As part of The Lawyer's In-house Financial Services conference 2020, David Gardner provides an industry spotlight covering some of the main challenges (and opportunities) the Covid-19 pandemic presents to the Fintech sector.
We often hear in-house lawyers say how they wish they had more time to focus on horizon scanning and assessing the potential risks heading their way. Never has this been more crucial, with many financial services firms impacted in a way they never expected. The Industry Spotlight section aims to provide readers with quick summaries of some of the challenges on the horizon.
This next post focuses on Fintech.
Fintech has emerged as a key driver of growth and change in UK financial services, attracting £billions in investment and employing over 75,000 people in the UK prior to the impact of Covid-19. During the early part of the Covid-19 crisis, the fintech industry demonstrated its flexibility, scalability and responsiveness by quickly launching targeted products and services to help customers cope with difficulties caused by the lockdown – Open Banking’s #PowerOfTheNetwork hashtag showcases some great examples of those solutions.
Even accounting for the strengths and creativity of businesses in the fintech sector, the Covid-19 pandemic presents challenges to every industry and fintech is no exception.
The impact of Covid-19 has accelerated digitisation at an unprecedented rate – from the mass adoption of video conferencing and remote working to the rapid reduction of cash transactions. Link reported that ATM withdrawals fell by 50% in the UK in the month of March 2020, whilst research by Nucoro found that 6 million customers downloaded their Bank’s digital banking app over a similar period.
In many ways, this plays to the strengths of fintech, which frequently makes use of highly digitised, distributed business models to interact with customers. However, fintech providers need to move quickly to produce standout solutions and capture market share, as digital banking evolves quickly in the “new normal”. Starling’s new “Connected Card” for customers who are self-isolating is a good example of this.
Regulators have given the financial industry some breathing space to focus on consumer protection and resilience post-Covid-19, as shown by the accelerated publication of the joint UK Regulatory Initiatives Grid in May 2020. The grid shows delays to the timescales for many regulatory actions and deadlines, but also highlights the huge number of regulatory changes in flight. Fintech is well positioned to harness the power of initiatives like Open Banking and Digital IDs, but will need to keep a close eye on all the moving parts on “the grid” to do so.
Pre-Covid, many start-up and scale-up fintech businesses relied on initial investment to grow customer numbers and refine their service offerings prior to making profits, making them vulnerable to cashflow interruption. The UK government has announced a raft of measures to support businesses during lockdown, but to have a sustainable future fintech business will also need to secure long term credit support and investment, in an environment where lenders and investors will be more cautious and risk averse.
Until the UK economy re-starts (and the shape of the post-Covid economy becomes clear), early-stage fintech businesses may find it harder to prosper, particularly those that are relatively young, niche, and thinly capitalised.
As noted above, Covid-19 has pushed the UK rapidly towards living, working and doing business online. Whilst this aligns with many fintech business models, fear and uncertainty about the post-Covid future could make this a double-edged sword.
Major banks have welcomed the fact that many more customers are now using their digital platforms, including older and less digitally-native customers doing so for the first time.
The economic downturn post Covid-19 may cause a “flight to trust”, pushing worried customers towards the perceived safety of more established, and better capitalised, providers such as high street banks. Fintech businesses will need to demonstrate to customers that they are reliable, trustworthy and financially sound in order to win customers in a much more difficult economic climate.
For those fintech businesses that can rise to these challenges – and many have already given strong indications they will do so – it seems likely that the Covid-crisis will accelerate us more quickly towards a digital future, in which fintech can flourish and prosper.
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