The growth of the global FinTech market has been significant. According to the Business Research Group, the market was valued at about $127.66bn in 2018 and expected to reach $309.98bn at an annual growth rate of 24.8 percent through 2022. Of course, the COVID-19 pandemic has caused significant disruption and cast doubt on many predictions and projections.
Like virtually every other sector, the FinTech industry has been negatively impacted in terms of investment. According to Innovate Finance, it has seen a 30 percent reduction in investment across the UK – from $760m in the second quarter of this year compared to more than $1.2bn in the same period in 2019.
Resilience, opportunity and innovation
But most FinTechs have also demonstrated resilience and an ability to handle financial difficulties, giving them hope of surviving the crisis intact. Their high level of equity finance, coupled with agile operations and a willingness to embrace remote working, has enabled FinTechs to withstand the disruption. They have also taken steps to reduce their risk exposure and cut costs, including workforce reduction.
According to Beauhurst, only 1 percent of FinTechs have been critically affected by COVID-19 and 2 percent severely affected. By comparison, around 17 percent of other high-growth companies fall into these categories.
Many FinTechs have experienced a surge in demand as working practices and customer banking habits change in the COVID-19 era. Technology continues to change the face of the financial services industry. The advent of digital financial services, for example, has created faster, more efficient and typically cheaper banking compared to traditional financial services.
Prior to the outbreak, it was clear that FinTech would play a pivotal role in financial services going forward. COVID-19 has undoubtedly accelerated that process. Business models are being re-evaluated to incorporate new strategies and remote capabilities in a post-COVID-19 world.
“Prior to the outbreak, it was clear that FinTech would play a pivotal role in financial services going forward. COVID-19 has undoubtedly accelerated that process.”
Established FIs have been forced to expedite their digitalisation plans to meet new demands. As their infrastructure needs have evolved, automation and other digital services have become more important, with FinTechs ready to deliver innovative solutions.
Indeed, the industry is no stranger to crisis. The FinTech wave emerged primarily from the chaos caused by the 2007/08 global financial crisis (GFC). Uncertainty breeds innovation, and in the wake of the GFC, FinTech attracted significant investment and began to revolutionise financial services. COVID-19 presents another opportunity to advance this legacy.
As the global economy recovers from COVID-19, one particular area of focus for FinTech is financial inclusion. According to the World Bank, there are currently around 1.7 billion unbanked individuals worldwide, and FinTechs will be central to efforts to integrate these people into the global banking system.
Doing so will help to mitigate the economic and social impact of the pandemic. According to Deloitte, FinTechs, in strategic partnerships with financial institutions, retailers and government sectors across jurisdictions, can help democratise financial services by providing basic financial services in a fair and transparent way to economically vulnerable populations.
Digital finance is also expanding in other areas. Health concerns in the COVID-19 era have made physical cash payments less practical, opening the door to an increase in digital payments and e-wallets. Though cash use was predicted to decline in any case, COVID-19 has hurried that decline, due to concerns that handing over money can cause human to human transmission of the virus. According to a Mastercard survey looking at the implications of the coronavirus pandemic, 82 percent of respondents worldwide viewed contactless as the cleaner way to pay, and 74 percent said they will continue to use contactless payment post-pandemic.
In addition, improved ‘know your customer’ services are required to counter the rise in digital fraud and cyber crime since the beginning of the outbreak. As more of the global economic and financial system continues to move online, cyber defences will become even more crucial to protect data. Security-conscious FinTechs are designing their products with this in mind – even if face-to-face meetings and processes do return.
Given the rising reliance on technology, digital transformation will be a primary focus for FIs in the months and years ahead. Whereas previous efforts to integrate technology may have been limited in scope, many FIs are awakening to the fact that in order to deliver an efficient, effective and sustainable banking service, they must adopt a more holistic approach to digital transformation, which includes utilising FinTech.