Friday, December 04, 2020 06:29
PM / by World Bank Group / Header Image Credit: World Bank Group
This global study seeks to assess how financial technology firms (FinTechs) have been impacted by Covid-19, and how they are responding to the resultant challenges and opportunities. The study is a joint initiative of the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School, the World Bank Group and the World Economic Forum. This research was supported by the UK Foreign, Commonwealth & Development Office, and the Ministry of Finance of Luxembourg.
The study draws on a rapid global survey of FinTechs. Between June 15th and August 18th, 2020, the joint research team designed an online questionnaire and successfully surveyed 1,385 unique FinTech firms operating in 169 countries. This unique dataset provides insights on global FinTechs' i) market performance, ii) responses to Covid-19, iii) regulatory needs and policy support requests, and iv) operational challenges and risks. This study represents one of the largest studies to date on the impact of Covid-19 on FinTechs globally.1 This report seeks to provide timely data to a broad set of decision makers. To this end, this study focuses on summarizing the key findings stemming from information and views provided by the respondents, as this can provide preliminary but valuable insights to industry and policy makers. Future research will seek to analyze the impact of Covid-19 and related policy and regulatory implications in a more comprehensive and deeper manner.
FinTech is defined as encompassing advances in technology and changes in business models that have the potential to transform the provision of financial services through the development of innovative instruments, channels and systems. For the purposes of this study, FinTech refers to a set of activities (which may be either regulated or unregulated, according to each jurisdiction) contributing to the provision of financial services facilitated predominately by entities emerging from outside of the traditional finance system (such as the banking industry or capital markets). Therefore, within this study, FinTech is narrower in scope than digital financial services (DFS). A major contribution of this study is further standardization towards a commonly acceptable taxonomy when discussing an array of differentiated FinTech activities both for market analysis and regulatory context. According to our working taxonomy of FinTech activities, the survey respondents were from 13 different primary verticals, and 103 sub-verticals representing both retail-facing and market-provisioning activities. To further contextualize responses, FinTech verticals were grouped into Retail Facing (i.e. providing financial products and services with a focus on consumers, households and MSMEs, and more likely to be B2C) and Market Provisioning FinTechs (i.e. those which enable or support the infrastructure or key functionalities of FinTech and/or DFS markets, thus more likely to be B2B).
This study finds that, overall, FinTechs operations across the globe have grown, albeit subject to several operational challenges. 12 out of 13 surveyed FinTech verticals reported growth on average in Q1-Q2 2020, compared with the same period in 2019. FinTechs were nimble and innovative in adapting to market conditions by both tweaking existing products and services and launching new ones. However, they still face significant headwinds in operations and fundraising, and seem to be in need of further government and regulatory support.
FinTech market performance in general during Covid-19
Despite Covid-19, FinTechs continue to grow globally. On average, FinTech firms reported a year-on-year increase in their transaction numbers and volumes of 13% and 11% respectively in Q1-Q2 (used interchangeably with H1 throughout the report). This is consistent with reported improvements in other key market performance indicators such as new customer acquisition and customer retention.
However, the impact of Covid-19 on market performance is not uniform across FinTech business verticals or geographic jurisdictions. Except for Digital Lending, all verticals reported an increase in transaction volume, however the rate of growth varied significantly. Digital Asset Exchanges, Digital Payments, Digital Savings and WealthTech all reported year-on-year growth in transaction volume in excess of 20% in Q1-Q2, whereas Digital Banking, Digital Identity and RegTech sectors reported more modest year-on-year increases of around 10% in Q1-Q2. Conversely, Digital Lending firms reported an 8% year-on-year contraction in Q1-Q2 globally in transaction volume and numbers of transactions, as well as a 6% decrease in the number of new loans issued. This situation was compounded by a 9% rise in defaults on outstanding loans. All geographic regions reported growth by transaction volume, but with pronounced variations among them, with the highest increase reported in the Middle East and North Africa (40%), followed by North America (21%) and Sub-Saharan Africa (21%).
FinTech markets with more stringent Covid-19 lockdown measures reported higher growth in transaction volume. With OxCGRT dataset2, countries in the FinTech survey sample were grouped into low, medium and high stringency quantiles according to the lockdown stringency of government responses to Covid-19. On average FinTech transaction volume growth in high stringency markets was 50% higher than those in low stringency jurisdictions. This trend was most evident for Digital Payments, where FinTechs in high stringency jurisdictions reported a 29% growth, twice the average growth of Digital Payments providers in low stringency jurisdictions during the same period. The demand for Market Provisioning FinTechs also followed this trend, with transaction volume growth of 20% for high stringency jurisdictions compared to just 2% for low stringency jurisdictions.
