Fintech “Financial Technology”

Financial technology (or “fintech”) is becoming the primary medium for financial transactions. Following the financial crisis of 2007-2008, the financial services industry sought ways to provide their services in a more effective, cheaper, and more modern medium to its consumers, many of whom were in the middle or lower class. This sector grew rapidly, and by the time we hit 2020, investment capital and new startups have been flocking to the industry due to its immense growth. In 2019 alone, fintech startups raised close to $35 Billion in funding. Popular services within the industry include mobile payments, online lending, and digital currency. These services have become extremely abundant and competitive.

The Pressures On

As the coronavirus pandemic hit, many fintech companies came under significant pressure. Many were heavily reliant on funding as they were or are in the early stages of growth trajectories, a time when investment capital is critical. Funding access became more difficult for these earlier stage ventures as a flight to stability occurred for investors, who quickly began to focus on established companies with precise and proven business models. Not only has the pandemic changed this, but it has also altered industry fundamentals as interest rate cuts and economic slowdowns have drastically influenced the industry.

Concerns vary widely depending on the company; however, the clear and immediate concern is the management of the current uncertain aspects of the market. The pandemic’s length is unknown. Will it be over in a month? A year? Many of the questions are driven by not only the virus but also the political climate. With the length of the pandemic unknown, many fintech companies have rushed to shore up their foundation by securing stable capital from investors, lenders, and any sources possible.

Business Disruption

In general, fintech startups are smaller as companies, making them more susceptible to short term business disruption, often leading to long term problems. That said, those that can survive generally have the luxury of being newer, meaning they are more nimble. Older technology companies have the negative baggage of migrating and transitioning old technologies when they are changing their practices or implementing new strategies. Companies of significant age are few and far between in fintech, giving them a technological edge. For these reasons, fintech companies have often sought after by more substantial companies due to the inability of larger companies to integrate new technologies into their systems. Using these outsourced, smaller companies allows larger companies to avoid poor installation and management of old systems, which can often compromise IT performance and security.

In the parallel path to the pandemic question mark, much of the industry has been overwhelmed by customer requests for forbearance and loan relief options, spurred by directives from the White House’s Cares Act and other state or municipal economic relief initiatives designed to allow businesses owners to weather the storm of the pandemic. Maintaining operations when authorities forced office shutdowns has been incredibly difficult. Management was forced to reorganize their entire workforce while handling never before seen service demand spikes. With cash short and employee costs as high as ever, many companies struggled to keep up.

Growth activities have been halted or altogether scrapped. With cash no longer a luxury and time dedicated simply to keep up with demand, there seems to be little to no time to accommodate any thoughts for growth.

Underwriting Practices

Underwriting practices have changed, as well. Prior to the pandemic outbreak, lenders were trending towards lax practices, making loans easier to obtain, specifically for riskier borrowers. For many, that trend is now reversing. Online lenders are looking to maintain a healthy balance sheet quality and avoid the risks that brought down the financial industry in 2008. Risks are not looked at positively internally or externally, particularly for those lenders with public ownership, which has had as strong of a scrutinization of their records as ever.

With changes comes challenge, but also opportunity. Social distancing measures and interest rates may have negatively affected the industry. Still, they have also led to a growth in the use of digital financial services and e-commerce, both niches within the fintech industry.

For those that can survive and do take advantage of the ability to innovate, there is usually an audience waiting. The modern consumer is more often than not willing to trust a new brand and try new things. Less established companies can pivot into a new niche and catapult to the top of their industry if their brand identity and product are strong. The pandemic has closed down in-person interactions and pushed digital-first uses, which are now experiencing never before seen demand for their services.