There is no doubt that Covid-19 is shaking up the financial market. Big players such as HSBC have seen share prices fall 30%, a massive decline for an FTSE 100 blue-chip stock. Oil prices are often considered the indicator of global economic conditions and they’ve turned negative for the first time in history. Financial markets are collapsing and - as the recent report from agency brokerage Rosenblatt Securities suggests - there is a real worry about the slowdown in investment.
While public fintechs were significantly outperforming the S&P 500 and Nasdaq up until the Covid-19 crisis hit, since the end of February fintechs have underperformed in both stock market indexes. Fintech startups have found themselves in quite an unsympathetic investment environment.
Whether this means that innovation will come to a grinding halt remains to be seen. However, fintechs still have an upper hand compared to some other industries and sectors. They have built innovation around the most cutting edge of technologies and are lean compared to some of the stalwarts of their industry, meaning they can be more agile. Therefore, they are in a better position to adapt at speed.
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Most companies have adapted to a new ‘normal’, we have all moved to remote working, adjusted operations and strengthened customer services. But whilst the ability to adapt is crucial, the next immediate step is to look into the future and predict customer needs. This insight-led approach is also something that is in the DNA of most financial challengers. While there are both challenges and opportunities ahead, fintech's path through the Covid-19 storm is likely to be a journey worth following.
Every financial storm has a silver lining
The pandemic will undoubtedly bring about change in customer behaviour when it comes to spending. EY Future Consumer Index predicts that 22% of consumers will stay frugal and 13% will keep making deep spending cuts post Covid-19. At the same time, EY has identified 25% of consumers as ‘cautiously extravagant’, spending more in areas important to them in future, and 9% representing a younger audience, which will be spending more in all categories. Consumers believe that the way they travel, shop and spend time with their families will change as a result of COVID-19.
With the spread of Covid-19 linked to the handling of money, we have seen a global conscious decision to alter the way we pay for goods and services. Data from ACI Worldwide shows that online retail jumped 74% in March. This current scenario has certainly accelerated the potential for a totally cashless society through an increase in adoption of digital payments. The industry has already understood this need and reacted to the challenge by increasing contactless payments to £45, from the regular £30 UK limit.
Opportunities also lie in the financial gains to be had from the investment market. While it’s true that not all consumers have a trader mentality, there are savvy people who in times of crisis will be thinking about new innovative ways to invest, or save money. Fixed-rate investment products in areas, like Asia, that have re-established control of Covid-19, or which have suffered little impact from the virus, such as South America, can offer good options to diversify risk whilst getting a decent return, due to the rates in these countries remaining high.
Speaking of alternative ways of investment, we shouldn’t forget cryptocurrencies. We’ve never experienced an economic crisis of this scale where there has been an alternative financial system in place, but it will be worth watching this space carefully to see how it performs. After swinging as low as $4000 in March, Bitcoin has risen to as high as $7,000 in April, with a spike starting after the US Federal Reserve announced unlimited quantitative easing measures to help reduce the economic impact of coronavirus.
The Federal Reserve and other Central Banks have been rapidly expanding their balance sheets by ‘printing money’. They are also likely to be venturing into the stock market, buying ETF (exchange-traded fund). This usually leads to asset inflation (price vs. real value) and potentially some real inflation. The measures proposed to stabilise the U.S. economy - stimulus packages and other government spendings, can help cryptocurrencies to show their value thanks to their finite supply nature. A certain type of bold customer might be inclined to explore this territory, in order to diversify their investment portfolio. It’s for innovative fintechs to spot the market gap at the right time and offer a compelling cryptocurrency product.
Will fintechs shine in the banking sector?
For the traditional high street bank, the impact of Covid-19 has affected not only the way they operate but also their customers’ ability to use their services. Many branches are now closed, shorter opening times are now in place, and many of their services can only be offered in-branch rather than through their online or telephone banking services.
Where fintech firms have tended to position themselves as an alternative to the traditional bank, they have an advantage in that they can offer agility and can deal with customer queries quicker and more efficiently. They are also more prone to implementing new ideas and new technology in a reactive manner and it is this fast-response, forward-thinking approach that will certainly help them to improve their operations and respond to changing customer needs.
As an example, ‘know your customer’ (KYC) validation is one task that has traditionally been an in-person operation. Remote ‘know your customer’ (KYC) validation through blockchain technology is now being heavily discussed as it offers a quick and secure way to validate a customer’s identity, without the need for the customer to be present. This opens up more opportunities for innovation in the fintech sector, where customer identification may be required, as well as reducing the risk of fraudulent activities.
When it comes to ‘traditional high street bank customers’ and their trust, fintech unicorns will have to do more than just offer friendly customer service to win them on their side. But I believe there is a good chance for fintechs to fly. Those that are able to predict customer needs, as well as offer innovative solutions as a response to the current situation, will be best placed to build long-term trust and are likely to be the last ones standing.
Frank Zhou is CEO and founder of Zeux
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Frank Zhou is the CEO & founder of fintech Zeux, a former derivatives trader from leading investment banks and high frequency trading firms such as Merrill Lynch, Société Générale and Optiver. He graduated with a Distinction in his MSc from Oxford University and has a British Mensa membership. Frank had a vision to create an all-in-one service which would serve all the need of future thinking consumer and he is passionate about educating the UK market about the future of banking. Zeux is the first mobile app where you can pay, transact and invest in one place.