The World Health Organization (WHO) classified COVID-19 (coronavirus) as a pandemic last week. While ensuring people, particularly those at high-risk, are safe, protecting businesses and jobs has been a major priority for governments across the globe. But what are the good and bad impacts it can have on FinTechs?
It’s unclear how long this virus will be present for. Some estimates put this playing out through a couple of months, others say it will last until summer and few even suggest it could even be here 18 more months. There are going to be a range of businesses impacted by the virus, with the most notable being restaurants, cinemas and airlines. However, most companies are headed for tough times.
There have been around 263,703 reported cases of coronavirus at the point of writing. Of these, nearly 10,000 people have died around the world and 86,676 individuals have recovered, according to Worldometer. These numbers are only expected to grow in the next few weeks and potentially months.
Europe’s regulators have been taking a lot of steps to ensure they can stabilise the financial market as much as they can. Earlier this week, the European Central Bank revealed a €759bn Pandemic Emergency Purchase Programme (P2PP). This is for the asset purchase of private and public sector securities and will help to combat risks on the monetary policy transmission mechanism and the European financial outlook during the pandemic.
Meanwhile, the European Securities and Markets Authority (ESMA) has issued a temporary requirement on net short positions in traded shares as it seek additional measures to secure financial market in COVID-19 pandemic.
These are very specific measures which are not going to help everyone. FinTech startups are among the high-risk companies. Succeeding as a small company is fraught with many challenges and failure is always looming over them. The unpredictable challenges posed by the coronavirus are just adding to these worries. Robin Kiera, founder of the consulting and marketing company Digital Scouting, believes social media branding is the key for FinTechs wishing to survive the current troubled market.
The UK government announced this week that it has prepared a £330bn package to support businesses and workers during the course of the pandemic. The government has said that the size of the package could increase if demand calls for it. Other countries are implementing similar measures – France and Germany both have packages of over €500bn ready, the US is looking to approve a $860bn safety net and Japan is preparing a $193bn parcel.
But what are the good and bad impacts which businesses could face?
1 – Increased customers for digital banks
While it might be strange to hear that businesses other than toilet paper manufacturers and pasta companies could benefit from the virus, it might be the case. According to a report from Finance In Bold, it claims that UK challenger bank Revolut could increase its customer numbers by nearly three million from now until June.
As of February, the bank has around 10.8 million users, but the current pandemic might mean the bank raises this to 13 million. This figure is likely to continue rising throughout the year, with data from Finance in Bold putting Revolut’s customer base at 16 million by 2021 – a 36% growth from February.
So how is a virus, which could potentially damage how much money people have access to, directly correlate to a digital bank increasing users? According to Finance in Bold the drive will be helped by the fact countries are encouraging people to avoid using physical money or going to their branches, both of which Revolut does not use.
While this research only focused on Revolut, it is a safe bet other challenger banks could see similar results.
German challenger bank N26 has already witnessed similar signs of this happening. A spokesperson for the bank said, “While we haven’t seen any notable change in the spending habits of our customers in the last few weeks, have seen a slight increase in the number of card and mobile wallet transactions, and we expect this trend to continue as more people adjust their everyday habits to reduce the risk of transmission.
“We believe this is because recent reports from the WHO have advised people to use contactless payments over cash whenever possible, as bank notes change hands often and can carry bacteria and viruses as they are circulated. Using a mobile or digital banking solution like N26 means that customers are able to pay with their own card or mobile device only, without having to handle cash.”
While this does not necessarily show people are going to switch accounts to a challenger bank, it does show people moving away from cash for more digital services.
2 – FinTechs are more prepared for remote working
Legacy systems are the never ending source of problems for financial institutions and coronavirus could make matters worse. Governments around the world are urging people to work from home if they can, and countries like Italy have even implemented complete lockdowns forcing people to stay in their homes. The problem is, are financial institutions prepared for this? Data from Leesman suggests they are not.
A recent report from Leesman stated that the majority of players in the UK’s financial services space are unprepared for just this. Leesman surveyed over 700,000 employees around the world, of which, 265,840 were working in the financial services sector. Of those respondents, 56% had never had any home working experience.
Of the respondents to have worked from home, 84% stated they only do it for one day a week or less, and only 1% had worked from home for more four days per week. Furthermore, of those homeworkers, only 40% had a dedicated room for work.
Will Hurst head of commercial development at digital personal loan platform Monevo said, “All of our systems and platforms are hosted by cloud servers and our technology will keep on working. As an industry, we are well-suited and used to remote working and as we look ahead, whether it’s coronavirus or something else that drives change, I think we’re going to continue to see a greater need for FinTech solutions.
“With the Office for National Statistic having announced recently that more than half of UK employees could be working remotely by next year, I believe enforced remote working will change business behaviour and reliance on the fixed workplace.”
FinTechs are naturally more suited to operating from homes as they are typically built on more flexible technology and do not require customers to physically turn up to a brick and mortar shop.
“Monevo’s customer experience will be unaffected and consumers will still get access to products. As with most Fintech’s, it’s a digital journey and coronavirus could end up being a further catalyst for the global industry as a whole because customers can access products wherever they are,” Hurst added.
3 – Challenges for payment providers
While people look like they are using contactless payments more frequently, it does not mean everything is smooth sailing for payment companies.
Payment giants Mastercard and Visa both recently came out warning their investors that sales will be lower than expectations for the current quarter by around 2% to 4%. The main cause for this has been pinned down to people not travelling as much due to the virus.
Visa issued a release which stated it had seen “a sharp slowdown of our cross-border business, in particular travel related spending in both card present and card not present.” However, it has not seen a big impact on e-commerce unrelated to travel.