FinTechs in emerging market and developing economies (EMDEs) reported higher growth that those in advanced economies (AEs). EMDE FinTechs reported an average H1 growth in transaction volume and numbers of 12% and 15% respectively - more than the 10% and 11% reported by firms from AEs. FinTechs from EMDEs also reported higher growth in new customers and higher customer retention than firms from AEs. While FinTechs from EMDEs were able to grow their customer base and transactions during Covid-19, they also reported larger increases in operational challenges, costs and risks than firms from AEs, as will be explained further below.
FinTechs' Responses to Covid-19
FinTechs have responded to Covid-19 by implementing changes to their existing products, services and policies. Two-thirds of surveyed firms reported making two or more changes to their products or services in response to Covid-19, and 30% reported being in the process of doing so. The most prevalent changes across all FinTech verticals were 'fee or commission reductions and waivers', 'changes to qualification/ onboarding criteria' and 'payment easements'. For instance, 36% of surveyed Digital Payment firms implemented fee or commission reductions, while 53% of Digital Lending firms made changes to their qualification or onboarding criteria and 49% introduced payment easements.
FinTechs have launched a range of new products and services. 60% of surveyed firms reported launching a new product or service in response to Covid-19, with a further 32% planning to do so. The most prevalent change for Digital Payments firms was the development and deployment of additional payments channels (38% of firms). For Digital Lending it was an increase in value-added non-financial services (e.g. information services, introduced by 35% of firms). For Digital Capital Raising it was hosting Covid-19-specific funding campaigns (introduced by 35% of firms).
To date, there is limited involvement by FinTechs in the delivery of Covid-19 related relief, despite significant willingness by firms. More than a third of surveyed FinTech firms reported a willingness to participate in the delivery of one or more Covid-19 related relief measures or schemes. This demonstrates strong interest, yet the participation rates of FinTech firms in relief schemes are still relatively low. Only 13% of the surveyed FinTechs have contributed to the delivery of the Government Job Retention Measures, 7% participated in the delivery of stimulus funding for MSMEs and a further 6% involved in the delivery of stimulus funding for households. FinTech firms were most likely to indicate interest in the delivery of industry-led relief measures (32% of firms), government match-funding schemes (32%) and government-based stimulus funding to MSMEs (30%).
These findings hold a similar pattern, when analyzed by level of lockdown stringency and income level.
FinTech operations and fundraising challenges during Covid-19
Covid-19 is posing operational challenges to FinTechs, which are also experiencing higher costs. Overall, FinTechs reported a 5% average increase in agent or partner downtime and a 7% increase in the number of unsuccessful transactions, queries or access requests compared to the same period in 2019 (Q1- Q2). FinTechs also reported an 8% rise in onboarding expenses and an 11% increase in data storage expenditure. They also indicated an average of 4% decrease in revising their fiscal year 2020 turnover target.
FinTechs also reported an increase in risks, in particular cybersecurity. FinTechs globally reported a 17% year-on-year increase in cyber-security risk perception. Digital Asset Exchange, Digital Banking and Digital Payments firms reported the largest perceived increase in cyber-security risks, up 32%, 20% and 19% respectively. In line with this perception, 28% of surveyed firms reported introducing enhanced fraud or cyber-security features, and a further 12% reported being in the process of doing so. FinTechs also reported that they perceived an increase in liquidity (17%) and foreign currency exposure risks (12%).
Some of these challenges appear more severe for FinTechs in EMDEs. In particular firms in EMDEs reported higher increases in costs related to onboarding and storage. However, FinTechs in EMDEs, on average, indicated that they will retain their Fiscal Year 2020 Turnover Target and grew their full-time equivalent employees (FTEs) by 8% on a year-on-year basis. Concerning risks, cybersecurity concerns were also higher for firms in EMDEs, which reported a 19% increase over the same period.
