Global COVID-19 FinTech Market Rapid Assessment Study

Tania Ziegler (CCAF), Bryan Zhang (CCAF), Ana Fiorella Carvajal (World Bank), Mary Emma Barton (World Economic Forum), Herman Smit (CCAF), Karsten Wenzlaff (CCAF), Harish Natarajan (World Bank), Felipe Ferri de Camargo Paes (CCAF), Krishnamurthy Suresh (CCAF), Hannah Forbes (CCAF), Neha Kekre (CCAF),Charles Wanga (CCAF), Guillermo Alfonso Galicia Rabadan (World Bank), Nilima Chhabilal Ramteke (World Bank), Cecilia López Closs (CCAF), Leyla Mammadova (CCAF), Alexander Reviakin (CCAF), Rui Hao (CCAF), Rose Njuguna (CCAF), Grigory McKain (CCAF), Nadeenut Suvanprakorn (CCAF), Altantsetseg Ganbold (CCAF), Chris Knaup (CCAF), Chung Liang Khong (CCAF) and Hunter Sims (CCAF).

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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.

Key findings

This study finds that, despite unprecedented uncertainty and rapid changes in market conditions, FinTechs across the globe have been resilient in responding to the challenges of the COVID-19 pandemic. Twelve out of 13 surveyed FinTech verticals reported growth on average in Q1-Q2 2020, compared with the same period in 2019, although the growth was very uneven across markets and geographies. 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, fundraising and regulatory challenges across the world.

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 per cent and 11 per cent 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 per cent in Q1-Q2, whereas Digital Banking, Digital Identity and RegTech sectors reported more modest year-on-year increases of around 10 per cent in Q1-Q2. Conversly, Digital Lending firms reported an eight per cent year-on-year contraction in Q1-Q2 globally in transaction volume and numbers of transactions, as well as a six per cent decrease in the number of new loans issued. This situation was compounded by a nine per cent 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 per cent), followed by North America (21 per cent) and Sub-Saharan Africa (21 per cent).

FinTech markets with more stringent COVID-19 lockdown measures reported higher growth in transaction volume. With OxCGRT dataset[i], countries in the FinTech survey sample were grouped into low, medium and high-stringency quantiles according to the stringency of government responses to COVID-19. On average FinTech transaction growth in high-stringency countries was 50 per cent higher than those in low-stringency jurisdictions. This trend was most evident for Digital Payments, where FinTechs in high-stringency jurisdictions reported a 29 per cent growth, twice the average growth of Digital Payments providers in low-stringency jurisdictions during the same period. The demand for Market Provisioning FinTechs (i.e. Digital Identity) also followed this trend, with transaction growth of 20 per cent for high-stringency jurisdictions compared to just two per cent for low-stringency jurisdictions.

FinTechs in emerging market and developing economies (EMDEs) reported higher growth but also more operational challenges and risks than those in advanced economies (AEs). EMDE FinTechs reported an average H1 growth in transaction volume and numbers of 12 per cent and 15 per cent respectively – more than the 10 per cent and 11 per cent 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.

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 per cent 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 onboarding criteria’ and ‘payment easements’. For instance, 36 per cent of surveyed Digital Payment firms implemented fee or commission reductions, while 53 per cent of Digital Lending firms made changes to their qualification or onboarding criteria and 49 per cent introduced payment easements.

FinTechs have launched a range of new products and services. 60 per cent of surveyed firms reported launching a new product or service in response to COVID-19, with a further 32 per cent planning to do so. The most prevalent change for Digital Payments firms was the development and deployment of additional payments channels (38 per cent of firms). For Digital Lending it was an increase in value-added non-financial services (e.g. information services, introduced by 35 per cent of firms). For Digital Capital Raising it was hosting COVID-19-specific funding campaigns (introduced by 35 per cent of firms).

Some FinTechs are responding to increased cyber-security risks. 28 per cent of surveyed firms reported introducing enhanced fraud or cyber-security features, and a further 12 per cent reported being in the process of doing so. FinTechs globally reported a 17 per cent year-on-year increase in cyber-security risk perception. This risk was higher for firms from EMDEs who reported a 19 per cent increase over the same period. Digital Asset Exchange, Digital Banking and Digital Payments firms reported the largest perceived increase in cyber-security risks, up 32 per cent, 20 per cent and 19 per cent respectively.

