Fintech during COVID-19: Formidable challenges and a vital role

Photo: MasterTux (pixabay.com)

COVID-19 poses an existential threat to many Fintech startups in 2020, particularly in ASEAN. But certain subsectors are better positioned to survive and even thrive in a future that will demand increased reliance on digital solutions.

By Preetam Kaushik

In the space of barely five months, COVID-19 has struck a body blow to the global economy. In ASEAN and the rest of the world, economic life has been brought to a standstill by social distancing, quarantines and lockdown measures.

In business, there can be no winners when the greatest recession in more than a century looms. Sectors like pharma and biotechnology obviously have a crucial role in combating a viral pandemic but other industries will also rise to meet emerging needs. While financial services are far from the frontlines of the war against COVID-19, the current crisis demands new digital solutions and fintech has a large role to play.

Fintech plays a critical role in social distancing

In countries where shops are shut and folks under lockdown are unable to venture outside, fintech solutions like online payments, virtual cards, microfinance and other consumer services will find new customers.

A similar trend can be expected in the business-to-business segments as enterprises of all sizes are forced to shift to digital solutions for payroll and financial services.

“Fintech firms that sell software or solutions to traditional financial enterprises can expect faster growth,” said Radboud Vlaar, managing partner at venture capital firm Finch Capital.

This is also tied to the massive fiscal stimulus packages from governments, including allowances for vulnerable citizens and relief payments to SMEs. For quick and secure delivery of these payments, fintech offers the best solution.

When government relief is not enough, fintech firms can also provide further assistance through online microfinance and peer-to-peer loan platforms, particularly for highly vulnerable small businesses and individuals.

The potential of AI and big data in contact tracing

Singapore, South Korea and Vietnam have been hailed for their early successes in flattening the COVID-19 infection curve, in large part due to aggressive contact tracing of infected individuals.

Along with cellphone records and GPS data from smartphones, digital payment histories have played a crucial role in successful contact tracing. While this approach carries significant privacy issues, governments have waived privacy laws, citing the public health emergency.

Chinese tech giants like Alibaba and Tencent have already developed apps for contact tracing that have been downloaded over 1 billion times. Singapore recently unveiled its own app, called “TraceTogether.”

“On the social distancing front, fintech companies developing tracking apps for governments will have a vital role to play,” said Vlaar.

Not all types of fintech companies will see benefits

According to a recent report by Finch Capital, not all sectors of fintech will benefit from the unique challenges posed by COVID-19.

Online-only banks, also called “neo-banks” or “challenger banks”, will struggle as risk-averse consumers fall back to traditional bank accounts. Reduced economic activity will also make it harder for these banks to attract new customers post-crisis.

As stock markets across the world become more volatile, wealth management services will also be affected. Lower returns on assets under management (AUM), combined with clients looking to reduce risk, will put these services under pressure.

Digital payments have been hit the hardest due to the global economic slowdown, as sectors like travel, leisure and hospitality all shut down. Fintech firms involved in payments have seen anywhere from a 10-30% decrease in transaction volumes.

But as consumers, businesses and government services go digital, payments will undoubtedly bounce back. More immediate winners will be lending platforms and “enabler” firms that revolve around technologies like AI, internet of things (IoT) and Know Your Customer services (KYC).

According to Vlaar, such firms will have two advantages in the post-crisis market: the ability to grow their market share despite the slowdown and the ability to attract more capital, as investors shift their focus from the future to immediate profitability.

The broad outlook in Southeast Asia

According to the latest IMF forecasts, the region will experience negative or close to zero growth in 2020, with GDP growth in Indonesia at 0.5%, the Philippines at 0.6%, Malaysia at -1.7%, Singapore at -3.5% and Thailand at -6.7%.

The crisis will likely continue through the third quarter of this year and the coming 5-6 months could be a harrowing ordeal for smaller fintech firms and startups, especially those involved in slower sectors like payments and wealth management.

The ASEAN region is well-known as a breeding ground for fintech startups. But many startups may simply be unable to survive this initial crisis period. Those that do will be locked in a struggle with incumbent firms.

For years, governments in ASEAN have been trying to encourage consumers and businesses to “embrace digital” to promote financial inclusion, reduce corruption and improve productivity.

With COVID-19, consumers, businesses and governments are now forced to go digital for survival’s sake. “This kind of across-the-board adoption, combined with price-sensitive behaviour due to recession, will ultimately benefit fintech companies in the long run,” said Vlaar.

About the Author

Preetam Kaushik
Preetam Kaushik is a Mumbai-based journalist covering business, tech and economy. A former freelance Mumbai correspondent for Business Insider India and freelance journalist for TheStreet.com, his work has been published by The Times of India, The Huffington Post, Economic Times, WIRED, and World Economic Forum.