Covid-19 crisis also an opportunity for FinTechs, says BCG

14 July 2020 Consultancy.eu

While Covid-19 has brought its share of challenges for the global financial technology (FinTech) sector, a new report by Boston Consulting Group (BCG) highlights how the crisis could be an opportunity for the segment.

Most FinTechs came up post the last financial crisis in 2008/2009, which makes the current Covid-19 crisis their first global economic crisis. Prior to Covid-19, FinTech was among the fastest growing economic segments in industry, drawing vast pools of funding across the international market.

In fact, the FinTech sector was reaching a level of maturity last year, characterised by lower frequency but higher value activity. No doubt, the Covid-19 crisis and the accompanying economic conditions have changed the outlook dramatically. FinTech is an umbrella term that covers a wide variety of businesses, although each sub-cluster appears to have been hit hard in some way or the other.

For instance, there are the payment FinTech’s, which were gaining tremendous traction before the crisis, to the extent that they were challenging the payments market share of incumbent banks across the globe. Now, consumer activity is at an unprecedented low, which has dramatically reduced payment activity. On the other hand, online payments are going to become central as consumer activity picks up again, which puts this segment in a strong position for the medium and long term.

Total equity funding by value and number of deals

In a similar position are FinTech lenders. Once the economy enters the rebuilding phase, lending will see a boom. In this phase, the flexibility offered by FinTechs is likely to be a driver of their popularity in the lending space. While this is a risky competitive advantage to have, it could ostensibly boost FinTech lending activity in the near future. For now, however, high-risk markets across the world are causing a severe dip in lending volume.

Then there are the FinTechs that operate in the accounts & saving space. BCG uses Neobanks as an example of how this segment was also on the rise before the crisis. However, the crisis has exposed the trust deficit that consumers have in FinTech accounts, with many preferring traditional institutions to house most of their savings. The number of new accounts is drying up as a result.

That being said, FinTech accounts & savings players tend to specialise in high standards of customer experience. As the user moves online for most transactions, these companies can build loyalty among their existing users, paving the way for a stronger foundation in the post-crisis scenario.

Expected near term impact on FinTech sub-clusters

The shaky global market has also put a dent in trading and investment activity, directly affecting the value proposition for trading & investment FinTechs. On the other hand, digital channels are the only remaining option for brokerage and retail activity, signaling a boom for brokerage FinTechs. In fact, BCG reports that retail brokerage FinTechs reached an ‘all-time high’ in activity during the start of the crisis, to the extent that some applications have malfunctioned under the heavy activity load.

Lastly, there are the technology & support companies to the FinTech sector, which saw an uptick in activity in the immediate wake of the crisis, but might see their own curve flatten in the medium term as third-party tech spending is dampened. Nevertheless, these businesses will scarcely fall out of relevance, as tech support is likely to be a constant need.

On the whole, every immediate challenge being faced by FinTechs is accompanied by an opportunity, according to BCG’s experts. These companies are built to be agile and adaptable, making them ideally suited to reorient and bounce back in the wake of the crisis.

“As long as FinTechs shore up their risk profile, continually work on customer satisfaction and constantly explore new opportunities, they will remain strong for the foreseeable future,” concluded BCG.