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The COVID-19 crisis has highlighted how rapid business response and the ability to quickly pivot have differentiated winners and losers across retail, telecom, supply chain and financial services.
Despite fast growth over the past decade, many financial services and fintech players may not survive the latest downturn because they've lost sight of a key business fundamental that's crucial to sustaining a long-term competitive advantage: operational resilience.
The True Value Of Fintech
As a result of the pandemic, many fintech firms that have never experienced an economic downturn found themselves up against unprecedented market conditions and a dramatic shift in consumer behavior. While some fintech organizations are struggling to stay afloat, others have the unique opportunity to play the hero using new technology or business processes. Companies like OakNorth and Funding Circle in the U.K. have done exactly this, distributing loans and credit assessments utilizing their machine learning algorithms.
According to Rosenblatt Securities, the pandemic will reset fintech market valuations — prompting private fintech organizations with lower fixed costs to outperform and spark interest from investors as opposed to fintech that carry higher costs. As for public fintech organizations, after outperforming the S&P 500 and Nasdaq before the crisis, the FinTech Index is now underperforming by 7%. The flexibility of business models and their ability to adjust costs will determine which fintechs are able to survive the crisis.
Revealing Operational Weakness
The Paycheck Protection Program (PPP) — created to provide financial assistance to small businesses — resulted in a surge of applications that banks were unprepared to handle. As interest rates hit a record low, mortgage lenders saw a 12% surge in purchase applications, and refinance applications increased by 479%. Financial technology platforms were inundated with issues related to a significant spike in volume.
Seamless Digital Experiences Trump Face-To-Face Interactions
Before the pandemic, many businesses and consumers were satisfied with the status quo. Remember the rise and fall of Webvan in the dot-com era? Many concepts that didn't initially take off, like grocery delivery, digital payments and curbside pickup, have recently seen dramatic increases in adoption. In March, e-commerce transactions increased by 23%, while grocery delivery apps Instacart, Shopt and Walmart Grocery saw their daily downloads increase by well over 100%. Digital wallet usage also surged past $1 billion in March.
So what does that mean for the future of payments, commerce and financial services?
• Ongoing Opportunities For Digital Innovators: Sean Healey of Wirecard predicts that the payments and commerce industries will see an increased interest in their innovative solutions even after the crisis subsides.
• Sustained Shift From Face-To-Face Interactions: 42% of consumers say they are using mobile banking more frequently and 12% of banking customers have enrolled in online or mobile banking for the first time since the pandemic.
• Continued Usage Of Electronic Payments: As cited above, digital payments have surged, with 30% of consumers trying contactless payments for the first time and 70% saying they will continue after the pandemic is over.
Companies that have performed well post-COVID-19 were able to rapidly support digital experiences. Toast, a restaurant management system, depended on in-person meetings and had to lay off half its staff in April. Contrast this with companies like Square Inc., which pivoted its services — implementing a pickup and delivery option for restaurant customers.
Alternative Data Will Go Mainstream
The COVID-19 crisis has also accelerated the need for lenders to improve the precision of their risk and underwriting processes in the midst of a shaky economy. Short-term solutions include Plaid's efforts to ease the burden on banks during the PPP application process by aggregating payroll data. Ocrolus and Brace partnered to create software to provide automated document classification and extraction for mortgage applications. My own company pivoted with new data solutions to enable companies relying on paper to move to fully electronic bill capture, bill presentment and payment.
Temporary changes made for payment extensions and loan forbearances will lead to long-term inconsistencies, making traditional risk assessment less effective. Thus, applicant screening will require additional data sources to provide a better assessment of a borrower's financial standing. In the long term, alternative data sources like rental and utility payments may become the norm across the global finserv industry.
Operational Resiliency Principles To Keep Top-Of-Mind
Based on observations across industries, the necessity of balancing innovation with operational resilience is evident. Organizations need the ability to alter their operations in the face of rapidly changing business conditions, with a focus on these factors:
• People: Organizations with operational resilience have a keen understanding of the human resources required to perform during a crisis. Here at my company, our teams worked to ensure that all employees were equipped with the tools they needed to work remotely. We invested in Wi-Fi cards and added a telehealth option for dedicated doctor support.
• Process: Across departments, processes have to adjust to new lending volumes, regulatory guidelines, and remote interactions. For example, lenders have modified service delivery models to support remote customer interactions while implementing extra measures to minimize risk. An organization's ability to shift and scale operations to accommodate the current climate is essential to operational resilience.
• Systems: The ability to expand system capacity to withstand the stress of higher transaction volumes is specifically critical for small business and mortgage lenders. Fortunately, organizations with resilient systems have proactively tested system capacity and security. They have also digitized processes to make the business less reliant on manual and paper-based processes.
The Fintech Silver Lining
The fintech industry has ridden the wave of favorable economic conditions — until now. Business leaders that achieve operational resilience will be in a better position now and after the current downturn is over. Hopefully, entities across the fintech ecosystem have learned some valuable lessons that will lead to smarter innovations — innovations balanced with operational resilience to weather the next storm.
About the Author
Forbes Councils Member/Forbes Technology Council.
CEO at Urjanet, helping organizations impact people, planet and profits using our innovative cloud-based data service.
Sanjoy is a seasoned entrepreneur and experienced executive who has built and operated several successful technology businesses. In 1999 Sanjoy founded Air2Web, a leader in mobile marketing services. Under Sanjoy’s leadership Air2Web grew from a pioneering wireless services provider to become a market leader and global strategic mobile partner for over 100 of the most trusted brands in the world. Prior to Air2Web Sanjoy founded Synchrologic, a company that created the first enterprise class data synchronization platform for mobile devices. Sanjoy was responsible for raising venture capital, hiring a successful management team, and establishing partnerships with key industry leaders. Synchrologic was acquired by Intellisync which later became part of Nokia.
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