As the coronavirus pandemic continues around the world, the direct impact and subsequent government responses have brought severe challenges to the global economy. Social distancing, and in many cases, lockdowns, are leading to a dramatic reduction in revenues for many businesses, alongside large rises in unemployment.
In this unprecedented situation, where many industries are challenged, some may be faced with an opportunity. As the world, both business and individual, enacts social distancing measures, digital services become ever more relevant. Digital streaming services replace physical entertainment, logistics services do the shopping for us, and digital marketplaces connect us to the goods and services we can’t physically access. This is no less relevant for financial services. Fintech companies have long focused on digitalisation as a form of differentiation and while there are certainly challenges, could the current crisis provide a springboard for parts of the industry?
In response to severe economic challenges, governments around the world are intervening to support capitalisation of business, provide financial aid to individuals and ultimately inject cash into a struggling global economy.
For the fintech lending industry, facilitating credit decisioning and lending to businesses and individuals, whether in support of government initiatives or directly, is a clear opportunity. For many years fintechs have touted their ability to out-lend the traditional lenders – now they have a chance to demonstrate this as they play a role in getting much needed funds to those struggling with cash flow.
Fintechs may be best positioned to serve customers that are often excluded by traditional lenders, such as SMEs with limited collateral and individuals with insufficient credit history. Traditional lenders using legacy models and technology struggle to support these segments and have been historically reluctant to lend using alternative data for credit decisioning. The fintech community has already taken positive action during the crisis, with just a few examples including:
- Credit Kudos, Fronted and 11:FS created “Covid Credit” to support the self-employed getting access to income relief
- TrueLayer and Plaid have opened up their platforms for free – supporting services such as credit decisioning/assessment and payments to charities
- Credit Passport launched two free tools (1) liquidity shortfall calculator and (2) pre-crisis credit report
- Experian began offering its affordability passport for free
- Chime has piloted a way to enable instant delivery of the $1,200 federal stimulus check
- Iwoca launched a new Open Lending Platform to support funding to SMEs
Alongside these individual efforts, fintechs are participating in government initiatives to inject cash into the economy and support struggling businesses. In the US, PayPal announced that it was the first non-bank to gain approval to provide small business loans as part of the US Small Business Administration’s Paycheck Protection Program. Following this, Square, Funding Circle and QuickBooks have all joined the ranks of approved non-banks. In the UK, fintech lenders are joining the Coronavirus Business Interruption Loan Scheme (CBILS), with Starling, Funding Circle and OakNorth all gaining accreditation from the British Business Bank, the UK Government-owned economic development bank.
While there may be an opportunity for fintechs to raise their profile and prove their pedigree in getting funds into the economy, it is not without challenges. The current crisis has ended the “growth first” mentality driving the industry. The funding environment has undergone a complete reversal, with data showing that deals and investment into fintech companies are significantly down. This trend holds up across all geographies, showing the global impact of Covid-19 on the investment world. Asia, Europe and North America are all showing falling numbers of deals, with funding hitting the lowest levels since 2017. During this time, fintechs may have to shift gear, away from pure growth and towards profitability and cash flow. In addition to this, lenders could see further impact as consumers and businesses are unable to service their debts and while this may be partially mitigated through government assistance the full effect remains to be seen.
The substantial drive towards digitisation may play into the hands of the already digital fintech companies, however, it may also prove to be the much-needed push that traditional banks required to fully develop their digital capabilities, either in-house or through acquisition of newer players – closing the gap with their more agile competitors.
Ultimately, the current crisis proves that digital financial services are the future and there is an opportunity for fintech to step up to the plate and prove themselves in the world’s time of need – as long as they themselves are able to survive.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).