The last couple of years have seen an acceleration in the growth of the FinTech industry, from record funding levels and rising valuations to major acquisitions, increased participation of incumbent banks and regulatory bodies, and the deepening of financial inclusion in developing markets, just to mention a few. The growth impact is reflected in the significant increase in access to financial services; the speed, agility, and security of FinTech infrastructures; and the cost and convenience attached to FinTech solutions.

In the last few months, however, we have had to adjust the way we live, work, and interact due to the COVID-19 pandemic. Perhaps, one of the most hostile health crises since the dawn of human existence, the pandemic is disrupting modern society, economies, contracts, business models, and industries on a scale that most living individual has never witnessed. The impact of the pandemic on the FinTech industry—in terms of growth, competitive dynamics, consumer behaviour, operations, investor appetites, and valuations—is no less immediate, given the industry’s connection with some of the most affected sectors of the global economy such as aviation, retail, hotels and leisure, electronic and consumer durables, just to mention a few. This article is intended to provide key perspectives on the evolving situation and implications for the FinTech industry from five dimensions: (v) contractual obligations and regulatory compliance; (w) economic activities and payments; (x) FinTech deals and financing; (y) winners and enablers; (z) the future of FinTech after the pandemic.

Contractual Obligations & Regulatory Compliance

“The Great Lockdown”—a phrase coined for this unprecedented period[1]—may necessitate a review of contracts between FinTech firms on the one hand and employees, traditional financial institutions, merchants, customers, and third-party service providers on the other hand. Core issues would typically range from the performance of contractual obligations to milestones and force majeure provisions (if any). In the same light, ongoing commercial or deal discussions and negotiations may be delayed, suspended, or even terminated in worst-case scenarios. Interestingly, given the agile and remote-work friendly structures of FinTech firms, the relative stability of payment and other FinTech infrastructures, and business continuity measures of central banks, the impact of the pandemic on contractual obligations in the FinTech industry may be transient.

For regulatory compliance, there may be a need to review financial services regulations to manage statutory reporting requirements and returns, ensure compliance with legal requirements on customer complaints and remedial measures, transaction monitoring, and data protection in terms of privacy and security of personal data (including sensitive personal data).

Economic Activities & Payments

As large-scale quarantines, total and partial lockdowns, travel restrictions, and social-distancing measures continued to maintain an upward trajectory, driving sharp fall in economic activities and transactions volume in major sectors that are ordinarily responsible for revenue growth in the payment space—airlines, hospitality and tourism, electronic and consumer durables, luxury retail, hotels, restaurants and catering, and events[2]—revenue growth in global payments is expected to turn negative. The extent of the decline is rather imprecise, as governments implement measures to stimulate economic activities and predictions as to how the economy will recover remain speculative. For instance, such predictions have ranged from V to L, U, W-shaped recovery curves or even swoosh.[3] For payment companies, thriving during and after the pandemic will largely depend on the complex interplay of economic activities, government policies, the resilience of players in these major sectors, and how payment companies are able to navigate the nuances of the uncertainties and pay closer attention to changes in consumer behaviours.

FinTech Deals & Financing

Depending on who you asked, total global FinTech funding in Q1 2020 ranged from $5.7Billion to $10.11Billion with between 13% to 28% decline, compared to Q1 and Q4 2019. In Africa, equity investment in the FinTech sector in Q1 2020 totalled $116.461Million across 21 deals, a significant increase from $17.009Million in Q1 2019.[4] According to The Baobab Network, FinTech firms based in Nigeria and South Africa attracted $50.458Million and $56.236Million respectively, which totalled almost 92% of the total amount invested into FinTech companies across Africa. While FinTech remains the most attractive and highest-funded sector, gulping almost 40% of the total funding in Q1 2020, it becomes more appreciated if considered with the fact that the cumulative funds raised by African Start-ups in that period declined by over 57%, compared to Q4 2019, and that in March 2020, overall investment in African technology companies reduced by 55% since March 2019. The decline, which apparently picked up in March 2020, is mainly due to the COVID-19 pandemic and the resulting concerns for a potential COVID-19-triggered economic recession (or depression, if economic activities continue to nosedive).

