Banking During a Pandemic
Updated: Oct 2, 2020
The Coronavirus pandemic is undoubtedly a crisis in every sense of the word. As it continues to rage across the globe infecting more than two million people, its effects are far-reaching leading to country-wide lockdowns and damaging the global economy. It has affected almost every sector of the economy, bringing most manufacturing and service sectors to a standstill. The Financial Services sector is another which is currently facing a lot of pressure from concerned customers and struggling businesses. However, this is not the first global crisis under which the Banking System has had to run and it presents new opportunities for further expansion and innovation amid the disarray.
With the number of rules and restrictions imposed by governments to curb the spread of the virus such as the social distancing measures, quarantines, and determining what is “essential work,” consumer spending has drastically decreased resulting in a drop in total transactions at all levels of the economy. Additionally, infodemic, which is the spread of false information about the topic, is doing nothing more than planting the seeds of fear and panic deeper in the minds of the public. As a result, businesses are now facing difficult times with reduced activity and therefore decreased revenues. Subsequently, many people find themselves without jobs and a stable source of income meaning that they are defaulting on loans, can no longer afford insurance, missing mortgage payments, etc. The trickle-down effect is clear with traditional banks also suffering through a drop in transaction fees and net interest margins.
To solve the increased strain on traditional banking systems and to reduce the risk of the virus spreading through physical contact, a push towards digital banking is being made by many governments as well as the WHO. This increase in demand for digital banking systems presents an opportunity for FinTech firms to take advantage and develop. However, these firms are not without their difficulties.
Problems faced by FinTech firms
One of the major problems faced by FinTech firms is financial inclusion. A prerequisite of switching to digital banking services is the ability to use technology. However, groups such as the elderly are particularly vulnerable during this outbreak and are typically more hesitant in trusting digital banks with their life-savings. Now more than ever, efforts need to be made in educating the general population about digital banks and the required technical skills to comfortably work with them.
Considering the economic stagnation with reduced consumer spending, FinTech firms, like traditional banks will also see a drop in the number of transactions carried out across their platforms. This means fewer fees collected. Additionally, many FinTech firms have temporarily offered free or discounted services to help ease some of the stress caused by the virus. However, this means that their profits, as well as their valuations drop.
Consumer uncertainty, which has been reflected in other areas such as the stock markets, hinders FinTech firms’ source of capital. This is because FinTech firms largely rely on Venture Capital funding. This is expected to decrease as consumers look for more secure investments potentially forcing smaller FinTech firms to completely shut down.
Opportunities for FinTech firms
FinTech firms will benefit primarily from the increase in demand for digital banking services when people need to pay for essential goods. This avoids the hand-to-hand exchange of physical money. While some governments’ central banks direct their efforts to quarantine and disinfect bills by using UV light or high temperatures, others are focusing on making the use of contactless payment consumers’ first choice. For example, the UK has increased its contactless payment limit from £30 to £45. However, it will take some time to establish this as thousands of card machines need to be updated with the necessary software.
The push towards contactless payments, along with the fear of physically going to bank branches and possibly contracting the virus is now forcing traditional banks to focus on digital innovation and spurring them to go branchless. This provides an opportunity for FinTech firms to form new partnerships with traditional banks in setting up better digital banking options. In times when common sources of investment for FinTech firms such as Venture Capital funding are scarce, these partnerships provide them with a lifeline.
Looking to the future, as things start getting back to normal, the surviving FinTech firms are more than likely to receive increased Venture Capital funding as investors regain their confidence, and competition will have reduced.
The Finch firms that find ways to expand their business horizons through Merger and Acquisition deals, and other means such as Financial Inclusion, are the ones that will thrive during and after the current crisis. For example, a solution to the Financial Inclusion problem could be to provide a more user-friendly and assistive app that incorporates a help or panic button. This can guide the user through processes via a chatbot AI or even provide users the option to talk to a company employee directly.
By building trust and bridging the knowledge and technology gap for elderly, poor, and uneducated people, they can provide a lot of value to consumers and traditional banks. They will have managed to find new sources of funding, acquired a larger customer base, and grow overall. Fundamentally, they will have innovatively changed their business models to serve the needs of their customers, thereby ensuring their survival.