Global recession — a challenge for fintech
The last decade has become an era of rapid development of financial technologies. According to CB Insights, in 2018, fintech companies attracted $39.57 billion from venture funds, which is 2.2 times more than in the previous year. The total turnover of two leading payment systems, PayPal and Ant Financial has steadily exceeded $100 billion in recent years. Even the ultraconservative investor Warren Buffett admitted that it was a mistake to ignore the opportunities of investing in fintech.
However, the fintech was succeeding amid the growing global economy. Now experts are talking about decreased volumes of highly liquid assets (Global М1) and predicting a repeat of the 2008 crisis. Many modern companies lack experience of working under such conditions, and the recession will become a new challenge for fintech. The influence of crisis will certainly be different for companies depending on the region and a particular field. Based on the experience of Robo.cash operating within the international group, we can identify several issues, which global fintech can face in the near time.
1. Investor retention
Fintech attracts investors with high returns and expected growth of company value. All this is based on unique technologies allowing to occupy available niches in the financial market. However, over recent years, the banking system has been noticeably upgraded. It is impossible to say now that fintech offers solutions that banks do not have. For example, over ten years banks have changed the attitude towards the blockchain technology from a complete rejection to widespread adoption.
Alternative lending is a good example here. The expenses of fintech companies for launching and scaling are growing, and the projected returns of new projects are reducing due to increasing competition. This situation has not only affected core investors who can expect returns on investment in the long term. Recently, a large P2P company, Funding Circle, announced a decrease of return projections for the lenders of the platform. Previously, high returns were an absolute advantage for fintech investors, but in the near future, such investments will become one of the alternatives to traditional investments in stocks and bonds. In order to retain investors, fintech companies will have to find new arguments.
2. Outside the sandbox
The first fintech companies created absolutely new business areas, for which there were no methods of government regulation. When the regulators finally appeared, the existing legislation could not keep pace with the development of technologies. As a result, regulatory sandboxes and preferential taxation have become compulsory elements of advanced economy. States make such decisions for a purpose — creating modern infrastructure should make national financial system independent and provide tax revenues in the future.
However, a recession can cause a shift in priorities. This is seen by the example of China, which has already experienced a slowdown of the economic development. The fall of the financial pyramid Ezubao amid growing debt load of the population has pushed the country’s government to introduce strict regulation for the entire fintech sector. More than 70% of existing companies could not work under these conditions. It is unlikely that such a scenario will completely repeat in other countries, but fintech companies should not rely on never ending operation in a sandbox. The growing popularity of fintech services, low tax returns and risks of significant financial losses for users make an “explosive” combination. A management mistake in a large company can cause a domino effect. According to recent surveys, about 2/3 of online retailers in the EU are not ready to fulfil the requirements of PSD2 about strong customer authentication taking effect on September 14, 2019, which is a warning sign.
3. The cost of loyalty
The first fintech companies offered solutions for quite specific purposes and aimed at clients with a high level of financial literacy. The problems of interaction between fintech and the classical banking system were well received and often solved by the users themselves. Now, the application of financial technologies has become much wider and even includes payments for a trip in the subway. However, integration with the banking payment system is still incomplete. It is easy to transfer funds from a bank account to the payment system, but a reverse transaction often involves high fees or takes a long time.
For example, the WebMoney payment system charges 0.8% of the amount, while the maximum cost of a bank card transaction in the EU is 0.3%. The fee policy of the company is clear: payment systems stimulate customers to use their services as much as possible. But during a recession, the cost of services becomes an important competitive factor. Fintech companies should consider other ways to ensure customer loyalty.
This is not a complete list of issues to be solved in the near future. The solutions will surely be found: fintech has a huge potential for development due to improving technologies and its expanding presence in the everyday life. Nevertheless, an objective assessment of current issues and possible solutions offered by different companies should help investors make the right choice.