We’ve all been affected in some way or another – whether it is your own or a loved one’s health; living in a country in lockdown; or having a business temporarily on hold or closed. Now more than ever people need support and strategies for staying afloat (mentally, physically, and fiscally). In this blog we share our views on COVID-19’s impact on fintech along with actions fintechs can take in the short-term. While this blog concentrates on fintech in the short-term, a follow-up piece will focus on long-term trends and how fintechs should adjust their course.
The economy and COVID-19
As COVID-19 spreads across the globe, we are witnessing one of the biggest crises of our lifetimes. What began as a regional event has now swept across the world, leaving governments to take measures that will likely stay in place for some time. Even though we find ourselves in the midst of this crisis, it is inescapable that if not yet affected, we will all be touched by COVID-19’s eventual effects on the economy.
With large swathes of society working from home, schools shuttered, and the entertainment sector shut down, the economy is taking a big hit. We’re quickly diving deep into a big economic shock and long-term recession. International trade and travel have diminished. Supply chains are distorted as factories and borders are closed. Given a decline in demand, plus government measures to protect public health, whole sectors face a sudden, sharp decline in revenue. Whilst there are large differences between sectors, this will impact the entire economy. Governments have announced large aid-packages, but this will only help curb some of the shock. Given this scenario, it’s easy to understand the fintech community is also facing losses.
Impacting business continuity
At the outset of the outbreak, it was important to first manage any direct impact to operations to ensure business continuity. Many fintechs were early and quite successful in transitioning a fully remote ‘working from home’ scenario enabled by virtual tools. Compared to incumbents, fintechs’ processes are already largely digital (i.e., most challengers offer fully digital customer onboarding without any required face-to-face interaction).
Their agile way of working and great deal of independence to their employees also enabled fintechs to let their people better manage the impact on their daily lives. On top of that, many fintechs have been promoting the health and well-being of their staff.
Many fintechs were also quick to respond vis a vis helping their customers. The African neo bank Eversend repurposed its app to assist with reporting coronavirus cases. The updated app provides customers with verified health information and includes a symptom checker along with a location capture, which is shared with local health authorities.
Other challenger banks such as the UK’s Atom bank, Starling Bank and Monzo are offering their customers ‘payment holidays’. And Brazil’s Nubank has been offering additional lending to customers short on cash.
However, working remotely and banking digitally requires reliable technology and a robust IT infrastructure. Amidst the stock market crash, Robinhood was plagued by three rather untimely outages to their trading system. This locked people out of trading at a time when it was most important, and was reported to have resulted in many customers losing large sums of money.
Non-digital activities are also being affected. Customer acquisition and marketing must now be altered to the new reality, with adjusted messaging for each channel (i.e., how effective or appropriate is it to have an ad campaign in the London tube right now?). Hiring processes are affected as both companies and candidates delay until the worst of the uncertainty is over.
At this moment, most companies have already managed the immediate risks. But it remains important to keep a close eye on all business activities and creatively manage the short- and mid-term impacts.
Mitigating the financial impact
Once the immediate impact is managed, it’s important to look ahead and take actions for the mid-term. Not all fintechs are impacted in the same way; it depends on the stage of the company, the segment, the market fit, and its cash reserves.
To understand where you stand as a fintech, it’s important to quickly assess your financial position. This includes a detailed overview of the financial runway, understanding where you can cut costs, and outlining options for additional funding.
Additionally, it is critical to accelerate the creation of a viable business model (as opposed to just seeking growth and global expansion). Many fintechs are early-stage and not (yet) profitable. At Fincog, we believe that it’s important to develop a viable business model first, before scaling.
This now becomes more important than ever and can be achieved, for example, by re-focusing on core markets and expanding into profitable product segments (e.g., secured lending or insurance). However, bear in mind that while growing into lending may provide opportunities, fintechs must be cautious to properly manage the credit risk to prevent large, mid-term loan-losses. For more tips, you can also read our previous blog on the path to profitability.
For those that have a runway of less than 6 months, they must act quickly to obtain funding. The market circumstances have abruptly changed and, without a doubt, become more challenging. We expect that some funding will still take place, but valuations will be lower and the fundraising process will take longer. Solid preparation now is key to enhance your chances of long-term success. We stand at the ready, should you wish to explore raising new funds.
Moving forward together
We’re all impacted, and life and work are certainly not ‘business as usual’. We are the first to admit that we don’t know all the answers either. We’re in the same boat together and here to help. We believe that by working together we can weather this storm. Feel free to contact us for a free in-take and to discuss what action you should take in the short-term.