Has fintech made us more resilient or vulnerable to economic shocks?
There was a moment during the pandemic where we collectively dreamt of a better world.
Economists imagined fairer workplaces, exploding pent-up demand driven by new models of more domestic, sustainable production. There would indeed be inflation, but it would be a temporary blip while supply chains figured themselves out and the world got back to normal.
Sadly, it turned out that demand wasn’t the only thing pent up in global markets. Tectonic events like the war in Ukraine, dystopian lockdowns in China, Brexit, and even smaller ripples like a blockage in the Suez Canal have all led to huge inflationary pressures.
So who better to save the day than fintech, right?
Fintech’s great promise has always been to democratise access to lending, to ‘bank the unbanked’, to get people insuring, spending, and investing - the list goes on. But just as technology can be used as a tool for good and bad in equal measure, fintech’s scorecard is mixed, especially in times of economic uncertainty.
...fintech’s scorecard is mixed, especially in times of economic uncertainty.
Lending products are fairer and more affordable for customers
According to a new study by Plaid, fintech yields a median of $360 savings in fees compared to traditional banks in the US. Increasing interest rates should help to bolster fintech lenders, finding a path to profitability that neobanks have struggled with. Covid has laid bare the urgency with which people need fair credit decisions and there’s been a bunch of innovation from the fintech world, particularly with business lending.
SME lending has been a huge growth area in the last few years, with examples like Line of Credit Depot in the US able to assess creditworthiness better than a bank. As businesses rush to protect their cashflow from up to triple digit inflation within their supply chains, financing like this will be crucial to keep the economy running.
When it comes to lending, there are even more innovative styles rethinking the very nature of credit. Pipe, for example, converts future revenue potential into a tradable security that you can sell for cash. Tranch promises to reduce your SaaS licensing costs by purchasing long-term contracts on your behalf and passing most of the savings to you, the business.
It’s not all sunshine and lollipops
Buy Now Pay Later (BNPL) is equally, if not more, problematic for consumers. Controversial and unprofitable since its inception, BNPL has thrived under smart branding and a causal association with teenagers buying the latest sneaker drops. In the UK however, they’re seeing a darker side as people jump to BNPL solutions for their grocery shop.
Relying on credit for essentials is deeply concerning for household debt, and is rightly attracting concern from regulators and the whole industry. But in a country where 13.4m people live below the breadline, we have to wonder what alternatives are out there. BNPL’s offer low or zero interest rates in comparison to the alternative - crippling overdraft fees or high credit card interest rates. It feels like people may be stuck between going hungry or the cheaper of two credit options.
...crippling overdraft fees or high credit card interest rates. It feels like people may be stuck between going hungry or the cheaper of two credit options.
In Argentina, people are used to living under the harsh conditions of systemic inflation. With the recent spike, Stablecoins have seen a 300% jump in demand as people rush to protect their paychecks. But recent instabilities in Stablecoin USD pegs have rocked user confidence, making it hard to see how cryptocurrencies designed to facilitate cross-border transactions can be used as a safe asset. Like the BNPL example in the UK, it feels like people are willing (or desperate) to take a risk on new, unstable financial products with low barriers to use and cheaper fees.
Democratised access to investments have lost people vast amounts of money
When the founders of Robinhood set out to let anyone trade stocks for free, or when Satoshi dreamt up Bitcoin, I don’t think either realised the market frenzies they’d unleash. We’ve watched the barriers to entry tumble down in both the stock and crypto markets, yielding pump-and-dump cycles, meme-stocks and a tonne of money lost for the average investor.
We’ve watched the barriers to entry tumble down in both the stock and crypto markets, yielding pump-and-dump cycles, meme-stocks and a tonne of money lost for the average investor.
In fact, as the threat of recession looms across Europe and China, various statistics show that almost 80% of private day traders lose money. The picture is more bleak with crypto - a US Fed study has recently shown that 12% of all households have invested in cryptocurrencies in 2021. With the latest crypto crash, the losses to personal savings have been catastrophic - horror stories are not hard to find.
From the ashes…
As the fintech industry licks its wounds from the stock market route, there are strong signals to show that fintech’s next wave can double down on fair lending and financial inclusion. Crypto markets are coming under much needed regulatory scrutiny, and even BNPL will be part of an ecosystem of alternative payment types with lower costs and easier integrations into the customer experience, pending regulation.
Finally, increasing interest rates could carve out an even bigger space for fintechs to develop ever fairer lending products for market segments most in need and most overlooked by banks.