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Future of Industry

The Future of Fintech in a Post-Pandemic World

Fintech is having its big moment.

The pandemic given a fillip to any industry with the word ‘tech’ in it – as the world becomes wary of physical spaces and connections. And when you club tech with finance, you essentially are on board a rocket ship (mostly).

Australia-based Afterpay is a case in point. An online service that lets shoppers from different parts of the world pay for smaller items (shoes, shirts etc) in interest-free payments over six weeks, its shares went up almost ten times after the lockdown – vaulting its founders into the billionaire club. CredAble, a leader in the supply chain financing space in India founded in 2017, is another example. The company met its year-end targets within the first few months of the pandemic, said Nirav Choksi, CredAble’s CEO and co-founder.

These are, of course, not alone. An analysis done by Forbes revealed that some five fintech entrepreneurs have made it to the billionaire rankings due to the pandemic – little known names like Chris Britt, who founded a digital bank called Chime, and Baiju Bhatt and Vlad Tenev, the co-CEOs of Robonhood, the free stock trading app – have now shot to fame, thanks to their newly acquired status.

Then there are the big players like Paytm and Google Pay, which have grown exponentially during the Covid era. In July this year, Vijay Shekhar Sharma, Paytm’s well-known founder, announced that the company was witnessing more than three times growth in transactions, as users turned to the safety of digital payments. This is not the first time that the fintech behemoth has recorded high transactions. Its stratospheric growth started in 2016 with demonetization, which steered the move towards a cashless society.

Over the years, fintech technology or fintech has become increasingly important for both consumers and businesses across the world. Its benefits can be increasingly felt in our everyday lives, as people do more and more transactions online – from paying utility bills, buying groceries, recharging mobile connections, to booking travel and events online. Fintech, thus, has enhanced financial inclusion, improved efficiency, and broken down physical barriers in the real world.

According to an IMF study, the level of digital financial inclusion has improved considerably over the years due to the emergence of powerful platforms, such as M-Pesa in Kenya, Alipay and WeChat Pay in China and Paytm in India. The efficiency of banking and finance operations has also improved, driven by fintech, from which many have benefited.

So, what does the future of fintech look like in the post-pandemic world?

Digital payments - the contactless way to pay

When the Coronavirus pandemic broke out, countries all over the world announced stringent lockdown measures, forcing offices and banks to temporarily close. This was good news for fintech companies, because people were forced to rely on digital solutions.

As per a survey conducted by Raconteur Publishing that produces high-quality content for business decision-makers, it was found that 66% of the people in the UK were regularly using financial technology between March and July 2020 – a steep rise of over 50%, as compared to the figures used in 2019.

Some businesses were more agile than others, and were able to quickly innovate. UK supermarket chain Sainsbury’s, for instance, was able to launch its Volunteer Shopper Card (that helped others shop on behalf of vulnerable citizens), just a few days into the lockdown. The initiative was a big success, and has driven Sainsbury’s to introduce an entire range of digital vouchers.

Another traditional brick and mortar brand, Tesco, has also witnessed increased adoption of its Tesco Pay+ payment app. The app revolves around the principle of QR code payments and gifting of money to dependents across the country for purchases in Tesco stores.

COVID-19, it is now evident, will accelerate the fintech revolution. Financial services firms are now increasingly implementing innovative technologies, and moving from age-old IT systems to state-of-the-art cloud platforms. Moreover, the pandemic has also pushed more consumers and businesses to warm up to digital solutions, instead of traditional offline processes. Fortunately, this trend is unlikely to get reversed in the post-pandemic era. Consumer habits are hard to change, but once they do, they remain.

All in all, it is clear that tech will play a more important role, especially when we are cut off from the physical world.

Surge in online loans

Fullerton Capital-backed Lendingkart’s profits went up by two times in FY 2020, thereby expanding its loan book by 80% to Rs 2,400 crore in the period, according to a report in The Economic Times. The company that has SMEs and retail borrowers as its primary clientele saw a spike in interest income by 113% to Rs 465 crore, against the same period in financial year 2019.

