Why invest in innovative fintech companies in 2020?

COVID-19 has changed the world in drastic ways. Not only are nations facing a health crisis, but the resulting restrictions imposed by governments have a far-reaching effect on both domestic and international markets. According to experts, social distancing, lockdowns, and other adopted measures will give rise to a global financial crisis.

While such a crisis brings many challenges, it also has the potential to stimulate incentives. Recessions are said to spark innovation, and we need not look further back than to the financial crisis from 2008 to 2010 to find evidence of this claim. It was during this economic decline that multi-billion-dollar businesses such as Instagram, Uber, WhatsApp, Credit Karma, and many dozens more were launched. Considering this, it is likely that a similar phenomenon will appear during the post-COVID recession. In particular, the birth of new Fintech companies, as well as an evolution of existing ones, is highly plausible. For this reason, investment in such businesses could prove to be quite a lucrative venture for both private and institutional investors.

What is the status of the fintech market?

Financial technology has been a multi-billion-dollar industry for years. Mobile payments, money transfers, blockchain, investments, and borrowing are only a few of the most popular fintech services used by many organizations, businesses, and consumers in the digitalized world. By late 2019, around 90% of all US and European banks had invested in blockchain to provide the highest possible safety measure for themselves and their customers. Moreover, 37 % of all financial service institutions worldwide have reported using at least one financial technology in their operations. The vast majority offer these technologies to facilitate transactions for their customers.

At the moment, we can see a palpable global trend in terms of the fintech market. During Q2’20, there was a sharp decrease in fintech deals compared to the previous quarter and previous years. Clearly, the outbreak of the coronavirus has left its mark. Contrarily, the funding to these companies has increased. In Q2’20, funding landed on US$ 10.2 billion, which is an increase of 11% compared to the previous quarter. Similarly, it is a rise of 1% in comparison to the same period in 2019. This shows that despite the pandemic, shareholders did not refrain from investing in the market.

Why fintech companies?

1. Fintech can mitigate the effects of crises
   Making investments in financial technology can be a wise move because this market has the potential to grow immensely. Covid-19 has made it increasingly clear how vital innovative technology is for businesses and consumers. Due to measures such as social distancing and lockdowns, access to brick-and-mortar banks and other establishments has been virtually cut off during the pandemic. In these situations, fintech services are the only way for consumers to manage their finances, insurances, and more. Therefore, it is evident that fintech have made it easier to cope with the challenges posed by the pandemic.
   In particular, fintech services such as online payments, loans, and e-commerce have been of great significance. This points to a very apparent need for smooth, well-functioning digital solutions that consumers can rely on at all times. The Covid-19 pandemic has made it clear that emergencies can occur at any time, without warning, which means the tools to manage such crises are much needed to minimize the negative impacts.
2. Fintech bridges the gap between different groups
   Financial technology can also be a tool for combating social and financial exclusion. Since fintech services can be used by anybody with an internet connection, a growing number of consumers can gain access to useful technologies. Therefore, unbanked people, ethnic minorities, women, and other vulnerable groups can use these tools to improve their lives, whether it be during the pandemic or post-COVID.
   The pandemic has also highlighted the importance of making digital solutions available in emerging markets. Since emerging economies are expected to undergo growth during the coming years, increased demand for financial technology is foreseen. Therefore, stakeholders are likely to enjoy substantial profits.
3. Collaborations could boost innovation
   Financial technology is a promising field not only because of the potential in terms of innovations but also due to the potential that lies in cooperation with other parties. Partnering up with other businesses, whether it be other fintech or big techs, can lead to even better solutions. A significant increase in cooperation with banks is also at the forefront. Since the banking sector has prioritized innovative solutions within the fields of cybersecurity, AI (Artificial Intelligence), and RPA (Robotic Process Automation), coaction with fintech is not only highly probable but also expected to result in substantial innovations.
   Moreover, partnerships with non-financial businesses could give rise to new, helpful services. For instance, the provision of online medical consultations integrated with financial solutions is of great significance. Such solutions could be highly useful in most parts of the world, especially during a crisis.

Why is now a good time to invest in fintech companies?

1. Success stories from past recessions
   The COVID-19 pandemic has had a powerful impact on consumer behavior. This opens the door for possibilities, particularly for entrepreneurs with an understanding of organizational agility. Those who can act quickly and design meaningful solutions to the present predicaments have the potential to see an explosion in demand, just as Square, Slack, LendInvest, and other businesses have seen.
2. Government funding for businesses
   Another aspect favoring the development of financial technology is the government response to the pandemic. As many companies are struggling to cope with the effects of Covid-19, governments have put in place multiple mechanisms to support these businesses, including the provision of government funding. Consequently, companies that are quick to adapt to the current scene can use these funds to explore innovative ideas. Thus, existing government funding can provide entrepreneurs with the financial tools needed to create innovative services. Naturally, this increases the probability of success.
3. Skyrocketed incentives for innovation
   Financial technology companies are very likely to be some of the winners in post-COVID times. This is because even before the pandemic, there was a strong focus on innovative financial technologies. However, after current events, this focus has skyrocketed. Having witnessed the extensive effects of the pandemic, the incentives to create new solutions are even higher.

Social distancing has spiked the use of home delivery services, e-commerce, mobile banking, and other similar services. Thus, it is likely that we will see innovations in these fields, but also in terms of proptech, regtech, and insurtech. To minimize health risks, it is also probable that administrative processes, customer service solutions, and other transactions will become increasingly digitalized. Therefore, it can be concluded that financial technology has the potential to experience growth and flourish, regardless of an international economic downturn. The fintech industry might, in fact, very well be the best place to invest in right now.

Commentary by Elijah Puscas. Here’s what you’ve missed?
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