Business & Investment

Pandemic has changed FinTech’s growth trajectory

Along Neeti Aggarwal

The COVID-19 pandemic has accelerated the digitization and innovation of financial services. It also impacts the operations, financial sustainability and financing of fintech companies.

Financial technology (fintech) companies have targeted market inefficiencies and have disrupted existing companies’ operating and business models by enhancing the customer experience and expectations. Over the last decade, the entry of fintech companies can be divided into three major phases. Initially, the financial industry witnessed an influx of innovative business-to-consumer (B2C) fintech disruptors competing with traditional players. This was followed by a strengthened ecosystem partnership between FinTech and institutions to meet customer needs. Today, the industry is witnessing the emergence of business-to-business (B2B) fintech companies that enable enterprise technology capabilities.

Acceleration of digitalization by pandemic

Global pandemics are rapidly changing customer behavior, some of which continue after the pandemic, and are restructuring the way consumers interact with financial service providers. It has accelerated the adoption of e-commerce transactions and online financial services. Customers have easily transitioned to real-time cashless and contactless payments. Increasing adoption of instant payments, QR-based payments, “payment requests”, and faster cross-border payments. All of these offer payment companies new growth opportunities.

The pandemic has led the financial services industry to increase cloud adoption. Enterprises leverage data and advanced analytics to differentiate their services, and artificial intelligence (AI) finds new applications to improve and personalize the customer experience and enhance risk management. In addition, ethical and explainable AI modeling is currently in the spotlight of the industry.

Meanwhile, peer-to-peer lenders face the challenges of reduced investor motivation and renewal, and increased defaults. A slowdown in the global economy could widen the funding gap for small and medium-sized enterprises (MSMEs).

In addition, the risk is increasing with the increase in cybersecurity and data breaches during pandemics. This requires fintech companies to strengthen their cyber resilience and security measures.

Open ecosystem and industry collaboration

One of the main focal points of today’s financial professionals is to improve the customer experience by better predicting and meeting their needs. It is driving strategic change towards greater ecosystem collaboration and partnerships between institutions.Banks adopt open banking frameworks and applications

A programming interface (API) that enables partnerships with fintech companies and other financial players. For example, DBS Bank connected to 400 partners through the API platform, and ICICI Bank launched an API banking portal with 250 APIs.

Over the years, several banks have set up innovation labs to help identify the right fintech partners, co-create solutions, and build an innovation culture. Some banks have also allocated venture funds to actively invest in promising fintech companies.

Alex Manson, head of SC Ventures at Standard Chartered Bank, shared that the bank has a $ 100 million investment fund that can commit to relatively early-stage companies. Invest only in partners to support partner expansion.

Ecosystem partnerships form the basis for SuperAppli’s growth to expand product and market reach in regions such as Alipay, Grab and Go-Jek. These companies also make it easier for people who do not have Asian bank accounts and are short of funds to access financial services. The World Bank states that 29% of the adult population in East Asia and 30% in South Asia do not have access to formal banking services.

For example, Grab is expanding its insurance services to strengthen its reach in Southeast Asia (following the acquisition of Bento) while expanding into microinvestments, consumer loans and postpaid products. Reaching the market through GrabPay allows you to onboard your customers and introduce them to other financial services products. Reuben Lai, Senior Managing Director of Grab Financial Group, said: .. He shared that the company currently issues 13 million microinsurance policies and nearly 400,000 loans and finance solutions across drivers and merchant partners.

FinTech sustainability attracts attention

The rapid expansion to gain market share meant a large investment, often costing most fintech companies. And the fintech model is being tested this year. As companies strive to balance operational costs with significant growth, there is increasing focus on the viability and long-term sustainability of business models.

“What we can see now is that people go back and sometimes back to the drawing table to rethink their business model, rethinking what’s really rewarding and what’s not. “Vice President Eduard Fabian explained, Razer Fintech’s Chief Technology Officer.

Growth of digital banks in Asia

With a technology-first approach, digital banks focus on the customer experience through an innovative yet low-cost digital model. They not only promote financial inclusion, but also differentiate services through better data insights.

In Asia, the growth of digital banks has skyrocketed in the last few years. In China, Tencent has WeBank, which offers lending services. In South Korea, KakaoBank boasts a strong traction. Several banks have launched digital arms such as DBS Digibank, SBI Yono, UOB TMRW and BTPN Jenius.

Hong Kong recently issued eight digital banking licenses, but Singapore and Malaysia are currently evaluating candidates for digital banking license applications. However, these new banks need a viable business model as well as a good operating model to meet their customers’ needs. For example, Neobank in the UK is rapidly expanding its market reach to millions of customers, but is still struggling to achieve profitability.

Fintech funding cut in 2020

FinTech faces many challenges during a pandemic. They had to work on remote control of employees and the decline in customer demand due to the economic closure. This further impacts investor needs and limited funding for the sector, and many small fintechs are struggling to float.

In 2020, VC-led FinTech financing transactions fell sharply. The pandemic has hit FinTech financing globally. According to market intelligence firm CB Insights, the total number of transactions with fintech companies fell by 30% in the second quarter compared to the first quarter of this year. Global FinTech funding for the third quarter was $ 10.63 billion, up 4% from the previous quarter. Trading activity continued to decline by 24% from the third quarter of 2019. Investors have further focused on late-stage fintech this year through more large-scale financing transactions.

In Asia, FinTech financing has witnessed a slide as well. In the first three quarters of 2020, Asia Pacific FinTech raised a total of $ 3.9 billion, down 46% from the same period last year, but trading volume was 20.5%, according to S & P Market Research. It has decreased. However, after hitting the valley in June, FinTech funding seems to be witnessing a recovery.

Within Asia, Southeast Asia had the highest number of FinTech financing transactions in the third quarter of this year. The region is becoming a hotbed for fintech growth as new companies emerge, but some of the major fintechs have scaled up to extend their reach across the country.

The pandemic not only revealed the urgent need for corporate digital transformation, but also highlighted the existing digital gap in the industry.

Pandemic has changed FinTech’s growth trajectory Pandemic has changed FinTech’s growth trajectory

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