Fintech: Reshaping the Future of Finance in a Homebody Economy

Global markets have stumbled since the World Health Organization (WHO) declared the outbreak of COVID-19 a pandemic in March 2020. As uncertainty escalates amongst the current crisis, the ensuing change in consumer habits has led to an interest in newer, niche markets. In the current circumstances where everyone is forced to reconcile their need for interaction with restrictions on physical contact, fintech, in particular, has helped us adjust to this new normal. A surge in the usage of mobile phones, internet access levels and scope for increased digital payments prove to be the key drivers that have propelled us five years forward in consumer and business digital adoption in a matter of around eight weeks. These figures in just about two months’ time justify the state of bedlam in the global financial markets since the outbreak, leading us to a possible evolution of the fintech industry. 

Sweeping global regulations, growing emergence of digital devices, and increasing investor interest are hurtling the fintech industry to new highs of disruption in the conventional financial services market. This has led us to enter into the third era of fintech innovation, which grew out of the fallout from the 2008 global financial crisis and the advent of the smartphone. Increasing strategic investments and tremendous growth have sparked fintech’s emergence as a worldwide phenomenon, allowing these enterprises to bring new technologies to the market even faster and with a greater impact. This poses a growing competition to the traditional financial services industry, typically slow to adapt to changing consumer sentiments and behaviors.

Regarded as one of the slowest to innovate its value proposition to target millennial customers, the financial industry has always conducted end-to-end service delivery by combining experience, processes, and products, lagging behind in terms of innovation and customer centricity. While fintechs are gaining pace in the financial services industry, legacy financial businesses like MoneyGram and Western Union, two of the largest remittance firms in the world, have taken a hit since the pandemic as migrant workers face higher expenses in sending money back home. The current pandemic poses a major disruption to remittance flows; the World Bank expects a 20% decline in 2020, the sharpest decline in recent history. Both Western Union and MoneyGram have struggled for top line growth as their cash-to-cash segments faced a slow but serial decline, whilst experiencing growth in their digital businesses, effectively putting four years of expected digital growth into just two months. As developing economies largely include customers choosing either cash pickup or traditional payments directly into their bank account, the majority of the remittance industry is still estimated to be offline, making it a valuable target in the money transfer space. This paves way for the consumer-facing money transfer market to sustain its standing in the financial services industry, where customers already seek the added convenience of mobile received remittances through fintechs that have established positive brand equity in the digital payments space.

Struggling money transfer businesses cause the expected amount of money migrant workers send back to their home countries to decrease by almost $110 billion this year as unemployment increases across the world. A fall in remittance flows can affect families’ ability to spend on subsistence and living costs areas as more of their finances will be directed to solve food shortages and immediate needs. This could in turn mean that countries economically dependent on remittance inflows will likely suffer as they attempt to recover from sharper economic downturns due to the pandemic. Indeed, for many dependent economies, remittances make up a sizeable portion of the national gross domestic product and are a large contributor to the foreign reserves needed to finance imports of goods and services.

As about 1.7 billion adults remain unbanked, financial incumbents struggle to create rapid change to address the needs of this unheeded segment. Innovations in mobile payments and alternative lending platforms challenge the norm by leveraging technology to bring financial services to underserved populations, thus offering alternatives to incumbent service providers. From lower costs to enhanced transparency, fintechs aim to improve user experience by promulgating faster transactions, immediate consultation, providing faster communication with customers, and remote account opening. Now, with the added challenges of the pandemic where the issue of accessibility is brought to the fore and the ability to attend brick-and-mortar banks has worsened the limited availability and support offered by the traditional banking system, fintech powerhouses that are the most agile will find their value proposition better positioned in the current market dynamics and be prepared to exploit future opportunities in a post pandemic world.

The defensible economics and resilient business model of the banking industry coupled with the highly automated, scalable, software-based services and no physical-distribution expenses of fintechs can lead to better customer-centric solutions and creativity. The impact of the next wave of financial-technology revolution that started only a few years ago will be broader this time, and fintechs will continue to exert pressure on the incumbent financial service providers. The traditional banking system will have to adapt to the fintech’s innovation playbook by co-operating with the fintech ecosystem. Without a doubt, the ultimate winner of this new payment paradigm shift will be consumers who will enjoy lower costs, less bureaucracy, faster transactions, and an enchanced customer experience.