Five Effects of COVID-19 on the Fintech Industry While on one hand the Covid-19 outbreak has blurred lines between banks and fintechs and accelerated digital adoption, it has led to decline in number of alternate lenders

Financial technology (fintech) sector has been developing fast in Asia in the last few years. But, like most other sectors, it has been hit hard by the COVID-19 outbreak. Here is the good and bad that has come out from the pandemic for the fintech industry.

The Momentum for Survivors

According to market intelligence platform CB Insights, investor appetite for fintech in Asia has been the lowest in the first and second quarters this year since the end of 2016. It is a direct consequence of the Covid-19 pandemic, which has raised uncertainty on the future of the industry.

Limited access to capital will force several players to shut down, leaving the industry to larger and stronger companies. It is evident that startups are struggling as Sequoia Capital sent out a warning that it would need at least three or four quarters to recover from the Covid-19 crisis.

Prolonged uncertainty will decrease the number of fintech startups and in turn give momentum to the companies able to cope up with the challenges. New players will find it even more difficult to catch up. However, there is still a chance for them, as even large players will nevertheless grow weaker amid the pandemic outbreak.

Reduction in the Number of Alternative Lenders

Agile scoring approach towards assessment of the underserved segments and focus on smaller loan amounts should make a strong case for alternative lenders in the ongoing situation. But, the real picture is different. There has been a notable decline in incomes across small and big businesses and retail customers. This has not only decreased consumption but also raised defaults. Robocash Group research has found that about 54 per cent borrowers will loan only after lockdown restrictions are lifted. Also, repayment holidays have reduced the revenue streams for lenders. As a result, lower demand and tightened requirements have caused a drop in issuance and, in some cases, forced companies to cease operations.

Then, insolvency of borrowers and economic uncertainty have led to an outflow of investors' funds from P2P lending. In Europe, during March and April this year, P2P lending dropped to one third of the cumulative volume of previous months and forced several platforms to collapse. Although some reports are hinting at potential recovery this summer, the longer the uncertainty lasts, the fewer players will stay afloat in the market.

Expansion of Digital Finance

Quarantine restrictions have raised the use of remote services—from online shopping to delivery, to entertainment, streaming services and mobile payments. People accustomed to the advantages of the digital world are likely to keep using it actively in the post-COVID-19 period.

Cashless payments are a perfect example. Thus, the United Kingdom, Germany, Ireland, Poland, Norway, Egypt and other countries have raised limits on the size of contactless payments. In some cases, it has more than doubled.

Another outcome is the regulatory progress. Thus, coronavirus has pushed the adoption of fintech and regulatory technology (regtech) in China. In South Korea, it facilitated introduction of cryptocurrency law.

Therefore, although the pandemic has been tough to the industry, it has provided a grace period for fintech, helping it to succeed.

Blurring Borderlines Between Banks and Fintechs

Traditional banking is increasingly looking at fintech. The inevitable digitization is not the only reason. The industry has been facing a decline in financial performance since last year. Bloomberg Intelligence stated that the average cost-to-income ratio at the top European banks amounted to 67 per cent in 2019, the highest rate since 2008. Return on equity fell to the lowest level in three years at -8.7 per cent.

The global recession in 2020 has aggravated the situation. Lower incomes of the population, swelling unemployment and the financial uncertainty decrease the number and size of bank deposits and purpose loans, such as mortgages, car loans and others. Berenberg Bank predicted that the decline in revenues of the European and American banks in 2020 would amount to 8.5 per cent, while profit would be 30 per cent lower than it predicted a year ago. In Asia, the situation is similar—banks in Singapore are also expecting a significant revenue drop.

Changes in the operating model and digital transformation are the means for banks to overcome difficulties. It may also stipulate banks to provide smaller loans and assess customers less formally, as well as start acquiring fintech firms. Remarkably, fintechs are quite active in this regard themselves, as they seek opportunities to strengthen the performance.

The recent acquisition of AsiaKredit by the financial supermarket GoBear and the takeover of Africa's largest platform MPESA by Vodacom and Safaricom serve as an example. Additionally, talks about Metro Bank's potential acquisition of RateSetter, one of the largest P2P lending platforms in the UK, takeover of the IT vendor TSX in Spain by Santander, as well as Western Union's potential acquisition of MoneyGram, confirm the trend.

Shifting Toward Higher Personalization

The surge of interest in telemedicine amid the COVID-19 has the potential to grow into a large-scale phenomenon. Potentially, it may boost commercial interest in biological data, such as body temperature, blood pressure and others. It will allow companies and governments to improve assessment and forecast, and influence the way people think and act.

Although it is a long-term trend, with the massive 5G adoption, it promises to shift the consumer paradigm dramatically. These changes will affect fintech services foremost—software, targeting and customer acquisition, credit scoring procedures, etc.

It will be one of the steps toward more individual customer offers and comprehensive IT solutions automated to the highest possible extent. Within a single frame, they might combine solutions from different fintech segments, as well as serve diverse audiences.