FINTECH AND IMPACTS OF THE CORONAVIRUS PANDEMIC

FINTECH AND IMPACTS OF THE CORONAVIRUS PANDEMIC

The COVID-19 pandemic has taken the world by storm. This crisis too shall end – but its implications shall never be forgotten. Similar to the Great Recession, as the financial industry suffered a great reform, the birth of fintech was witnessed shortly after. At this point we have just started to feel the impact on financial markets, consumers, and businesses globally. On the flip side, this pandemic has resulted in the biggest catalyst for digital transformation we have seen in years, wherein digitizing one’s business has moved from a good-to-have, to a must-have in order to survive. The lack of a digital element to one’s work renders their product unsellable since the way consumers travel, work, shop and interact has changed drastically. What does this mean for the fintech industry? History provides strong evidence of this correlation. A study on the “World Financial Crisis and Cybercrime” ^[1] highlights that in 2008–2009, “the worldwide financial crisis sparked an increase in spam production following the initial mid-September collapse of Lehman Brothers Bank, Bank of America, and AIG. As the world’s stock markets crashed, spammers attempted to lure recipients by promoting services that claimed to eliminate or leverage debts, mortgages, and other fiscal or loan obligations.” Therefore, this article shall seek to outline how different areas in the fintech space that have been impacted by the pandemic in discussion.

I. Payments

The chance of a recession in 2020 has increased dramatically with Good Judgment^[2] forecasters’ estimates of a US recession by the end of March 2021, the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Funds (IMF), as well as banks like JP Morgan having downgraded their estimates for global growth. Companies that deal with POS machines have seen a negative impact as retail shops have rapidly closed their doors to prevent the further spread of the virus^[3]. Moreover, due to the travel restraints, the digital payments sector has seen a decrease in the number of transactions due to the impact on air travel and hospitality with an increase on cancellations and refunds across the globe^[4].

However, it is not all doom and gloom in the fintech space. Due to the high usage of e-commerce websites there has also been a slight increase in digital transactions since residents of various jurisdictions are left with no choice but to shop online. In South Africa, online payment Ozow has witnessed 35-40% more transactions as people are refraining from touching cash and POS machines^[5]. The company has also stated that it has been witnessing the greatest demand from pharmacies and retailers.

Fintech is a complex and multi-faceted sector – where startups in the lending space are finding the going a bit tougher, those in the payment processing space may witness a surge in that segment due to individuals using non-contact-based digital methods of payments (wallets, P2P transfers, contactless payments) rather than cash. One general rule that applies across industry segments would be the path to profitability. This is going to force startup founders to look at ways of conserving cash and gaining customers more intelligently, rather than seek embarking on get-rich-quick schemes.

II. Lending

Traditionally, individuals take loans to make large purchases – but since most physical retail shops which induce a certain pattern of spending behaviour are closed, individuals are spending less on non-essentials, leading to a lack of ‘need’ to borrow money to purchase luxury goods^[6]. Moreover, many are facing a partial or complete reduction in wages which results in non-repayment from borrowers that faced financial difficulty due to a decline in salary imposed by COVID-19. Bailout packages are being sought across the globe with lenders in Italy, the United Kingdom and India having offered repayment holidays. This sets a tone for a decrease in the number of loans processed globally since people would be unable to pay loans back for a long time.

On the flip side, loans will be essential for small to medium enterprises that are currently suffering due to customers purchasing less. Various governments are assisting these enterprises to shift to a tech-focused business where possible to get funds into the hands of small businesses faster than commercial banks.

III. Cybersecurity Threats

The benefits reaped by companies strengthening their ‘online presence’ in this day and age are becoming increasingly countered by certain issues that are becoming prevalent. A key observation that can be drawn is that the internet has influenced the world of organized crime and the criminal marketplace. Cybercrimes mimic the mindset of street crimes, and they are seen to be increasing as society goes through changes and challenges. With the world currently focusing its attention on the massive threat posed by the pandemic, having most of the world’s population under some form of lockdown, cybercriminals are likely to thrive in such climate.

Financial institutions face a very serious challenge in this regard, and thus the need for a system which not only protects against, but also prevents such attacks, has become much more pronounced with the advent of the coronavirus. The market situation is reminiscent of 2008, that is a crashing stock market, a recession and a societal shift to the poverty line. A study by Cybersecurity Ventures predicts that cybercrime will cost the world in excess of 6 trillion U.S. dollars annually by 2021, up from 3 trillion U.S. dollars in 2015^[7].

