Inflation rates have drastically increased worldwide over the last couple of years. Pew Research Center reported on a study on inflation rates from 44 countries, where the highest inflation rates were found in Israel at a rate 25 times higher than it was in 2021. The U.S. averaged around 8.0% inflation in the first quarter of 2022, placing it as the 13th highest among the countries examined. These numbers are quite alarming for both consumers and companies as price hikes occur.
Inflation is defined by AskMoney as “the tendency of the purchasing power of money to decrease over time”. With the prices of goods and services on the rise, the same amount of money won’t be able to buy as much as it used to before. Inflation can be a mixed bag for fintech companies, in particular, as they are involved in different activities like lending money, buying equipment, and more. In this article, we’ll take a look at exactly how inflation can influence fintech.
Increased spending on equipment
Fintech has been essential in storing and moving money through the technologies and/or infrastructures they develop. Due to current events, however, profits from these services have been affected. Our post on companies reacting to the Russia/Ukraine war noted that some digital payment services like VISA and PayPal have withdrawn their services from Russia. Russian cross-border transactions were worth $40 billion in 2020, so fewer available services would place significantly larger costs on the existing customer base. Furthermore, exports from Russia have been cut off across the globe, leading to shortages that contribute to the upward prices of computer equipment. Fintech firms now have to factor these shortages into their budgets, so they can continue to improve and develop current systems serving e-wallets and mobile banking.
Decreased confidence from investors
Fintech companies are ever-reliant on investors to grow and expand their businesses. Unfortunately, the risk of inflation will call for bigger demands on investment returns and lower company profit. These economic conditions make it difficult for many fintech firms to attract investors. For instance, digital bank Zopa has delayed its release of public stocks, while payments company Stripe is unsure of its own valuation due to rising inflation. Despite these challenges, the BIS Quarterly Review suggests that funding for fintech will continue to happen but in different ways — depending on whether or not the country has regulatory spaces for it, and if the fintech firm has great innovation capacity. In the case of the U.S., most of these investments can be consolidated through mergers and acquisitions, which may need to balance and complement existing services between companies.
Increased borrowing from fintech
With rising costs due to inflation, fintech companies remain essential in providing loan services to small businesses and individuals. A study on fintech lending by the Federal Reserve Bank of Cleveland found that although the requests are smaller when compared to lending from a traditional bank, there are quite a number of benefits that appeal to borrowers. It’s generally more convenient and easier for applicants to receive loans through fintech companies, and there is a greater tendency for revenue and employment growth for those who borrowed from a fintech firm. Through these opportunities, fintech firms are better able to establish themselves with the public.
It’s difficult to tell when inflation rates will return to normal. With the current crisis, the future and sustainability of fintech are reliant on its response, especially for smaller fintech firms that would have to push for continued innovation amid rising costs. Still, the dependency on fintech is strong in modern economies, and we don’t expect to see the industry disappear anytime soon.