COVID-19 situation has presented unprecedented challenges to businesses across the globe. The Fintech industry is probably going through one of the most challenging times, according to a report by Rosenblatt Securities.
How will the FinTech industry, which is relatively new and hasn’t really dealt with a major market volatility so far, respond to the situation? Rosenblatt report highlights that the decline in public equities and the economic fallout due to COVID-19 will have a major impact on the private FinTech market.
According to IMF chief, Kristalina Georgieva, because of this global pandemic the developing nations will now require massive funding. She states, “We have entered recession.” But she is also hopeful that a recovery and sizable rebound is very much possible in 2021. This scenario, however, is possible if the virus is contained everywhere worldwide.
More than 80 countries, she says, have requested for emergency funds from the International Monetary Fund. This worldwide economic downtime has created a requirement of massive $2.5 trillion to fulfill the financial needs of emerging countries and markets.
Impact on Different Fintech Sectors
The latest Rosenblatt report reveals that Public FinTechs were performing significantly until the COVID-19 crisis began. In February 2020, the FinTech index which consists of 26 firms was up 49%, compared to Nasdaq which was up by 28% and S&P 20% respectively. But in a span of one month, Rosenblatt notices that FinTech index has underperformed and both Nasdaq and S & P have shown a decline by 7%.
For many private fintech firms which are less than 10 years old, it is the first time they are facing a market downturn which is directly impacting customer demand, capital, thus affecting employee retention.
The Rosenblatt report also states that, “FinTechs with lower fixed costs will outperform and gain favor with investors over those with big, rigid fixed costs. The flexibility in business models and the ability to dial-up/down costs will become critical for FinTechs and will determine which firms survive. Firms that rely heavily on large marketing expenditures to generate growth will come under investor scrutiny as they can no longer justify large customer acquisition costs (CAC) due to weak transaction volumes.”
What to expect in future
The report comes up with a very interesting observation at this critical time. it says that traditional financial companies will gain a competitive advantage over FinTechs in this highly uncertain market environment. This is primarily because the incumbents are better capitalized, have bigger brands, and benefit from customers becoming more risk-averse.
The report also notes that FinTechs with recurring revenue and long-term contracts will be impacted less than firms with transaction-based business models. However, the RegTech and compliance FinTechs will remain popular as a market dislocation doesn’t impact demand for their services. Investors may double down on these investments boosting their valuations. They may be one of the few bright spots in an otherwise tough FinTech market.
In countries like South Korea, where FinTech regulations were very strict is now being eased. They are accepting contactless payment to control the spread of virus thereby reducing the negative impact on the economy.
Coronavirus outbreak may soon make the FinTech industry search for novel ways where people can transact without the fear of infections. This may drive the technological advancement that most of us have been waiting for many years.
Every few years when we see such major outbreaks across the world, it allows us to rethink and reinvent our ways of operating. It acts as an indicator on how prepared we are to face such disasters.
COVID-19 will definitely make traditional banks and businesses without digital channels to shift their focus and go digital to enable smoother customer transactions. This will pave the way for a digital transformation that the world has been so eagerly waiting for a long time.
Time to show-off your poker skills and win Rs.25 lakhs with no investment. Register Now!