Similarly, Mastercard released a statement stating it had seen an impact on its sales related to cross-border travel and even a small decline in cross-border e-commerce.
According to a report from Forbes, their stocks have declined by around 12% since the market’s peak back on February 19 2020.
It is not just cross-border travel which could hamper payments companies, but also their supply chains. Square, a point of sale terminal developer, stated that due to the virus there might be lengthy restrictions to travel and commercial restrictions. It is predicting these could cause disruptions in its supply chain and shortages of its hardware. This would hamper the company’s ability to grow and acquire new sellers.
The statement also said, “Moreover, our product development might be delayed, as we work with manufacturers in China to develop new hardware products.”
4 – Drop in valuations and potential mass closures
FinTech funding has continued to grow each year and some companies are raising eyewatering amounts of money. This capital is raising their valuations, with numerous FinTech companies being in the unicorn club.
UK challenger bank Revolut recently hit the $5.5bn valuation mark after it closed a $500m Series D round, while Latin American payments processor EBANX joined the unicorn classification after it closed a new round. Last year, Brazilian challenger bank Nubank took it to the next step up and became a decacorn, putting its valuation at $10bn.
While FinTech funding is clearly strong, a report from Forbes suggest the slump in the stock markets could be a catalyst for a decline in these valuation and potential result in less investments.
Dan Rosenbaum, a partner at consulting firm Oliver Wyman, told Forbes, “One thing last week’s drop in markets reminds me of is the 2001 recession when the tech bubble burst. Valuations were high, and when the market crashed and the window for initial public offerings closed, early-stage companies had trouble getting funding. Many had to shut down.”
However, investment firms invest capital over a prolonged period and while some firms may hold of on raising new funds, they still have capital to play with. This year alone has seen Quona Capital close its sophomore FinTech-focused fund and Canapi Ventures deploy its maiden FinTech fund with $545m capital pool. While deals may slow down, or potentially stop, they are likely to commence again post coronavirus.
5 – Drop in stocks and investing
It is not just the institutional investors which could be scared off from deploying capital. An article from Business Insider suggests consumers will be just as likely to part with their cash in these uncertain times.
A report from PwC claimed that over half of CFOs and finance executives in the US and Mexico believe that the COVID-19 outbreak could have serious consequences for their businesses. Of those responding, 80% said that the risk of a global recession. These fears are being seen in the public. People are becoming concerned for their jobs and the chance of a recession which is being hinted at.
These troubles could lead to consumers being less likely to invest their savings, the Business Insider article claims. This could be based on people’s concerns on their own financial situation or fears of companies closing.
This would have a negative impact on digital wealth managers and robo investing platforms like Robinhood or eToro.
6 – Increased cyberattacks leveraging coronavirus fears
Hackers and cybercriminals never miss a chance to scam people out of their money and coronavirus is the latest trick they are leveraging.
According to Shai Alfasi, a security researcher at Reason Labs, the threat research arm of Reason Cybersecurity, criminals are taking advantage of those using digital maps and dashboards to find out more about the coronavirus.
Alfasi said, “The attacks usually arrive in the form of an email that looks like the sender is a trusted, official source such as the Centers for Disease Control (CDC) or the World Health Organization,” he told The Telegraph.
These attacks tend to involve sending an email which claims it has advice on how you can protect yourself from the virus and provides updates on the pandemic situation. Certain incidents even offer a map which lets the user track the spread of the outbreak.
After this, victims are told to install maps and other tools. The scam aims to steal personal information including usernames, passwords, credit cards and other sensitive information. These attacks are targeting both individuals and businesses.
7 – increased scrutiny from regulators
While the regulators have been implementing measures to ensure businesses do not fail, they are also putting extra stress on them, as the consumer always comes first.
Concerns have been raised about whether insurance firms will help those impacted by coronavirus; however, the UK’s Financial Conduct Authority has come out to say they should “show flexibility in their treatment of” customers. It went on to state that while consumer behaviour may change, such as working from home or commuting by car, they should not have claims impacted by things out of their control.
One of its expectations of insurers is to clearly communicate if there are policy exclusions and this should be given to existing and new policies.
Furthermore, insurers should have plans in place to manage and mitigate operational impacts of the virus. This includes ensuring they have robust systems and controls which will enable them to operate in stressed situations. It also suggests they have a senior manager responsible for business continuity.
These are just some of the steps insurers now need to implement to meet compliance, adding to the challenges already faced by the virus and staff being self-isolated.
As for insurance claims, the FCA largely stated firms should to honour their commitments made before the impact of coronavirus was understood. This includes paying out for cancelations of travel, safe-guarding home and work-related assets used while working from home and covering medical expenses.
To read the full extent of these changes click here.
8 – Increased number of refinancing
As people become more fearful of their jobs and getting access to cash, this could pave the way for an increase in refinancing mortgages.
Digital mortgage solution developer Blend has reportedly seen the volume of refinancing applications increase by 1,500% to 2,000% each day since March 4, compared with the same days in 2019, according to an American Banker article.
The FinTech has also seen a rise of 85% to 95% in mortgage purchase applications compared to last year.
In total, Blend is allegedly seeing 15,000 to 20,000 applications each day and is processing loan values of up to $8bn per day.
Blend president of Timothy Mayopoulos told American Banker that the coronavirus is boosting the urgency of financial institutions to invest into digital lending technology. However, he also stated this is just the latest in a number of trends which is boosting appeal of online lending technology from traditional providers.
Fellow mortgage technology supplier, Black Knight, told American Banker it had not seen a change in behaviour following the coronavirus incident. A spokesperson said, “Adoption of our digital mortgage tech continues to be strong, but doesn’t appear to be driven specifically by this as of yet.”
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