Financial services firms seem to be the preferred target for cyberattacks. Finastra^[8], a major fintech technology solutions provider for global banks, announced that it discovered a security breach on 20^th March 2020 leading the company to shut down its key system due to an unknown hacker group attempting to induce malware into the network through a ransomware attack. Such attacks are not only occurring in budding fintech companies but have even affected the likes of the European Central Bank, which had to shut down the Banks’ Integrated Reporting Dictionary website after routine maintenance uncovered a cyberattack that was compromising the data of its newsletter subscribers.

There are a plethora of examples that may be cited, but the main takeaway is that the nature of attacks in the financial services space shall continue to grow in levels of sophistication as well as in numbers, and the advent of the coronavirus shall only serve as a catalyst.

IV. Blockchain

The gradual collapse, or at the very least seismic shift, that the traditional financial system will undergo, paves the way for the prominence of lower-level systems to thrive. By lower-level systems, one understands systems that work without, or with little intervention, from high-level structures that tend to be centralised. P2P payment systems are already thriving in regions where centralised financial institutions are either not present or difficult to access, and with another financial collapse in the offing, it is likely that such P2P payment systems will also grow in popularity in regions considered to be developed. Likewise, access to lending systems which enable microlending may well prove to be lifesaving for SMEs. Such payment and lending systems will benefit greatly from the use of blockchain technology, especially since centralised financial institutions have so far been the cornerstone of trust for these systems which inherently would benefit from “trustlessness”.

The resiliency of decentralised, distributed systems is also a key factor in the war against cybercriminals, especially since data is regarded as the ‘new oil’ and is often the target of malicious attacks. Safeguarding the accuracy and safekeeping of data through blockchain technology is being explored, with various implementations coming to light^[9]. Likewise, further decentralized of the Domain Name System would hinder cybercriminals in various attacks such as DDoS attacks.

Conclusion

The coronavirus pandemic will affect companies of all sizes. Whilst it is understandable that most businesses are moving online to stay relevant, it is essential that implemented systems enable remote access and ensure VPN and other remote access systems are fully patched. The implementation of multi-factor authentication, the enhancing of system monitoring to receive early detection and alerts as well as ensuring all machines have properly configured firewalls, are a few key cybersecurity essentials to consider. However, as highlighted above, future solutions should have in mind the words “cutting-edge” in terms of their assessment; if such solutions make use of blockchain technology by way of practical enhancements rather than just using blockchain for the sake of it, then they should be thoroughly considered. Apart from the technical ramifications, one should also take the time to look at resources, see what is needed to scale down. Letting go of individuals should be the last option, but digging deep into established contracts, staying afloat for the next eight to twelve months whilst not compromising on cybersecurity measures, shall likely render your venture a success.

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1. World Financial Crisis and cybercrime by Bashar Matameh et al, Int.J.Buss.Mgt.Eco.Res., Vol 2(1),2011,124-130, Deparment of Business Administration, Delmon Univesity ↑
2. https://qz.com/1790113/will-there-be-a-recession-in-2020/ last accessed 27^th April 2020 ↑
3. Pine Labs’ CEO, Amrish Rau, noted that their transactions decreased by 40% a few days ago. This also could be witnessed by the decrease in the M-o-M market cap of large payment processors such as Mastercard with a decline of 25% and Visa with a decline of 20% in market cap. ↑
4. In India, companies such as Razorpay have seen a decline of 40% in online digital transactions due to the ban on travel as well as due to cancellations and refunds ↑
5. ‘Digital payments soar amid COVID-19 fears’, Sibahle Malinga, ITWeb <https://www.itweb.co.za/content/j5alrMQaya2MpYQk> accessed 27^th April 2020 ↑
6. 33-to-43-billion dollar hit, according to AllianceBernstein and BCG ↑
7. https://www.herjavecgroup.com/the-2019-official-annual-cybercrime-report/ last accessed 27^th April 2020 ↑
8. https://www.cbronline.com/news/finastra-hacked last accessed 27th April 2020 ↑
9. “Using Blockchain Technology to Boost Cyber Security”, Yuliia Horbenko < https://steelkiwi.com/blog/using-blockchain-technology-to-boost-cybersecurity/> accessed 27^th April 2020 ↑

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