But it’s not that their journey is not fraught with Covid-19 challenges. The present time is likely to strain the company’s margin in the ongoing fiscal year, as new disbursals are much lower than what was seen in the pre-pandemic days.

Another big player, BankBazaar – a popular online financial services marketplace – has plans to close this financial year with operational profitability, as the demand for credit cards and housing loans is on the rise.

BankBazaar, like many others, had expected to make operating profits by the end of March 2020, and launch an initial public offering by 2022, but these plans came to a halt as Coronavirus disrupted growth in the financial services segment.

Interestingly, the online marketplace recently said that its monthly revenues are getting back on track, and are trending at 70% of the peak pre-Covid monthly revenue.

However, there are also some challenges in fintech that came to the fore during the pandemic.

Challenges in the Fintech landscape

The health crisis has left a deep impact on the economy, much like any other crisis. Unemployment rates went through the roof, and as economies went into lockdown, global GDP witnessed a plunge. This holds true for every country, except China, and as far as predictions go, most large economies will go down south in 2020.

But even as economies shrink and GDP plunges, digital payments globally have witnessed a spike by 5-10 percentage points, taking its penetration to 67%. Online-focused payment majors like PayPal or Adyen have never benefited the way they are doing now, and this reflects in their stock price.

However,  this is not true of other fintech segments. This economic crisis is also revealing loopholes in existing systems and business models. As the economy struggles, unproven business models have come under the radar for all the wrong reasons.

In digital lending, as consumption goes down, unemployment increases and repayment moratoriums have pushed up credit risks. Under such circumstances, undercapitalized lending companies have come into the scanner, and even pushing some to shut shop.

The key insight here is that most consumers did not use digital banks as their main financial services provider. Previously, they were considered secondary service providers that fulfilled specific requirements like international payments. Meanwhile, the moment companies paused their marketing spend, and new users associated with various digital finance platforms went down, and usage decreased. Eventually, with a rise in economic pressure, spending on non-essential services went down, thereby reducing the need for a secondary service provider.

On the other hand, digital banks, the fintech ‘darlings’ of investors, have also been hit hard. Their business models and valuations saw a decline, largely because they operate on wafer-thin margins.

As per a McKinsey report, many digital banks have a cash-consumptive business model that requires continual investor funding. Pre-Covid-19, their loss per customer was between €10 and €60.  Now, fintechs’ loss per customer is expected to expand to €20 to €75. “Fintechs that are skewed towards customer acquisition (as opposed to driving positive unit economics) are particularly challenged. Given the contracted funding environment, many digital banks cannot sustain a cash consumptive business model in the medium term,” says the McKinsey report.

What does the future hold?

Covid-19 has shed light on the importance of fostering the right partnerships to create technologies that seamlessly connect different banking accounts, products, and services. This trend was already gathering pace pre-lockdown, but its growth has fast-tracked, with customers today expecting more from digital banking. As such, the quality of a finance company’s digital offerings has become – and will remain – a major differentiator between competitors.

There’s no denying that there is a greater need for innovation, even if the fintech sector survives and thrives during this crisis. But companies, founders and investors will need to take all the lessons onboard to change and adapt their business models to counter the challenges the industry currently faces.

There are three main opportunities ahead. To begin with, fintech businesses have the potential to embrace the open-sourcing trend much more than now. This has been a common theme that has been witnessed in the surge of several big-bang technological innovations like the internet, cloud,and mobility.

The other important point to remember is to embed fintech services at the core of other apps. There are already some software service providers like Plaid or Stripe that have begun this practice, and are leading by example.

Second, for fintech companies focusing on serving consumers directly, such as digital banks, it is critical to transition from being just a secondary provider with good features, to a primary provider with a core engaged and paying customer base. The focus must not be on marketing gimmicks, but on no frills, value of-money and essential offerings.

Third, as they say, with crisis comes opportunity –  the current liquidity tensions have put an increased burden on valuations, which make some good fintech assets available at a reasonable value. Historically, the amount of investments plunge during a crisis, but they can yield better returns, as the gross internal rate of return on deals concluded during the 2008 crisis.

Date added
03.11.2020

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Future of Industry

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