequently, the threat of losing a significant chunk of profits during the busiest part of the year loomed over their heads.
Desperate, the owner frantically contacted his bank and asked them to provide credit. This was the only way he could replace the machine on time. Although the factory was operating for many years and had a stellar record, his request wasn’t accepted. Apparently, the bank was too busy for this ‘small client.’ They did give an appointment, but it was scheduled after the New Year, which added insult to injury.
If this situation was played out 100 years ago, it could have driven the factory out of business. Fortunately, the factory owner lived in the 21st century, which came with several perks. Soon, his friend recommended him to get in touch with an online lender.
In less than seven days, the ‘digital’ lender evaluated the factory owner’s creditworthiness, authorized the loan, and disbursed the amount. As a result, the factory got a new machine two weeks before Christmas and turned the tables. This is a true story that occurred to a factory owner in London, demonstrating how fintech has changed the fate of businesses worldwide.
Fintech On the Rise
While the global economy stands on its toes after reeling from the COVID-19 aftershocks, not all industries tanked. One industry that shone during the COVID-19 is the fintech industry, prompting calls for its inclusion in the traditional finance industry on a broader scale.
Amidst the crisis, the fintech players demonstrated resilience and a priceless prowess to manage financial troubles, allowing them to survive the crisis intact. Factors such as willingness to adopt remote working, focus on agile operations, and a high level of equity finance, led this nascent sector to withstand disruption.
Meanwhile, the World Bank has revealed the number of unbanked individuals in the world: 1.7 billion. This is where fintech comes in; it promises to integrate these demographics into the global banking system. If it succeeds, it would be quite beneficial to mitigate the social and economic impact of the ongoing pandemic. Perhaps, this is why Deloitte believes that fintech, backed by government sectors, retailers, and financial institutions, can democratize financial services, thanks to their way of providing standard financial services in a transparent and fair process, especially in the underdeveloped and developing countries.
Due to COVID-19, health concerns have put the physical cash system in jeopardy. It is no longer practical, which in turn has expanded fintech applications, such as e-wallets. Even though a cash-less society was already predicted before the outbreak, COVID-19 triggered the collapse of the cash ecosystem sooner than expected. As a result, consumer viewpoints changed drastically in less than a year. According to a Mastercard survey, 82% of people believe that the contactless way offers a cleaner method to pay, whereas 74% of respondents said that they plan to continue using contactless payments in a post-pandemic world.
A joint-report by the Cambridge Centre For Alternative Finance (CCAF) noticed how the growth of fintech products/services prompted financial authorities and banks to ramp up their regulatory innovation efforts. The study collected responses from 118 banks and financial authorities in 114 jurisdictions around the globe.
Nearly 60% of the respondents reported a boost in the adoption of digital payments and remittances, whereas 22% found growing use of digital banks and a 19% uptick in deposits and digital savings.
Unsurprisingly, it was noticed that jurisdictions having strict COVID-19 rules experienced a greater use of digital payments. Also, there is a rapid surge in the utilization of digital payments and banks in emerging and developing (EMDEs). Simultaneously, the regulators are also busy. Nearly 72% of them have either introduced or accelerated initiatives for their digital infrastructures. In addition, 58% of them have either introduced or accelerated initiatives related to RegTech, and 56% of them continued with these changes to innovate.
Over a third of the respondents introduced one or more regulatory measures solely for the fintech industry. These included increasing transaction limits for digital payments and waiving transaction fees. However, there are certain risks that the regulators have to address, including consumer protection, cybersecurity, and handling scams and frauds.
Interestingly, there was no regulator in the industry that had to cancel these innovation initiatives. Considering how industries across the world slashed their budgets and eliminated various initiatives, these numbers indicate that innovation with fintech is no longer a luxury; instead, it has turned into a necessity.
Traditional Banking’s Pain Is Fintech’s Gain
Conventional banking is consistently allying itself with fintech solutions. Other than inevitable digitization, there are multiple other reasons behind this shift. In a nutshell, the banking industry was already struggling before the pandemic. Bloomberg Intelligence disclosed that the average-cost-to-income ratio in the leading European banks ended up being 67% in the last year – the last time it was this high was during 2008. Meanwhile, return on equity dropped by -8.7% — the lowest level in three years.
Thanks to the recession caused by the pandemic, banks have fallen into more trouble. Financial uncertainty, swelling unemployment, and lower incomes are contributing to a loss in the size and number of bank deposits and purpose loans, like car loans and mortgages.
Berenberg Bank predicts that the revenue decline of the American and European banks would amount to 8.5% this year, and the profit would drop by 30%. The Asian banking industry is not any better as Singaporean banks brace for harsher times.
What’s Next for Fintech?
This year’s studies have shown that COVID-19 created new opportunities for the fintech firms to personalize and expand their financial services, which in turn contributed to the financial resilience of low-income households and small businesses. These firms have demonstrated operational resilience and agility, formed partnerships, developed customer acquisition strategies, and tailored products to address evolving customer demands.
According to a survey comprising of fintech consumers, there is a lot of demand for credit and other financial products, along with major gaps in insurance coverage of different types (e.g., disability, life, and health). Besides, around 50% of the customers reported that they have leveraged fintech services once the pandemic broke out, and 60% found these services to be “very useful.”
Nevertheless, one of the biggest concerns for fintech companies is to access capital and investor network – this is the only way they can innovate. Now it is up to the investors to accept the challenge and supply fintech companies with the tools they require to adapt to the changing needs.