As the effect of the COVID-19 pandemic continues to reverberate, the impact on the global fintech firms continues to evolve at an unprecedented rate. A rapidly spreading outbreak is presumed to have a sudden economic slowdown across the globe. Various aspects of fintech firms are directly impacted by the COVID-19 pandemic, which includes the restraint of cash flow for many industries, loan moratorium, credit risks, loan repayments, and transaction processing, among others. While the COVID-19 outbreak severely hits automotive, aviation, and other sectors, the BFSI sector continues to witness both negative and positive impacts.
Negative Impact of COVID-19 on Fintech firms
The COVID-19 outbreak is impacting both consumer behavior and financial markets. Some of the companies such as MasterCard and Visa have confirmed that there has been a drop in e-commerce activities in the last two months of 2020. The drop-in activities can be attributed to the travel restriction imposed by governments, forcing many airlines to cancel flights, resulting in heavy losses. As per the report published by FINANCIAL BRAND, in 2020, PayPal is expected to have at least a 1% drop in foreign currency. Similarly, Square and Stripes also expected to face heavy losses on account of the COVID-19 pandemic.
Positive Impact of COVID-19 on Fintech firms
To address the global emergency, the World Health Organization (WHO) in March 2020 has encouraged people to use cashless transactions. This has increased the adoption of digital transaction services, forcing traditional financial institutions to increase their digital innovation efforts. Additionally, several banks are assisting fintech firms to improve digital transaction services. Also, weakening economies are presumed to force government organizations to enhance the expansion of fintech solutions. For instance, the South Korea Ministry of Economy and Finance plans to temporarily impose easy regulations on fintech firms to jumpstart its economy in the middle of the COVID-19 outbreak.
Impact on SMEs
Small businesses, such as gyms, restaurants, non-food retailers, and other small contractors have been forced to shut their businesses temporarily to support social distancing rules implemented by governments across the globe. These businesses are on the verge of being shut down due to low cash-flow, unable to pay rent and repay the loan. However, policymakers at the state and federal level have been implementing various policies to mitigate the difficulties of SMEs. For instance, so far in 2020, theU.S. government has approved USD 350 billion aid packages for small businesses covering wages, salaries, and benefits. Other efforts by the government assisting small businesses include loan payment deferral, late fee suspension, and small business credit card relief, among others. Some of the banks offering the above-mentioned services include Associated Bank, Green Bay, and WIS, among others.
EMI Payments
Businesses and customers have also witnessed adverse impacts due to the COVID-19 outbreak. To counter such challenges, several banks have taken efforts to assist customers. In March 2020, the State Bank of India has initiated a plan to defer the installment and EMIs from 1 March–31 March and extended the period of repayments by three months. In addition, public banks such as Canara Bank and IDBI Bank are also offering deferment in EMI payments in the wake of quarantine announced by the government. Such initiatives by public and private sector banks enable customers to stabilize their businesses and cash flow.
Regional Overview
North America
Small businesses are the backbone of the U.S. economy. As per the Small Business Administration (SBA) 2019, there are approximately 30 million small businesses in the U.S. alone. Given the COVID-19 outbreak; the state government has imposed regulations to close businesses and support social distancing. This has adversely affected small businesses in terms of cash flow and inability to pay rent or EMIs, resulting in the complete shutdown of businesses. To mitigate the challenges faced by these businesses, financial institutions have implemented various plans.
- Bank of America is enabling business clients to request refunds on various fees including, monthly maintenance fees, late fees, and an overdraft.
- The OceanFirst Bank in New Jersey and Pennsylvania is enabling small businesses with full deferral of loan payments for three months and has allocated immediate working capital of approximately USD 200,000.
- The Trump Administration and Congress have implemented a stimulus package of approximately USD 2 trillion for the U.S. to deal with COVID-19. Out of which, about USD 367 billion is allocated to small business loans to cope with cash related crisis.