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 ranged from 7 per cent for NGO-led measures and 13 per cent for government job retention measures. FinTech firms were most likely to indicate interest in the delivery of industry-led relief measures (32 per cent of firms), government match-funding schemes (32 per cent) and government-based stimulus funding to MSMEs (30 per cent).

FinTech operations and fundraising challenges during COVID-19

COVID-19 is posing operational challenges to FinTechs while driving up costs. FinTechs reported a five per cent average increase in agent or partner downtime and a seven per cent increase in the number of unsuccessful transactions, queries or access requests compared to the same period in 2019 (Q1- Q2). FinTechs also reported an eight per cent rise in onboarding expenses and an 11 per cent increase in data storage expenditure. These operational challenges and cost pressures were more severe for FinTechs from EMDEs. Despite these challenges, FinTechs in EMDEs countries, on average, indicated that they will retain their Fiscal Year 2020 Turnover Target and grew their FTE by eight per cent on a year-on-year basis. 

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 five per cent increase in agent or partner downtime, compared to -3 per cent in low-stringency markets. This trend held for growth in onboarding expenditure with firms in high-stringency countries reporting an 11 per cent increase compared to low-stringency countries reporting no increase. Perceived cyber-security risks were also positively correlated with lockdown measures, with firms in high-stringency markets reporting an 18 per cent increase for this risk compared to eight per cent for low-stringency markets.

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 per cent of firms reporting a significant impact and 30 per cent reporting a slight impact. About 40 per cent of firms reported that COVID-19 had a significantly negative (14 per cent) or slightly negative impact (26 per cent) on their firms’ valuation. On the future fundraising outlook, firm responses were more mixed, with 34 per cent reporting negative impacts, 21 per cent reporting positive impacts and 30 per cent of firms reporting no change or saying it was too soon to tell.

Regulatory responses and support for FinTechs during COVID-19

Early regulatory responses to COVID-19 have provided relief to some FinTechs. FinTechs benefited from regulatory support for eKYC (17 per cent of respondents), simplified CDD (13 per cent), support for remote onboarding (12 per cent) and streamlined product or services approval (seven per cent). Firms also reported benefiting from regulatory innovation initiatives, for instance, working with an innovation office (14 per cent) or participating in a regulatory sandbox (six per cent). FinTechs have utilized these regulatory measures differently. Digital Payment and Digital Lending were more likely to report benefiting from eKYC, 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. For instance, 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. More than half of FinTechs reported an urgent need for faster authorization for new activities (36 per cent of firms), streamlined product or services approvals (31 per cent), simplified CDD (30 per cent), regulatory support for remote onboarding (28 per cent) or less burdensome supervisory or reporting requirements (26 per cent). Comparatively, 24 per cent of FinTechs reported a need for admission into a regulatory sandbox and 20 per cent reported an urgent need to work with a FinTech innovation office. Nevertheless, for Market Provisioning FinTechs, and in particular RegTech and Enterprise Technology providers, were more likely to have need for admission to FinTech innovation offices and regulatory sandboxes, as well as participation in hackathons and Techsprints, given many of their activities are not regulated.

FinTechs from EMDEs were 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 per cent) and regulatory support for e-KYC (39 per cent). Overall, the urgent need for additional regulatory support measures were more acute for FinTech firms from SSA, MENA and LAC respectively.

The need for regulatory support is higher in countries with more stringent COVID-19 lockdown measures. 21 per cent of firms in high-stringency jurisdictions reported currently benefiting from regulatory support for remote onboarding (compared to 15 per cent in low-stringency countries). Yet a further 45 per cent of firms in high-stringency countries reported that they urgently needing this support (compared to 27 per cent in low-stringency countries). This trend held across all regulatory support measures tracked in this study, including support for e-KYC, simplified CDD and faster authorisation and licensing. Respondents in high-stringency countries were also more likely to report