By Nick Weising
Imagine never withdrawing cash from an ATM or carrying a wallet ever again. Instead, you have immediate mobile access to your cards and bank account. Your investment and insurance needs are all satisfied by apps. This image is not one of the far future but instead of the next couple years, and it is accelerating closer to the present thanks to the coronavirus.
The pandemic is seriously afflicting the already-strained American economy. A fifth of Americans were struggling financially before the coronavirus. Now, nearly 90% of American small businesses report a “moderate to severe” impact on operations and more than half of small business owners are worried about their job security. Unemployment rose dramatically by 4.5 million in April and, while unemployment has trended downward since spring, it is abundantly clear that many jobs will not return.
Rampant unemployment is causing food insecurity as low-income families are forced to drastically cut grocery expenses to make ends meet. Those who are unable to cut food expenses often cannot pay rent, leading to current sky-high eviction rates. In the interest of public health, the Department of Health and Human Services issued a temporary order to stop evictions until
January. However, Reuters reports that 60,000 evictions have already occurred, and when the protection is lifted, 8 million tenants will have to pay a collective $32 billion in back rent or face eviction. Although the stock market remained stable throughout the pandemic, its success is largely indicative of the Trump Administration’s corporate aid, which does little to nothing for the average American. Indeed, America’s macroeconomic conditions are not as optimistic as the markets would suggest.
The coronavirus-induced recession even hurt the sexiest industry right now, financial technology, or “fintech.” Fintech seeks to use technology to automate and improve financial services. However, loan defaults from small businesses, which comprise a significant portion of fintech loans, as well as limited access to capital, have forced several players to be bought by larger firms. This includes Morgan Stanley’s acquisition of the electronic trading platform E*TRADE and PayPal’s acquisition of the coupon-finding browser extension Honey. The result will be an industry consisting of a few larger, more stable companies. Meanwhile, fintech firms which manage to stay afloat must continue to absorb losses for the foreseeable future.
Both consumers and small businesses are less willing to spend, hence the vulnerability of smaller companies. Sequoia Capital, a venture capital fund, stated it will take at least a year to return to pre-pandemic investment levels. This is significant in an industry notorious for startups. Global fintech funding declined during the first half of this year, with $25.6 billion of total investment secured globally compared to $34 billion in comparable months. Although financial technology firms are, like many other markets, affected by narrowing investment opportunities, fintech is nonetheless in a unique position to take advantage of the opportunities presented in a post-pandemic economy.
Due to social distancing measures and physical money’s ability to act as a vector of disease, the pandemic strengthened the shift toward digital banking and cashless payments. People are unlikely to go back to traditional means of holding and exchanging currency, as digital methods are more convenient for the consumer and cheaper for businesses. Despite the
recession, payment processing platform Stripe raised $600 million in Series G funding in May. Other companies, like payments API startup Marqeta and cryptocurrency trading platform Coinbase, have recently announced intent to IPO.
The general move toward cashless payments is wonderful news for fintech firms, whose business relies on online banking. In the United States, Fintech collaborated with the federal government to distribute pandemic aid, integrating fintech in the US’s cash distribution network. For instance, the Small Business Administration took months to distribute aid due to poor website integration. Companies like PayPal, Fundbox, and Square Inc. were eager to assist and began distributing PPP loans. The United Kingdom, too, reached out to fintech firms like Starling and OakNorth to assist in issuing emergency loans.
There are other reasons why fintech is in a prime spot for expansion. Gig economy workers rely on fintech. The number of people who self-identify as working in the gig economy grew since the onset of the pandemic, most likely due to coronavirus-influenced layoffs. Upwork saw a 50% increase in freelancers on its site since the pandemic began. Instacart likewise saw a massive increase in drivers, hiring as many as 300,000 new contractors in a single month. IBISWorld estimates that the number of temporary employees will increase 1.8% by the end of 2020. Gig economy workers have unique tax, banking, and insurance needs which fintech firms are best equipped to handle. Some, like Hurdlr, streamline quarterly taxes for self-employed workers while others, like Chime, automate saving deposits to help build an emergency fund. Demand for more portable and virtual bank accounts and payment modalities are also emerging to cater toward those in the gig economy. Venmo and Zelle allow for mobile person-to-person payments. Setting aside the ethics of payday loans, fintech firms can offer credit immediately, a necessity for those struggling to make ends meet.
