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How COVID-19 Changed Fintech: What You Need to Know

How COVID-19 Changed Fintech: What You Need to Know

Businesses in all industries have felt the effects of the COVID-19 pandemic. However, pandemic’s effects have been particularly significant in the fintech sector. While the pandemic has hampered economic growth and created serious challenges, COVID-19 has actually benefited the fintech industry in a few ways.

Just consider the following examples.:

The Growing Hong Kong Fintech Industry

Hong Kong is just one part of the world where the pandemic’s impact on fintech is quite clear. Around the world, the pandemic has forced businesses of all types to embrace greater digitization. This has taken many forms, such as transitioning to remote work, conducting meetings over video chat apps, and generally relying more on technology to facilitate work that normally would require people being together physically.

This trend also includes fintech alternatives to traditional financial products, services, and processes. This trend has been more pronounced in Hong Kong because regulatory bodies there, including the Hong Kong Monetary Authority and Insurance Authority, have quickly taken measures to ensure that businesses can more easily and efficiently take advantage of digital technologies. Writing in the South China Morning Post, City University of Hong Kong adjunct professor Andy Chun believes the pandemic will increase growth in AI technologies, like biometric facial recognition and advanced fraud detection, for financial institutions in Hong Kong.

The regulatory changes are a fairly new development and we don’t know the long-term impact on the ground. However, it’s a situation that regulators in other regions throughout the world should pay attention to. Being able to quickly transition to a digital environment that allows for expanded use of fintech may help keep Hong Kong’s economy afloat.

Driving e-commerce

Fintech products support e-commerce businesses by allowing for easy, secure payments and transactions online. This connection highlights another way in which the COVID-19 pandemic has affected fintech. Research shows what many would expect: e-commerce has dominated brick-and-mortar retail during the pandemic. A writer in Forbes estimates that the pandemic has accelerated the growth of e-commerce by four to six years. According to Adobe’s Digital Economy Index, online sales in May 2020 totaled $82.5 billion, a 77 percent year-over-year increase from 2019. The growth was even more pronounced in certain regions—Connecticut, for example, experienced a 99 percent growth in digital commerce during the same month.

Even when the pandemic ends, experts predict this trend may continue, as large groups of consumers have simply begun to adapt to a new way of shopping. The fact that they may one day be able to return to brick-and-mortar stores doesn’t necessarily mean they will, for every purchase.

This means that there’s likely to be continued healthy demand for fintech products, particularly payment technologies. Retailers that once prioritized brick-and-mortar sales over online sales will need to adjust to new consumer behaviors. This projection is supported by research conducted by CB Insights. The market research firm concedes that payments companies focused on verticals particularly hard-hit by the pandemic—like hotels and restaurants—may face extraordinary short-term challenges. Still, CB Insights’ research indicates that “the biggest long-term beneficiaries of Covid-19 will be payments companies enabling the e-commerce sector.”

The “New Normal” for Banks

This blog often covers the relationship between fintech startups and traditional financial institutions. For the past several years, legacy banks have had to contend with the fact that fintech companies offer many of their customers convenient alternatives to their services. Many bank leaders have acknowledged that it’s necessary to adapt if they don’t want to get left behind.

This type of adaptation can take a variety of forms. For instance, sometimes banks partner with fintech startups, creating a mutually beneficial relationship. The bank gets to offer its customers better service through technological innovation, and the fintech startup gets to cut through the regulatory red tape more quickly than it could have without the bank’s compliance infrastructure and expertise.

All that said, some analysts have concluded that most of the fintech experiments traditional financial institutions have conducted in recent years have been just that: experiments. Banks haven’t truly embraced fintech; they’ve merely dabbled in it.

An analysis of the current situation indicates that may change relatively soon. Again, due to the limitations imposed by the pandemic, businesses have begun to use fintech products in greater numbers than they did just last year. There’s good reason to believe they’ll continue to rely on fintech going forward. They now have enough familiarity with these tools to understand their value.

That means the age when fintech starts to genuinely replace traditional financial services may have arrived sooner than many initially predicted. Banks will have to ramp up their own fintech efforts accordingly.

Of course, this doesn’t mean that the pandemic has been uniformly “good” for fintech. Something more nuanced is going on: fintech has been good for the world during a very difficult time.