- The U.S. legislation is offering about USD 454 billion worth of loan guarantees, loans, and the purchase of corporate debt to medium and large businesses.
Europe
European countries, especially Italy, the U.K., Germany, and Spain, are majorly hit by the pandemic. The outbreak has severely affected industries and financial markets. The banking sector is at the forefront of the customer’s attention to assist with this outbreak. The banking sector is the heart of any economy and provides funds to customers and small and medium-sized enterprises to deal with emergency situations such as the COVID-19 outbreak. The European Government and Central Banks have implemented various plans to deal with the emergency caused due to lockdown, which includes low-interest rates and defers EMIs.Some of the other plans implemented across various European countries to deal with the emergency caused by the pandemic are listed below.
- Deutsche Bank, a global multinational investment bank, offered credit card facilities for 55,000 business clients worth USD 2.68 million. The interests for payments and principal will defer for six months.
- The Italian government has implemented a fiscal rescue package that covers loans for businesses hit by the crisis and mortgage on payments and moratorium on loans.
- The German government has will provide unlimited cash to enterprises facing liquidity in the form of loan provided by the state development bank KfW. The government has expanded its program of export credits and other credits to help enterprises in crisis and enable them to save billions of Euros in tax payments.
- In the U.K., companies have been offered a package of loan guarantee and lending from Bank of England for large companies, and grants will be available for small companies.
The Middle East and Africa (MEA)
The ongoing pandemic has drastically affected the banking sector of the MEA region. Reduction in borrowing and lending, decrease in credit quality, and limited funding are some of the challenges faced by the financial institutions of Dubai and other Middle Eastern countries. To address the situation, in March 2020, the Central Bank of UAE has announced a USD 27 billion stimulus package to deal with the effects of COVID-19, which includes rescheduling loans, offering temporary deferrals on monthly loan repayments, and reducing commissions and fees. Similarly, the Abu Dhabi government has announced about USD 0.8billion for a credit guarantee scheme for small and medium enterprises to stabilize their cash flow and business operation.
Asia-Pacific
In Asia-Pacific, the COVID-19 outbreak has severely affected both the commercial and non-commercial sectors. Small and medium-sized enterprises play a vital role in the Chinese and Indian economies. The financial sector is under severe pressure as various businesses have shut down to support social distancing. The financial sector in these countries is witnessing slow credit growth, increase in Non-Performing Loans (NPLs), and decrease in cash reserves, and demand shocks. The below figure depicts the decrease in credit growth in the private financial sector on account of the pandemic.
Source: Bangladesh Bank, 2020
- The Central bank of China has established special low-cost facilities of approximately USD 42 billion to provide funds to national banks and local corporate banks to deal with the COVID-19 crisis.
- The SPD Bank, China Merchant Bank, and China CITIC Bank have provided approximately USD 57 Billion of loans to small and medium-sized enterprises at low EMIs.
- Union Bank has launched the COVID Emergency Line of Credit (CELC), which provides additional credit facilities to overcome liquidity issues.
- Indian Bank has announced additional funding facilities for large corporate, MSME, pensioners, retail consumers, and Self Help Groups (SHGs).
South America
The COVID-19 pandemic has adversely affected South American countries such as Brazil, Columbia, and Argentina. All the businesses are temporarily shut down to limit the rapidly spreading pandemic. This is further increasing pressure on the financial sector in terms of reduction in credit growth, asset quality, bank loan, and decrease in liquidity. To mitigate the challenges faced by businesses and individuals, governments in the region have implemented various plans to assist deal with the crisis.
- The National Monetary Council (CMN) Brazil will offer USD 640 billion worth of loans to firms and households over the next six months.
- The Central Bank of Colombia has implemented several measures to enhance liquidity in both foreign exchange rate markets and the financial market. This includes managing stock brokerage companies, trust, and investment companies.
- The Central Bank of Chile has implemented various measures to facilitate credit flow to businesses and households, which include the provision of deferred loans and mortgages to assist SMEs loans, among others.
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