COVID-19 has not only created a health emergency but is also on the verge of creating an economic emergency across the globe. With the number of cases unfolding at an alarming rate each day, countries are looking forward to continuing with lockdown to contain the outbreak. As per the preliminary estimate of the International Labour Organisation COVID-19 will result in the loss of more than 25 million jobs. According to the United Nations Conference on Trade and Development, this pandemic is more likely to cause a loss of $2 trillion to the global economy in the year 2020.
Amidst the already staggering economic condition, this global pandemic is pushing the economy to its worst. With an increase in the availability of zero cost EMI’s in the country, the share of household savings in GDP has declined from 23.6% in FY12 to 18.2% in FY19. The rise in the share of the household debt in GDP from 8.7% in FY12 to 11% in FY18 whereas the rise in the share of retail credit from 14.3%v in FY13 to 18.5% in FY19 clearly shows that in the case of prolonged lockdown there will be a rise in the defaulters as the ability to pay will be delayed. The prodigious challenges posed by COVID-19 is felt across all dimensions of business globally. The Fintech industry which is relatively new faces the most challenging times. As per the Rosenblatt report “The decline in public equities and economic fallout due to COVID-19 will have a major impact on the Fintech market” Before the outbreak of the global pandemic, the Public FinTech was performing significantly. The FinTech index which consists of 26 firms was up by 49% and outperformed Nasdaq and S&P which was up by 28% and 20% respectively. However, within a month of the outbreak, the FinTech index underperformed along with a 7% decline in Nasdaq and S&P.
There has been a significant drop in the e-commerce activity across the globe owing to the restricted delivery services. Mastercard and Visas have cut down the predictions of revenue for the year due to the slowdown in the revenue. PayPal expects to suffer a 1% drop in the foreign currency-neutral basis. Many private Fintech companies which are relatively new and have been in the market for less than 10 years will be the one facing most difficulties as they have never witnessed the market downturn before thus impacting the customer demand, capital and affecting the employee retention. As per the Rosenblatt report, the flexibility in the business model and the ability to manage the fixed cost will become crucial for the firms to survive in this crisis and attract investors. Firms relying heavily on large marketing expenditures to generate growth will no longer be able to justify weak transaction volumes. The asset quality requirement of the NBFC’s will be greatly impacted as the MSMEs will face a hard time sustaining their business making it difficult for them to repay the loans. They may further require financial assistance to continue their operations. The revenue stream will be largely affected by less or no repayment and a significant drop in the transactions. The RBI guidelines to offer a three months moratorium period on the repayment of loans will only delay the impact.
FinTech firms are likely to undergo a crisis until Q3 with a slow recovery period of around 12-18 months. There will be very limited opportunities available if any for the small FinTech firms. However, post this crisis there will be a major shift in consumer behavior which will open gates of opportunities for the firms to flourish. Digital payments are likely to see a major shift from low volume high-value business to high volume low-value business. With the government urging the citizens to switch to digital payments as a precautionary measure a boom is expected in the digital payments. RBI has also urged customers to use digital banking solutions to contain the spread of the virus. The traditional financial institutions are likely to collaborate with Fintech firms to provide in-house solutions and accelerate their digital transformation strategies. Post Coronavirus crisis there will be larger shifts towards digital solutions for the day to day operations in the financial institutions not only to ease out the stress and retain employees but also to be well equipped for any such crisis in the future. With digital payments showing the most promising growth in the services offered by FinTech, this behavioral change in the society seems to be healthy for it. The digital payments market in India is expected to grow to USD 1T by 2023. Some parts of the FinTech industry like Wealth Management could suffer. With favorable policies FinTech, start-ups will see a favorable growth in collaboration with banks.
Source: EY Global Fintech Adoption Index 2019 With an increase in the moratorium period of 3 months as per the guidelines of RBI the financial institutions are likely to witness an increase in the NPA due to difficulty in the collection and the inability of people to pay the EMI’s. However, PayDay loans are likely to get the least affected owing to the small token size. Amidst this global pandemic, Salary Dost is optimistic about seeing an increase in the number of people applying for Unsecured Loans in the near future. There are several startups that are not able to pay the monthly salary to their employees due to the loss of business in this unforeseen situation. This crisis has increased the demand for Unsecured Loans of small token size in the market. A large percentage of the middle class employed people are looking forward to small loans up to Rs. 20,000 to make ends meet. Microloans of such token size are generally not entertained by Banks or NBFC’s and this is what creates a good opportunity for a company like Salary Dost which provides small loans at easy interest rates.
Salary Dost provides small token size loans to customers at an interest rate of around 3%. It also gives an option of paying the EMI in a small amount as per the convenience of the customers which makes it easy for them to repay the loans by breaking the EMI in small token amount without overburdening themselves. This flexibility in the repayment structure will provide an advantage to the firm in receiving continuous cash flow even in times of crisis in comparison to other firms in the industry. Post this epidemic a slight change in the consumption pattern of the people can be witnessed. There may be a decline in the personal and emergency loans but a rise in the health loans to cover the cost of medical bills. Restructuring the products offered by the financial institutions to suit the needs of the market will not only benefit the consumer in times of crisis but will also result in higher revenue post lockdown. Small token size loans and ease in the processing, as well as the availability of the loans, will be of foremost importance for institutions of such sort to stay ahead of others. Post-Crisis the FinTech firms which will be able to survive the challenging situations will not only raise high in their learning curve but will also draw investor's attention and boost their valuation. A well-prepared organization with an agile business model will be able to adapt quickly to the changing situation of the market and flourish in collaboration with the NBFC’s.