Small businesses also rely on fintech firms. Fintech companies have ramped up their lending to small businesses over the past five years, filling a void left by banks which backed away from the sector following heavy losses during the 2008 financial crisis. Eyal Shinar, Fundbox CEO, explains that credit providers have been suffering through Covid-19 because of increased delinquency. Fundbox deploys technology which enables small business owners to receive loans without providing a credit score. For many small businesses, fintechs like Fundbox are the only way to get a loan. Aforementioned mergers and closures leave the fintech sector with fewer suppliers, but also with greatly increased demand. The fintech firms which survive the current recession are perfectly situated to drum up business from eager clientele.
It is difficult to predict whether the future of credit will swing toward banking or fintech. There is a real opportunity to rethink the financial services surrounding payment and credit. Although banks are competitors of fintech in many respects, the Federal Reserve seeks to develop a more efficient real-time electronic payment network, similar to Europe’s TARGET Instant Payment Settlement (TIPS) system. If fintech firms fail to partner with banks, they take the risk of being outcompeted by larger, institutional firms like CitiBank or Bank of America. Fintech firms have a lot to gain by partnering with established banks. Machine learning and algorithm development requires lots of data. More customers means more data which means better models. Partnering with banks, therefore, would greatly improve fintech products and cement the firms within the American financial market.
The realm of data analytics, more specifically the demand for consumer data, is perhaps the most valuable opportunity presented by the coronavirus. Fintech, due to robust investments
in machine learning, data infrastructure, and predictive software, is well-suited for AI-based lending. Underlying technologies such as blockchain and APIs also enable fintechs to rapidly develop their products and solve for digital use cases. APIs are producing payment ecosystems by connecting fintechs, banks, and financial networks. This includes the expansion and tracking of consumer credit, spending, and investment. As the economy recovers, demand will continue to grow for this data. To cater to demand for consumer data, fintech firms can create a “financial health score” by compiling banking, credit card, savings, and other self-generated data. A financial health score would provide a more holistic view of one’s financial standing than the current credit score provides (though credit score would be a component of the aggregate score). Fintech firms are best equipped to build a financial health score given the data analysis capabilities and sheer amount of information available to them. Currently only one Chicago-based nonprofit is pursuing this; doing so would be a public good and potential moneymaker.
The financial technology industry will grow in the post-pandemic climate. The transition to a cashless society, the industry servicing the gig economy and the underbanked, and yet-untapped ventures including a financial health score all indicate that fintechs who survive the current pandemic have promising futures. As market forces draw the up-and-coming industry in competition with legacy banks, partnerships between fintech and institutional lenders will be crucial to fintech’s continued success.
Imagine never withdrawing cash from an ATM or carrying a wallet ever again. Instead, you have immediate mobile access to your cards and bank account. Your investment and insurance needs are all satisfied by apps. This image is not one of the far future but instead of the next couple years, and it is accelerating closer to the present thanks to the coronavirus.
The pandemic is seriously afflicting the already-strained American economy. A fifth of Americans were struggling financially before the coronavirus. Now, nearly 90% of American small businesses report a “moderate to severe” impact on operations and more than half of small business owners are worried about their job security. Unemployment rose dramatically by 4.5 million in April and, while unemployment has trended downward since spring, it is abundantly clear that many jobs will not return.
Rampant unemployment is causing food insecurity as low-income families are forced to drastically cut grocery expenses to make ends meet. Those who are unable to cut food expenses often cannot pay rent, leading to current sky-high eviction rates. In the interest of public health, the Department of Health and Human Services issued a temporary order to stop evictions until
January. However, Reuters reports that 60,000 evictions have already occurred, and when the protection is lifted, 8 million tenants will have to pay a collective $32 billion in back rent or face eviction. Although the stock market remained stable throughout the pandemic, its success is largely indicative of the Trump Administration’s corporate aid, which does little to nothing for the average American. Indeed, America’s macroeconomic conditions are not as optimistic as the markets would suggest.
The coronavirus-induced recession even hurt the sexiest industry right now, financial technology, or “fintech.” Fintech seeks to use technology to automate and improve financial services. However, loan defaults from small businesses, which comprise a significant portion of fintech loans, as well as limited access to capital, have forced several players to be bought by larger firms. This includes Morgan Stanley’s acquisition of the electronic trading platform E*TRADE and PayPal’s acquisition of the coupon-finding browser extension Honey. The result will be an industry consisting of a few larger, more stable companies. Meanwhile, fintech firms which manage to stay afloat must continue to absorb losses for the foreseeable future.
Both consumers and small businesses are less willing to spend, hence the vulnerability of smaller companies. Sequoia Capital, a venture capital fund, stated it will take at least a year to return to pre-pandemic investment levels. This is significant in an industry notorious for startups. Global fintech funding declined during the first half of this year, with $25.6 billion of total investment secured globally compared to $34 billion in comparable months. Although financial technology firms are, like many other markets, affected by narrowing investment opportunities, fintech is nonetheless in a unique position to take advantage of the opportunities presented in a post-pandemic economy.
