The chaos wrought by the novel coronavirus is sure to upend companies big and small, in every industry, and fintech is no exception. Still, even in the face of unprecedented turmoil, the sector could yet prove helpful in getting the economy back on its feet.
The immediate challenges facing fintech are not hard to imagine, though looking to the stock market probably isn’t the best place to start. Yes, the stock market turmoil has been devastating to retirees and savers, but most fintechs are young, privately held companies that don’t have publicly listed securities. Instead, to get a sense of the problems in the sector you have to think about fintechs’ business operations.
The universe of companies that carry the fintech moniker is vast and diverse. Still, most companies — whether they be artificial intelligence tools, crowdfunding platforms or crypto firms — are early stage (often start-up) ventures, and as such are fragile enterprises whose continued funding will rely on growth and scale.
But in a world where the economy grinds to a halt, growth becomes difficult as firms run up against a brick wall of diminished demand created by the new reality of stay-at-home workers, not to mention historic strains to our public health care system. Only fintech firms whose businesses enable and support post-COVID-14 lifestyles — like being able to pay and apply for things remotely, beyond face to face transactions — will probably see a significant uptick in revenue.
Making things worse, many customers and clients of fintech firms will struggle in ways that could prove to be game changers for the ecosystem. Fintech lenders have been drawn to small businesses, in part due to their advanced analytics and the opportunity opened by legacy institutions overlooking smaller clients. Viewing larger banks as lumbering and at times disinterested providers of capital for start-ups and medium-sized firms, fintech firms have bet that they could provide faster, more efficient services.
But it’s precisely small and medium-sized enterprises that face some of the largest economic risks (think restaurants, yoga studios, coffee shops and more). With people staying at home, and reluctant to frequent their favorite diner or hairdresser, it’s increasingly likely that tens of thousands of everyday businesses will face problems repaying loans.
For this reason, members of Congress are already looking for more than just banks to step up and assist. In a joint letter, Democratic members of the House Financial Services Committee asked a broad range of industry associations, including online lenders and credit rating agencies, to explore changes in their practices to assist small businesses.
Whether they will be in a position to do so remains anyone’s guess, however. The bandwidth for fintechs in particular could be narrow. Fintechs are much smaller, and rarely as well capitalized as traditional banks. So they won’t be in a position to practice much forebearance. And even where fintechs originate loans for syndication, deteriorating credit quality can upend their reputation, making investors less inclined to do business with them in the future.
Fintechs may yet, however, play important roles going forward. With the U.S. Small Business Administration offering low-interest disaster loans for small businesses suffering substantial economic injury as a result of the coronavirus, fintechs might be important partners for getting money to the public. Kabbage’s Sam Taussig, for example, has argued that fintech partners could be integrated into the underwriting process, and begin to automate application and data collection processes that otherwise will stymie federal efforts to get funds expeditiously out to cash starved companies.
Fintechs might also be critical in providing new credit analytics for the coming swaths of people whose FICO and other scores are bound to deteriorate with the deceleration of the economy. With the coronavirus poised to wipe out the creditworthiness of millions of people under traditional metrics, fintechs could prove indispensable in devising new, less punitive models for scoring working and middle class applicants when the economy regains its footing.
Yet another tool could include leveraging crowdfunding in ways that temporarily permit greater levels of investment where neighborhood businesses seek bridge capital from local communities to retain their workforce.
These are, of course, but a handful of possibilities that might take advantage of, if not the balance sheet, then at least the technical know-how of the fintech industry in crisis. As the House Democrats’ letter suggested, other kinds of reforms — from rethinking what coronavirus-related data is reported to instituting a temporary moratorium on late fees and penalties, perhaps through advanced analytics -, might hold additional appeal. But just as in the case of the coronavirus, the time to act is short.