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Regulatory dilemma

Policymakers face a big test on whether to support fintechs given increased competition from big tech and incumbent banks says Dr Robert Wardrop, in a webinar for the What’s Next? How to Survive and Thrive in a Post COVID-19 World series.

Here’s an opportunity to see his presentation and read key findings:

Webinar: Is COVID-19 an Existential Threat to FinTechs?

Policymakers face a big issue whether to support innovative fintech firms as many will be “extremely vulnerable” in the face of competition from both big tech companies and incumbent banks, says Robert Wardrop, Director of the Cambridge Centre for Alternative Finance at Cambridge Judge Business School.

While online financial services have received a big boost from coronavirus-linked government stimulus programmes, particularly in developing countries, it’s not clear that online financial firms (“fintech”) will mostly benefit from this given recent trends, he told a 15 July webinar.

Even before the COVID-19 pandemic, venture capital investment in fintechs had been declining; the role of big tech firms such as Amazon (alone or in partnership) in online financial services has been surging; and only 25 per cent to 30 per cent of tech startups including fintechs have one year or more of “runway” (balance sheet funding relative to their “burn” or spending rate) compared to far healthier big tech balance sheets.

Taken together, this suggests that many fintechs are “extremely vulnerable going forward” given the far greater financial strength of big banks and tech firms, said Bob, Faculty (Reader level) in Management Practice at Cambridge Judge, to a webinar entitled “Is COVID-19 an existential threat to fintechs?” – part of the School’s series of webinars entitled “What’s Next? How to Survive and Thrive in a Post-COVID-19 World”.

Bob urged a “more holistic view” on the benefits that fintechs provide in terms of banking inclusion, mobile payments and providing liquidity to consumers and small- to medium-sized enterprises at this difficult economic time; he acknowledged, however, that many regulators are indifferent to whether fintechs, big tech or incumbent banks provide online financial services so long as innovation helps consumers.

“What lens do you want to look through?” is the key question for policymakers in the next 12 to 24 months, he said. “This is really important in a social outcome sense, rather than whether we get our financial services efficiently.

“Do we want a market dominated by a very small number of firms with a very large network effect (such as Amazon and Facebook)?” he asked. “There are consequences from the choices we make. We may have inexpensive financial services but they are inexpensive because they exclude 20 per cent of the population. Blanket statements about the cost of ‘financial services’ are difficult.”

Bob said that there has been a “horizontalisation” in the technology industry in that there are “no longer just ‘tech’ firms” but they also do something else, such as Amazon’s embeddedness in ecommerce. “Financial services is going down the same path” in becoming an “enabler” for other consumer services, so fintech firms will need to become more specialised in order to distinguish themselves from banks and big tech providing more online financial services. He also predicted a lively clash in the next year or two between big banks and big tech in this space, as incumbent banks ask whether strict regulations in the traditional banking sector create an unlevel playing field that favours big tech.