The chaotic effects of the coronavirus outbreak are not limited to financial markets, but business operations across a widening range of industries. The infodemic, the spread of false information about COVID-19, is making matters worse by sowing panic among consumers.
According to Euler Hermes, trade losses from the pandemic could amount to $320 billion every quarter. To put that into perspective, that is equivalent to the annual cost of the U.S. – China trade war.
This is not the first nor the last global emergency. FinTech and banking companies of the 21st century need to be prepared to operate in such circumstances. As with any significant market pullback, opportunities will eventually arise amid the disruption.
Let’s take a closer look at how this will affect the FinTech sector.
Fear, panic, and quarantine measure heavily impact consumer spending. Canceled flights, closed stores, and social distancing are expected to result in a drop in transaction volume at all levels of the economy. This means FinTech firms in the payments sector like Square, Stripe, or Chime will collect fewer fees, negatively impacting their profitability and valuations.
Both Visa and MasterCard have warned shareholders about a projected sharp slowdown in cross-border business and travel-related spending, cutting their expected sales by 2% to 4%.
Venture capital funding of existing and new firms is expected to dry up as consumers flock to safer investments, potentially leading to a drop in M&A deals. For publicly traded FinTechs, falling share prices mean an increase in the cost of capital. Combined with investors concerned with higher funding costs, the volatile market could be a catalyst for lower valuations.
The Federal Reserve, the Bank of England, and other central banks around the world have cut interest rates to help the markets and prevent a new global recession. As demand continues to shrink, commercial banks will see a drop in interest margins and reduced income from business clients and transaction fees.
To answer whether COVID-19 will affect banking and FinTech, Alex Malyshev, the CEO of SDK.finance, provides his opinion: “Banks are likely to delay spending decisions to prepare for a possible downturn. This crisis gives opportunities to those who understand people’s needs and take leadership despite the risks.”
To prevent the spread of the disease, central banks have resorted to quarantining and disinfecting physical bills that come in from local banks. A much safer and more convenient alternative to contaminated cash is the use of contactless payments, which is encouraged by the World Health Organization.
We expect a significant increase in the total volume of contactless payments as the pandemic continues. If your bank and payments company has not prioritized the introduction of contactless payments, now is the perfect time to fast track digital innovation efforts.
The fear of getting infected and quarantine measures are going to keep customers away from bank branches. Low utilization rates combined with high lease costs have been the reasons for switching to branchless banking for quite some time now. However, on account of a booming economy, most banks postponed the replacement of their legacy software and outdated business processes.
The coronavirus outbreak is a great time to make a move to a germ-free branchless banking experience. Not only is this approach more accessible to people in remote areas and preferential to younger generations, but it is much more cost-efficient.
Legacy banks and credit unions are increasingly losing customers to banks with superior digital solutions. Many banks are now looking to modernize and add new functionality to their legacy products by working with FinTech firms.
The increase in demand for digital banking software could provide a necessary boost to FinTechs at a time when other funding may not be an option. Some governments are trying to mitigate the effects of the outbreak by encouraging FinTech partnerships. South Korea is easing FinTech regulation, and China announced that its efforts helped drive FinTech adoption.
Business downturns are not uncommon. Those firms that recognize and adapt to new market conditions have the chance to outperform even the most established companies.