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The Big Idea

The Big Idea | FinTech in the World of COVID-19 (Apr. 1, 2020)

Throughout the year, we’ll be offering a deeper look at some of the biggest trends we see shaping fintech now and in the coming decade. This week, we’re taking a look at the fintech sector during the coronavirus crisis and what it might mean for financial services going forward. As always, if you have any ideas for us, or there’s anything you’d like to know more about, drop us a note at fintechupdate@gmail.com.

As we know, the COVID-19 pandemic has caused tremendous upheaval to the personal and financial lives of millions around the globe, and we all are doing our best to muddle through (safely! responsibly! at a distance!) during this uncertain time. Among other impacts, the spread of the virus and social distancing has driven an increase in digital financial services. Is this increase likely to be permanent? How are fintech firms impacted by virus-related volatility and uncertainty? What might this mean in terms of regulatory oversight? This week we’re digging into these questions and asking ourselves, What’s the big idea with fintech during the coronavirus crisis?

What’s happening?

The use of e-commerce platforms and online payments has soared in recent weeks, as governments around the world have imposed quarantines and stay-at-home restrictions to stanch the spread of COVID-19. And although fintech has become much more mainstream over the past decade, billions of people globally have continued to rely on traditional delivery mechanisms (e.g., bank branches, personal financial advisors, …cash??) as their primary means of accessing financial services. Until now. 

With all the social distancing measures now in place, the coronavirus pandemic has led many people to either use digital financial services tools for the first time or to rely on them to a greater extent than before. The use of fintech apps has grown significantly since the beginning of the pandemic, which corresponds with measures like brick-and-mortar banks reducing service hours and shuttering branches until normalcy returns. Fintech solutions have been gaining popularity for years, and much has already been written about the decline of traditional retail banking, but the COVID-19 pandemic may speed up the rate of change.

Why should I care?

As we see it, there are two immediate reasons to pay attention to this shift: first, because it may affect how you manage your finances going forward; and second, because it should make us all consider whether our favorite fintech firms are prepared to shoulder more of the global financial services load.

  1. Is this permanent?  Of course it’s hard to say anything is permanent, much less something as relatively recent as fintech. But that’s not to say we don’t believe in this bump. Digital-first financial services has long appeared to be the future, and fintech adoption has been growing for years, but until now digital services was the alternative – not the only – way to get a loan, go to the bank, or buy a puzzle for you and your partner to use as detox after bingeing on Tiger King and every episode of The Office (again). We expect that anyone who’s using fintech apps in a meaningful way for the first time will be won over by the convenience of apps and their focus on user experience, joining a wave of consumers who have helped hasten the decline of brick-and-mortar financial services providers in recent years. 
  2. Are fintech firms prepared? Assuming the shift toward fintech continues at a steeper trajectory post-corona crisis, we need to consider the reliability of our preferred digital financial platforms. The uncertainty of the current situation has produced a cash crunch for many startups and other small businesses, layoffs for even the buzziest tech startups, and concerns about whether venture capital will dry up as investors seek safer investments. Some fintech firms have suffered very public outages under the weight of increased demand for their services while others, particularly online lenders, have had their business models called into question due to unprecedented stresses on their assumptions. “Safety and soundness” considerations aren’t typically top of mind when discussing fintech, but fintech’s growing importance to the financial system suggests they might start to be…

What should I look out for?

…which is why we’ll be looking out for more attention being paid to fintech firms’ resilience planning. As fintech platforms get larger, touch more consumers, and control more cash, they will become increasingly more important to the overall economy. While no fintech firm is likely to qualify as a systemically important financial institution in the near term, that doesn’t mean no fintech firm is important. As we saw with the Robinhood outage, even a relatively short loss of service can cost customers tens of thousands of dollars, and that’s without considering risks posed by being a depository. 

Now that some fintech firms are becoming banks as well (see last month’s Big Idea, and also Square’s approval for an ILC charter), we’re beginning to see bank-grade regulatory resilience testing being applied to fintech business plans. This is expected for bank charter applicants, but such reviews may be expanding to other types of firms as well: in the wake of the coronavirus outbreak, the New York Department of Financial Services requested contingency plans from all the crypto firms it oversees. As fintech firms make up a larger part of the economy and represent a bigger part of consumers’ financial lives, we expect to see greater regulatory scrutiny of their resilience plans and strategic reserves.

And, even if regulators don’t take a stronger approach, we expect fintech bank partners to do it. Regulators impose high burdens on banks when it comes to third-party management, ultimately making them responsible for any third-party noncompliance. While fintech firms are in theory treated the same as any other third-party servicer provider, in reality banks often hold them to higher standards commensurate with their size and level of financial sophistication (e.g., banks may require that fintech partners have their own regulatory compliance teams, risk management programs, and compliance reporting processes). As fintech firms get larger and become responsible for more consumers and more cash, the potential impact of a data breach, system failure, or financial crash also increases; and this means greater risk to bank partners. As with regulators, we expect the COVID-19 crisis will spur many bank partners to take a harder look at their fintech partners’ resilience plans and push harder on the underlying assumptions. 

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