Although data on these nuances are still fragmented, the decline in FinTech deals and financing as a result of the pandemic is largely driven by investors’ adoption of “a wait-and-see approach” and rigorous cash preservation measures.[5] In general, investors are becoming more careful, and seem to increasingly prefer late-stage FinTech firms over emerging ones.[6] As a consequence, ongoing fundraising may face lower participation and take longer to close while new fundraising activities are expected to face competitive strains in meeting funding targets.[7] Also, African start-ups, including FinTech firms may have a tougher time in raising funds, due to the impending economic downturn that may be more prevalent across Africa.[8]

Defying the odds of the pandemic, FinTech firms with potential for high value-generation, strong leadership teams, and focus on solving real challenges in the market may enjoy more traction in their fund-raising activities. Thus, it is not surprising to see Nigerian FinTech start-up, Okra, with its open banking initiative, secure a $1Million pre-seed investment from TLcom Capital in April 2020, just three months after its launch, to strengthen its push to build the infrastructure for Africa’s next wave of FinTech innovation.

While deals such as Okra’s are likely to dominate fundraising activities, how this will play out in the long term depends on how FinTech firms strategically maintain liquidity, practice resilience, adjust to and meet new customer needs, maintain and develop contextual FinTech infrastructures, and leverage Artificial Intelligence (“AI”) and other emerging technologies to optimise their services and operations during and post the pandemic period. We have seen some extreme outcomes, such as the closure of Royal Bank of Scotland’s digital-only challenger bank, Bó in April 2020 to merge with the bank’s business banking app, Mettle. The closure of Motif, a US portfolio management FinTech firm in the same month, as well as the 40% drop in Monzo Bank’s (UK digital bank) valuation, is also very instructive. Back home in Nigeria, a trail of refreshing possibilities is found in the recently launched V Bank, an all-digital bank by VFD Microfinance Bank.

FinTech Winners & Enablers

Although consumer spending has reduced, revenue generation has also been at an all-time low, leaving individuals and businesses who have low to zero emergency funds, particularly in developing countries, more vulnerable to unprecedented negative impacts of the pandemic, while persons with more robust liquidity may have “excess” funds for long-term investments, say in money and capital markets.

FinTech firms and financial institutions with tech-enabled lending and investment platforms may be regarded as winners during this period, where lending platforms are used to provide quick credit access to consumers,  SMEs, and even key aspects of the economy, while investment platforms provide strategic avenues to making swift investments and maintaining diversified investment portfolios. However, given relative likelihoods of higher default rates on credit facilities, and insolvencies, caution need be exercised both from credit and investment perspectives.

The pandemic also provides opportunities for FinTech and insurance companies to strategically broaden and deepen their digital capabilities in the insurance space, particularly in terms of automating process flows, personalising insurance packages, and reducing human intermediaries. This is especially important in countries such as Nigeria where insurance technology is the least active segment of FinTech. Interestingly, Nigeria-based FinTech company, Carbon recently partnered with AXA Mansard (a leading provider of Life and Non-Life insurance products and services) to launch a new health insurance product in Nigeria.[9]

In terms of key enabling infrastructures for FinTech during and after the pandemic, Internet of Things, AI and other emerging technologies, and software solutions are said to be in high demand for loan automation, customer services, account opening, customer education, digital identification and verification, and protection of customer assets and data.[10]

Post COVID-19 and the Future of FinTech

With the rise in conscious bias for limited contacts, the future of FinTech in the post-pandemic era will be influenced by customers’ accelerated preference for contactless payments, i.e. payments made by waving or tapping a contactless device, usually a card or smartphone, over a reader, which then accepts the payment.[11] Other alternative payment channels to cash such as mobile banking, internet banking, mobile money, new-generation point of sale devices and USSD would also experience a dramatic surge in usage. While these present huge opportunities for FinTech firms, it may trigger an “outspending” war between incumbent banks and FinTechs, as both categories scrabble for growth and market share in the contactless (digital-only) payment space. This becomes even more stimulating when one considers markets such as the sub-Saharan African market, where 80% of adults still make bill payments and remittances with cash.