FinTechs operating in countries with more stringent Covid-19 lockdown measures may face more operational challenges and incur more costs. FinTech firms in high stringency markets reported an average 5% increase in agent or partner downtime, compared to -3% in low stringency markets. This trend held for growth in onboarding expenditure with firms in high stringency jurisdictions reporting an 11% increase compared to low stringency jurisdictions reporting no increase. Perceived cyber-security risks were also positively correlated with lockdown measures, with firms in high stringency markets reporting an 18% increase for this risk compared to 8% for low stringency markets. FinTechs in low stringency jurisdictions reported higher expected fall in their fiscal year 2020 turnover target (8%) than FinTechs from high stringency jurisdictions (unchanged). FinTechs in low stringency jurisdictions also reported a significant fall of an average 19% in the number of full-time equivalent employees (FTEs), in contrast, FinTechs in higher stringency jurisdictions reported an average of 10% increase in FTEs.
In line with these challenges, the financial position of FinTechs has deteriorated during Covid-19, with mixed views on the prospect of future fundraising. More than half of FinTechs reported that Covid-19 negatively impacted their capital reserves, with 21% of firms reporting a significant impact and 30% reporting a slight impact. About 40% of firms reported that Covid-19 had a significantly negative (14%) or slightly negative impact (26%) on their firms' valuation. On the future fundraising outlook, firm responses were more mixed, with 34% reporting negative impacts, 21% reporting positive impacts and 30% of firms reporting no change or saying it was too soon to tell. Overall these findings hold irrespective of the income level or lockdown stringency level of the jurisdiction where the firms are located.
Regulatory responses and support for FinTechs during Covid-19
A limited number of firms were benefitted from government interventions, but much more firms consider them urgent. In this regard, 13% of the firms reported the use of job retention scheme, and 10% were making use of a tax relief/subsidy. In general, however, most firms indicated that they have yet to receive any government support and 'urgently needed' a variety of governmental interventions. In particular, 38% of firms reported urgently needed access to liquidity facilities, 31% reported urgently needed access to tax relief or subsidies, and 30% needed urgent inclusion in a fiscal stimulus package.
Early regulatory responses to Covid-19 have provided relief to some FinTechs, but firms consider that more regulatory support is also urgently needed. FinTechs benefited from both regulatory measures and regulatory innovations initiatives. The regulatory support that most firms reported to be using were regarding to e-KYC (17% of respondents), working with a FinTech Innovation Office (14%), simplified customer due diligence - CDD (13%), and support for remote onboarding (12%). FinTechs have utilized these measures differently. Digital Payment and Digital Lending were more likely to report benefiting from e-KYC, simplified CDD and remote onboarding support measures over other respondents. Similarly, FinTechs from MENA, APAC and SSA reported higher rate of utilization of these regulatory measures than other regions.
However, FinTechs indicated that they urgently need more regulatory support. Overall, FinTechs were more likely to report an urgent need for regulatory responses related to the regulation and supervision of FinTech (e.g. licensing, permissions and reporting) than those related to regulatory innovation initiatives. Indeed, the measures that most firms reported as urgently need were faster authorization for new activities (36% of firms), streamlined product or services approvals (31%), simplified CDD (30%), regulatory support for remote onboarding (28%) or less burdensome supervisory or reporting requirements (26%). Nevertheless, certain verticals, in particular Market Provisioning FinTechs (and within it RegTech and Enterprise Technology providers), were more likely to consider the admission to FinTech innovation offices and regulatory sandboxes, as well as participation in hackathons and Techsprints, as urgently needed, likely because many of their activities are not regulated. Overall, the urgent need for additional regulatory support measures was more acute for FinTech firms from SSA, MENA and LAC respectively. FinTechs from EMDEs tend to have utilised more regulatory support than firms in AEs. Nevertheless,
FinTechs from EMDEs were also more likely to report an urgent need for regulatory support than FinTech firms from AEs. This trend held for all regulatory response measures tracked in this study. Nearly half of FinTechs from EMDEs reported urgently needing faster authorization or licensing for new activity. This was followed by an urgent need for streamlined product or services approvals (40%) and regulatory support for e-KYC (39%).
The need for regulatory support is higher in firms located in countries with more stringent Covid-19 lockdown measures. 21% of firms in high stringency jurisdictions reported currently benefiting from regulatory support for remote onboarding (compared to 15% in low stringency jurisdictions). Yet a further 45% of firms in high stringency jurisdictions reported that they urgently needing this support (compared to 27% in low stringency jurisdictions). This trend held across all regulatory support measures tracked in this study, including support for e-KYC, simplified CDD and faster authorization and licensing. Respondents in high stringency jurisdictions were also more likely to report that they have already utilised regulatory support than firms in low stringency jurisdictions.