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This Is How the Coronavirus Is Impacting the Fintech Industry

This Is How the Coronavirus Is Impacting the Fintech Industry

COVID-19 is one in a family of seven coronaviruses. Four of these are common viruses that infect humans throughout the year and are not considered particularly dangerous to most of the general public. The common cold, for example, is caused by one of these four coronaviruses.

The other three viruses, however, pose far greater dangers and are responsible for the three most severe disease outbreaks in recent years. In 2003, the SARS outbreak resulted in the death of more than 1,000 people, while the 2012 MERS outbreak caused the death of 862 people. COVID-19 has proven to be the most damaging, though, having resulted in more than 4,000 deaths around the world as of early March 2020.

The COVID-19 outbreak started in Wuhan, China. Leading experts hypothesize that the virus originated in animals. After experiencing enough of a mutation, it was able to make the jump to humans in contact with these animals at live animal markets.

As an acute respiratory disease, COVID-19 worst affects people who are sick, people who are elderly, and people with pre-existing conditions such as diabetes and cardiovascular disease. However, because it is highly contagious and symptoms can be mild for many who get infected, it has proved extremely difficult to contain.

As such, governments and industries are taking drastic precautionary measures in attempts to limit the spread, resulting in damaging consequences for many businesses. The aviation and travel sectors, for instance, have been particularly badly hit as airlines cease travel to many of the worst-affected countries and regions.

Stock markets have also taken a pounding in recent weeks as investors grow increasingly concerned about the impact of the virus. Manufacturing has been hard hit as factories in China—responsible for one-third of global manufacturing—grind to a halt as the nation battles to contain COVID-19.  There have been rebounds after sharp declines but you can assume that this volatility may continue  for a while.

But what of the financial technology industry? Some areas of fintech have also negatively felt the effect of the virus outbreak, while others have experienced a positive impact.

Negative Effects of COVID-19 Outbreak

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The negative impact on fintech during this outbreak is closely tied to the massive decline in consumer spending. Visa and Mastercard have already warned investors that sales in the current quarter are expected to drop to between 2 and 3.5 percent below expectations as people travel less and therefore spend less on their credit cards.

Visa has stated that “the most significant impact has been on travel to and from Asia. This has resulted in a sharp slowdown of our cross-border business,” adding: “Cross-border growth rates have deteriorated week by week since the coronavirus outbreak in China … [and] we anticipate that this deteriorating trend has not bottomed out yet” as current trends do not reflect the impact outside of Asia. 

Equally, Mastercard revealed that “cross-border travel, and to a lesser extent cross-border e-commerce growth, is being impacted by the Coronavirus. As a result, we now expect that if the trends we have seen recently continue through the end of the quarter, year-over-year net revenue growth in the first quarter will be approximately 2-3 percentage points lower than discussed on our January 29, 2020 earnings call.”

As a result, Visa and Mastercard saw their stock value plummet by around 12 percent since the market’s peak on February 19, compared to a 10 percent drop for the S&P 500.

Other fintech firms in the payment sector could also expect a negative impact from the virus outbreak. PayPal announced in a press release that “international cross-border e-commerce activity has been negatively impacted by COVID-19. We currently estimate the negative impact from COVID-19 to be an approximate one percentage point reduction.” If the outbreak leads to lockdowns—similar to those seen in China and Italy—particularly in the United States, and consumers are out less, this could affect companies like Stripe and Square which rely on payment-related revenues.

Chief Financial Officer Amrita Ahuja said during Square’s earnings call at the end of February that the company does not foresee any material impact on results. However, the same report did express concerns that a prolonged outbreak could cause disruptions to Square’s supply chain and a shortage of hardware products. Additionally, it could cause delays to Square’s product development as the company works closely with manufacturers in China.

As stock markets slump to levels not seen since the 2008 financial crisis, this could lead to lower valuations for fintech companies, particularly startups, and a pullback in funding. Indeed, the stock market downturn is likely to directly impact “robo-advisor” investing apps such as Wealthfront, Betterment, and Robinhood which charge their fees based on customers buying and selling stocks.

Meanwhile, another recession caused by a stock market crash will likely leave fintech companies—which rely heavily on marketing spend to expand—at risk. Marketing budgets are often the first to be slashed during a recession, so firms that rely on this approach could see growth stunted.

Additionally, fintech startups could find themselves in precarious positions as Venture Capital funding shies away from riskier investment in favor of more established companies. This would force startups to seek collaboration with investment partners from traditional banking institutions.

Positive Effects of COVID-19 Outbreak

As person-to-person interaction declines during the coronavirus outbreak, consumer demand for digital banking services are likely to increase. This could force traditional banking organizations to accelerate the implementation of digital innovations and solutions.

This could result in banks and credit unions looking to fintech companies for assistance to bring improved digital banking services to the marketplace quicker than previously planned.  I like that my friends at Tally are being proactive with their clients and the marketplace.  They have reposted a lot of great information on their twitter account to check out https://twitter.com/meettally.   I know with my friend and CEO, Jason Brown,  Tally will  find a way to help people through this time especially with the addition of our new VP of Engineering, Jan Chong. 

Advancements in contactless payment technology could see a boost during the outbreak. The World Health Organization (WHO) encouraged contactless payments as a measure to limit the spread of the virus.

Also, the weakening of the global economy has encouraged many governments to relax regulations to help stimulate the development of fintech. Ye Yanfei, from the policy research department at the China Banking and Insurance Regulatory Commission (CBIRC), said that the coronavirus outbreak has become a major driver for the adoption of fintech and regtech in China.

An article published on the China Banking News website said that Ye “called for Chinese financial institutions to strengthen their own in-house fintech capabilities, as well as research and development investment and technical expertise” and “that Chinese financial institutions should strengthen data sharing, while regulatory departments should be fully approving of the legality and compliance of electronic forms, images, seals and data.”

South Korea, another country hugely affected by the outbreak, recently announced it would ease regulations on the fintech industry to help jumpstart the economy.

In general everyone, including  the FinTech industry, has seen  a dramatic increase in their remote workforce.   It seems like Zoom meetings are going to be the new normal  for the foreseeable future for the workforce and for families.  Zoom recently released a pretty good blog on some  basic tips working from home which include virtual backgrounds.  I have been doing large team calls as well as smaller calls and it seems like everyone is adjusting just fine.  I added a beach  background today to cheer everyone up. 

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I personally love the fact that family members are now somewhat welcome to drop  in on meetings and are using remote  video tools on a daily basis.   My 8 year old son’s school has moved to remote  learning through the end of the year.  I think he misses the person to person interaction but Zoom is getting the job done! 

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Additionally, fintech firms that are able to ride out the negative impact of the outbreak and the resultant downturn in the stock markets are likely to benefit from future VC funding when the global economy settles. Private equity and VC firms are holding a record $1.2 trillion, which is ready to be invested.