Key Challenges Faced by Fintechs after the Pandemic
Globally, COVID-19 has disrupted the ways corporations function and people live their lives. As the cases continue to rise with no clear sign of waning in many regions, it has traumatized both demand and supply across the global economy. Across industries, the current crisis presents challenges for business owners who have seen revenues dwindle and been forced to lay off employees. For many corporations, this disruption can feel like an end, while many will face adversity in the coming weeks and months. The fintech sector is experiencing some of these challenges as well, particularly in the short-term, as venture capital funding may be less readily available, and consumers are more likely to be conservative with spending.
Leveraging the prospects that technology offers, fintechs have demonstrated their potential to disrupt financial services and reach the grassroots – including low-and-middle-income groups. Amplified implementation of smartphones, better access to the internet and enhanced ease of using technology have given rise to numerous favorable fintech innovations. However, new age lending entities had to slow down disbursements, with many of them going down to zero and just focusing on collections due to the pandemic. Generally, the loan tenure for these entities ranges from 1 – 12 months, with an average tenure of 4 - 6 months. With that as a premise, the moratorium of 180 days comes as a double whammy, with cash flow management becoming difficult due to delayed collections.
Though various measures were taken by the central bank starting with the Targeted Longer-Term Refinancing Operations (TLTRO) 2.0 to infuse liquidity into the system, many early-stage lending fintechs still have to rely on other bigger NBFCs and large family offices for fund raising, which will now be skeptical to lend during these uncertain times. Furthermore, one may expect a skewed repayment behavior since many folks with active loans took the moratorium window as a loan holiday. Raising equity might also be a challenge for some time, as even those investors lucky enough to be reasonably sequestered from the economic fallout are choosing to put their money in conservative options for the time being.
In addition, demand has moved from unrestricted to need-based. For example, certain fintech lending entities with a focus on consumer durable loans have been impacted by consumer inertia about going for discretionary purchases during such volatile times. Survival for many early-stage fintechs that are into consumer lending will be a challenge, since many customers have lost jobs in the market, been through a pay-cut or lost money in their small-scale businesses thus impacting the collections. To add to this, even the existing customers need to be re-evaluated before they can be lent again.
As the financial services industry continues to deal with the growing economic ambiguity, fintechs are re-imagining their strategy to weather this storm and flourish in this new normal. The COVID-19 pandemic has helped make the most compelling case yet for why fintech innovation is so essential to the function of our society. In times like these, fintech solutions allow businesses and consumers to do all the important work, following social distancing norms, without losing access to the financial systems they hinge on.
Fintech lending companies are in a better position to restart their business in the COVID scenario, since there is a limited interaction with the customer, and everything is done digitally. Many entities have identified various product tweaks to suit the customer requirement given the present scenario. Companies have also kept the customers engaged throughout this period by educating them about the pros and cons of taking moratorium etc. Additionally, they have provided customized options to customers to pay in full & partial, and even restructured loans in certain cases, instead of a binary all-in or all-out approach. Since most of the collections are done digitally, it was easy to keep a tab on the borrowers and collect money as compared to the traditional NBFCs or banks which still rely on physical collections. We see this as an opportunity where many large players are joining hands with fintechs for various services that can help them serve their customer base in these tough times, and offer better solutions that can be implemented without much manual intervention.
In the current financial backdrop, consumers have oodles of options in both traditional and contemporary ecosystems. Companies - both enterprises and startups - need to stay exceptionally innovative to convert and retain customers. Nobody can foretell exactly how this crisis will unfold and what the long-term effects on the fintech industry will be. However, the crisis seems almost positive to augment global investment in contactless payments and digital financial solutions - which is good news for fintechs in due course.