To win, incumbent banks may have to turn to outside Tech companies and talents to gain competitive edge and fast-track digital transformation, just as FinTech firms broaden their funding sources and strive to balance growth and profitability. There may also be a need to develop adaptable strategies that contemplate multiple scenarios and outcomes, as well as widen the deployment of payment and remittance solutions that are tailored and contextual. Tracking and understanding the evolution in the type and volume of mobile money transactions might be a great place to start.

It will also be interesting to see a spike in deal volume in strategic partnerships and alliances between FinTech firms, incumbent and challenger banks, and Tech companies, towards creating and deepening opportunities in the contactless payment space, particularly in developing countries. To mention a few—Visa’s recent agreement with Kenyan mobile operator, Safaricom, to allow the connection of M-Pesa’s 24 million users and 173,000 local merchants to Visa’s 61 million merchants and its more than 3 billion cards; and the recent partnership between Remita, a Nigeria-based Africa-focused FinTech brand, with Cellulant, a pan-African FinTech and AgriTech leader, to provide easy-to-use, secure, and convenient payment service options for individuals and businesses in every part of Nigeria—are good reflective instances of what may lie ahead for the FinTech industry in Africa.

Published in the 2nd Edition of the FinTech Nucleus, June 2020

Aaron Olajide

[1] International Monitory Fund, World Economic Outlook, Chapter 1, The Great Lockdown (Full Report to Follow in May 2020). Available at https://bit.ly/3gEXbB1 and directly at https://bit.ly/3gPnggW (Accessed 18 April 2020)

[2]  Philip Bruno, Reet Chaudhuri, Olivier Denecker, Tobias Lundberg, and Marc Niederkorn, How Payments Can Adjust to the Coronavirus Pandemic—and Help the World Adapt. McKinsey & Company. Available at https://mck.co/2zQA2Lc (Accessed 18 April 2020)

[3] World Economic Forum, Coronavirus: 5 Predictions for how the Economy Might Recover. Available at https://bit.ly/3eCqhz0  (Accessed 18 April 2020)

[4]  The Baobab Network (Jack Rumble, Maria Inziani, and Ruth Nyakio), Baobab Insights – Q1 2020 Funding Report. Available at  https://bit.ly/3gDKbeU (Accessed 6 May 2020)

[5] African Private Equity and Venture Capital Association, COVID-19 GP Survey (Survey Results: 49 Respondents, Presented by Enitan Obasanjo-Adeleye). Available at  https://bit.ly/3eCY7Eg (Accessed 19 April 2020).

[6] Forrester, FinTech Funding Roundup, Q1 2020. Available at  https://bit.ly/2ZVH2Bo  Accessed 5 May 2020

[7] CBInsights, How Covid-19 Is Impacting FinTech Financing. Available at https://bit.ly/2MfsRiz  (Accessed 18 April 2020)

[8] WeeTracker (Nzekwe Henry), African Startup Funding Suffered A 57% Slump in Q1 2020 Due To COVID-19. Available at  https://bit.ly/2zFUqyS (Accessed 5 May 2020)

[9] Ventures Africa, Carbon Launches Healthcare Benefits Program in Partnership with AXA Mansard. Available at https://bit.ly/2TWxORm (Accessed 4 April 2020)

[10] Finch Capital, The Future of Disruptive and Enabling Financial Technology Post CV-19. Available at https://bit.ly/3ezSjuZ (Accessed 13 April 2020)

[11] Bill Gardner, Dirty Banknotes may be Spreading the Coronavirus, WHO Suggests. The Telegraph. Available at https://bit.ly/2yUFufS (Accessed 18 April 2020)