How is COVID-19 reshaping the FinTech industry?
The financial services industry could look very different a few years from now, thanks to COVID-19 accelerating several emerging trends in FinTech
Since the start of COVID-19, there have been many success stories of financial technology companies (FinTechs) meeting consumer demands as a result of lockdowns, such as buy now pay later business models like Afterpay. Afterpay’s underlying sales increased by 112 per cent from A$5.2 billion to A$11.1 billion. At the same time, the number of active global customers – that’s across Australia and New Zealand, the US and UK – grew by 116 per cent to 9.9 million, according to its full-year results to 30 June 2020.
However, not all FinTechs have witnessed similar results, with some struggling to survive in the current economic climate. “Those businesses that are amalgamated with existing digital payment infrastructure are better able to offset the adverse economic effects of COVID-19,” said Associate Professor Kingsley Fong, former deputy head of the School of Banking ＆ Finance who initiated the Financial Technology courses and programs at UNSW Business School in recognition of high industry demand for FinTech expertise. UNSW FinTech offerings include Australia’s first undergraduate specialisations in Financial Technology, postgraduate specialisation in Master of Commerce and Master of Finance, as well as a fully online Master of Financial Technology.
The ability for businesses to adapt well to digital channels will be crucial to success in the future. So, what areas of the industry will see the most growth as a result of increased digital adoption?
Digital payment services
COVID-19 has accelerated demand for digital channels for payment, credit, business and general cybersecurity, said A/Prof. Fong. And the rise of FinTech lending and credit analytics especially will be a crucial driver of change in the future, given the demand for credit during the pandemic is overwhelming traditional banks. For example, one study shows the demand for credit in the US in March was 50 times the normal average.
The sheer volume of credit that is needed, combined with social distancing, also means better technology is required to grant a large number of loans and monitor the financial health of many individuals and SMEs, said A/Prof. Fong.
Another critical factor is that FinTech firms complement loan writing to customers that banks cannot reach – they increase financial inclusion, especially in developing economies, explained A/Prof. Fong. For example, the US$659 billion (A$898 billion) US Paycheck Protection Plan enlists FinTechs to write loans, and they fill some of the gap left by the banks.
Closer to home, neobank lenders have also met with success. For example, SME-focused neobank Judo Bank secured a A$500 million investment from the government to help provide loans to small businesses. According to reports, bank lending to small business shrunk more than 2 per cent during COVID-19. In comparison, neobank Judo’s lending grew 40 per cent to a loan book of A$2.5 billion. As the broader economy shifts from ‘response’ to ‘recovery’ post-COVID-19, it is likely to create even more opportunities for Australia’s neobank lending sector.
Meanwhile, digital payments services (across the payments ecosystem) have also grown since COVID-19, as the drive towards cashless payments has accelerated rapidly, explained A/Prof. Fong. “Digital and contactless payment is becoming a priority as consumers (and businesses) go digital as a new way of life (and survival),” he said.
Technological adoption during the crisis
One thing COVID-19 has made clear is that consumers and businesses continue to adapt to digital “as a new way of life”, which means the “technology laggers need to catch up” if they are to survive in the post-COVID-19 environment, said A/Prof. Fong.
For example, a recent study of finance app downloads (mostly banking and payment apps) around the world shows the spread of COVID-19 and related government lockdowns led to a 33.1-36.6 per cent increase in daily downloads during the peak of the pandemic. Traditional incumbents exhibited large gains relative to “BigTech” companies and newer fintech providers during this crisis period. However, the authors state there was also a smaller share of investment, lending, and government apps, which saw significantly higher relative rates of growth.
Such changes in the market will necessitate the development “robust systems with well thought out business models... data analytics to improve and speed up credit decisions and monitoring” and finally “digital identification to support financial inclusion, payment and credit”, said A/Prof. Fong. Governments are also likely to increase system integration and promote schemes to accelerate the rise of FinTech post-COVID-19 as a result, he added.
These trends are also likely to be supported by increased government system integration and government schemes to accelerate the rise of FinTech, with more FinTech regulation and regulatory technology development needed to ensure financial stability, effectiveness and efficiency in a post-COVID-19 world, concluded A/Prof. Fong.
The proliferation of SaaS technology
“I think you have to look at SaaS software as a significant driver of what is happening in financial services and FinTech,” said Xero CEO Steve Vamos, speaking recently on some of the latest drivers of innovation and developments in the Fintech industry.
“Another is the move by governments to want to interact with business digitally. And a big interest of the government is money flows,” he said.
He agreed with A/Prof. Fong that the management of flows of money through digital channels has become more accessible and said money flows should also take into consideration workflows. “If you look at it in the context of Xero, we’ve now integrated the opportunity to get paid and paid faster... the cloud has enabled that, and partners that we have like Stripe and Go Cardless help provide the services,” he said.
“To me, it is about how the workflows of business converge with money flows in a much more efficient way... that’s where a lot of innovation is going to come from."
Associate Professor Kingsley Fong is the former deputy head who initiated the Financial Technology courses and programs at UNSW Business School. Steve Vamos is CEO at Xero, and he has also held senior executive positions at Apple, IBM and Microsoft and served on the boards of Telstra, Fletcher Building, David Jones and Medibank. To find out more please contact Associate Professor Kingsley Fong directly, or to find out more about Xero please read: Change is about people: Xero's five lessons in digital transformation.