Tuomas Toivonen of Holvi reflects on the coronavirus crisis, and the vital role fintechs can play in ensuring businesses prepare for the rocky road ahead
A recalibration in how risk is managed in the financial services industry is underway. Something that has been brought to the fore because of the global crisis caused by Covid-19. Fintechs that have emerged to prominence after the last global financial crisis in 2008 could play a major role in redefining risk management where the assessment of business customers is concerned.
The rise in contextual banking has been at the forefront of the financial services industry since 2008 as incumbents and fintechs alike have endeavoured to tailor their services to the needs of customers. Where friction in systems and processes has been identified, fintechs – often followed by incumbents – have sought to iron out.
However hyper-personalisation and ironing out the kinks can be hard to implement during a crisis as the situation is no longer normative or predictable. The widespread impact of coronavirus will force fintechs and incumbents to adapt to a new reality post Covid-19. This health crisis has put colossal pressure on everyone: from fintech startups and scale-ups, to almost every other industry too; many of which will struggle to adapt to not only business during a pandemic, but whatever “normal” we find ourselves in after. A report by CBI Insights shows that startups often have less cash to burn and therefore don’t have the capital to trial and test new products.
History repeats itself
The 2008 financial crisis had wide macro economic effects, as people, investors and companies became more risk averse. A report from the European Business Organization Law Review stated: “The financial crisis enormously impacted two features that were critical for investors’ decisions: their beliefs and their preferences.”
In short, investors got cautious and considered when reviewing risk resulting in a loss of trust in banks, bankers and brokers, causing the stock market to collapse to alarming lows.
Amidst the breakdown in trust, fintechs were able to assert their position as an alternative to banks that remained complacent for many years. The fintech and startup industry thrived and grew to meet the demands of consumers who had become disillusioned with the traditional banks, in turn disrupting the status quo.
Fintechs were more focused on areas such as user-experience, speed and ultimately making the outdated process easier for the customer; something which customers had no access to before. This can be seen in the implementation of hyper-personalisation, and despite relationships being digital-only, fintechs took on the role of the friend of the customer rather than the increasingly distant bank. An example of this is Monzo, a forerunner in financial transparency, an approach that has awarded it praise far and wide. This has created trust in their customers and enabled them to build a good brand reputation.
The search for solutions
The fintech industry must now play a critical role in helping SMEs and freelancers through these tough times. Fintechs must find solutions to the issues that customers will face post Covid-19 by focusing even more on their strengths – acting agile and being customer centric.
While their capital resources may be lower than the incumbents, there are several reasons that fintechs may have the edge in the payments ecosystem. Their lean infrastructure by nature makes it easier for them to pivot faster to help the needs of SMEs. In conjunction with this they also have the ability to make sure there is greater financial inclusion in their offerings because they can focus on niche areas of payments. We started Holvi on the foundations of the frustrations we had felt as entrepreneurs ourselves, being unable to take control of our finances with the available services at that time. This is likely to seem too niche to a larger bank but it is through this smaller fintechs can succeed.
In order for fintechs to be trailblazers they also need to improve on areas where the banks excel. Namely, in building better relationships with governments. Secondly, fintechs should establish themselves more as not just disruptors but as the solution to problems – their USP shouldn’t be to mess with the status quo, but to add value to everyday lives.
Across Europe we face different challenges but mostly one goal – to survive, recover, then thrive. All countries face similar challenges and developments with national variations. For example the UK has already established itself as a fintech hub. Challenger banks are an accepted part of the financial landscape. A report in 2019 from the UK Finance organisation found that last year more than 50% of transactions in the UK were made by card and/or contactless payments. Stephen Jones, the CEO of UK Finance, says that this tipping point has “inadvertently” prepared the UK for lockdown and that the lockdown will “accelerate” the process of contactless/card payments.
ln Germany, fintech is slightly behind the UK on digitisation with many people still opting to use cash and traditional institutions. However this is slowly changing and people are starting to utilise new services. Similarly in France where there are a few very successful fintech’s such as Akur8, which uses AI for insurance but fintech has not been adopted as a genuine competitor. Finally, in Finland, Finns are comfortable with switching to digital services and have seen a quicker uptake to fintech.
How can fintechs help?
The reality is startups have shorter “runways” than more established businesses, and freelancers effectively just have their savings. It’s already a risky decision to become your own boss, but over the next few years that level of risk will only be heightened. In order to allay these fears fintechs must prepare for what comes next.
While contextual banking can tell us a lot about the needs of the customer in the here and now – this will surely change as Covid-19 forces a new reality. We may see both fintechs and banks begin to diversify their product portfolio and offer risk management services to SMEs and other businesses. In this we will start to see more applications that help with cashflow, access to finance and automated compliance checks. These will see an increase of bundled offerings on top of the core product so that small businesses can utilise their payments better.
There is a high chance fintechs will face many obstacles with their customers post-Covid. In order to overcome these challenges, they will need to become more focused on engendering trust, exhibiting deep understanding of consumers, and engaging with them, which are typically traits of successful fintechs anyway.
Covid-19 is an enormous bump in the road that no one saw coming but will likely accelerate the rate in which we accept new ways of using finance to better our experiences. The acceptance of new financial services will make it easier for smaller businesses to assess risk.
Even though hyper-personalisation can predict a lot about the likelihood of a consumer journey, it certainly did not predict the current crisis. Nonetheless, in order to avoid the threat of a repeat, it is likely we will see a shift towards future scenario planning that prepares businesses for trying times. Thus it is vital the industry continues to problem-solve and prepare itself for a multitude of eventualities. ν