Due to social distancing measures and physical money’s ability to act as a vector of disease, the pandemic strengthened the shift toward digital banking and cashless payments. People are unlikely to go back to traditional means of holding and exchanging currency, as digital methods are more convenient for the consumer and cheaper for businesses. Despite the
recession, payment processing platform Stripe raised $600 million in Series G funding in May. Other companies, like payments API startup Marqeta and cryptocurrency trading platform Coinbase, have recently announced intent to IPO.
The general move toward cashless payments is wonderful news for fintech firms, whose business relies on online banking. In the United States, Fintech collaborated with the federal government to distribute pandemic aid, integrating fintech in the US’s cash distribution network. For instance, the Small Business Administration took months to distribute aid due to poor website integration. Companies like PayPal, Fundbox, and Square Inc. were eager to assist and began distributing PPP loans. The United Kingdom, too, reached out to fintech firms like Starling and OakNorth to assist in issuing emergency loans.
There are other reasons why fintech is in a prime spot for expansion. Gig economy workers rely on fintech. The number of people who self-identify as working in the gig economy grew since the onset of the pandemic, most likely due to coronavirus-influenced layoffs. Upwork saw a 50% increase in freelancers on its site since the pandemic began. Instacart likewise saw a massive increase in drivers, hiring as many as 300,000 new contractors in a single month. IBISWorld estimates that the number of temporary employees will increase 1.8% by the end of 2020. Gig economy workers have unique tax, banking, and insurance needs which fintech firms are best equipped to handle. Some, like Hurdlr, streamline quarterly taxes for self-employed workers while others, like Chime, automate saving deposits to help build an emergency fund. Demand for more portable and virtual bank accounts and payment modalities are also emerging to cater toward those in the gig economy. Venmo and Zelle allow for mobile person-to-person payments. Setting aside the ethics of payday loans, fintech firms can offer credit immediately, a necessity for those struggling to make ends meet.
Small businesses also rely on fintech firms. Fintech companies have ramped up their lending to small businesses over the past five years, filling a void left by banks which backed away from the sector following heavy losses during the 2008 financial crisis. Eyal Shinar, Fundbox CEO, explains that credit providers have been suffering through Covid-19 because of increased delinquency. Fundbox deploys technology which enables small business owners to receive loans without providing a credit score. For many small businesses, fintechs like Fundbox are the only way to get a loan. Aforementioned mergers and closures leave the fintech sector with fewer suppliers, but also with greatly increased demand. The fintech firms which survive the current recession are perfectly situated to drum up business from eager clientele.
It is difficult to predict whether the future of credit will swing toward banking or fintech. There is a real opportunity to rethink the financial services surrounding payment and credit. Although banks are competitors of fintech in many respects, the Federal Reserve seeks to develop a more efficient real-time electronic payment network, similar to Europe’s TARGET Instant Payment Settlement (TIPS) system. If fintech firms fail to partner with banks, they take the risk of being outcompeted by larger, institutional firms like CitiBank or Bank of America. Fintech firms have a lot to gain by partnering with established banks. Machine learning and algorithm development requires lots of data. More customers means more data which means better models. Partnering with banks, therefore, would greatly improve fintech products and cement the firms within the American financial market.
The realm of data analytics, more specifically the demand for consumer data, is perhaps the most valuable opportunity presented by the coronavirus. Fintech, due to robust investments
in machine learning, data infrastructure, and predictive software, is well-suited for AI-based lending. Underlying technologies such as blockchain and APIs also enable fintechs to rapidly develop their products and solve for digital use cases. APIs are producing payment ecosystems by connecting fintechs, banks, and financial networks. This includes the expansion and tracking of consumer credit, spending, and investment. As the economy recovers, demand will continue to grow for this data. To cater to demand for consumer data, fintech firms can create a “financial health score” by compiling banking, credit card, savings, and other self-generated data. A financial health score would provide a more holistic view of one’s financial standing than the current credit score provides (though credit score would be a component of the aggregate score). Fintech firms are best equipped to build a financial health score given the data analysis capabilities and sheer amount of information available to them. Currently only one Chicago-based nonprofit is pursuing this; doing so would be a public good and potential moneymaker.
The financial technology industry will grow in the post-pandemic climate. The transition to a cashless society, the industry servicing the gig economy and the underbanked, and yet-untapped ventures including a financial health score all indicate that fintechs who survive the current pandemic have promising futures. As market forces draw the up-and-coming industry in competition with legacy banks, partnerships between fintech and institutional lenders will be crucial to fintech’s continued success.