Finance The Pandemic

How COVID Did, and Didn’t, Change Fintech

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

The debut issue of FIN discussed fintech’s “COVID accelerant”—that is, the idea that the global pandemic forced financial institutions to move forward rapidly with contact-free methods of acquiring customers and managing transactions. Whether that meant breakneck growth for fintech standalones like PayPal, or fintech startups providing services to traditional banks, you could feel the acceleration throughout the sector. A survey issued this week (from the Cambridge Centre for Alternative Finance, World Bank Group, and World Economic Forum) provides a comprehensive window onto that global phenomenon. The economic effects of COVID lockdowns have been favorable for fintech firms around the globe, with some notable exceptions around lending (which makes sense—people who lost their jobs during economic hardship find it harder to borrow or repay loans).

The graph below captures the global market impact: transactions, new customers, and investment were all up in the first half of 2020 compared to 2019—but so were defaults and late repayments.

Given that lockdowns were the prime mover in increased fintech activity, it was perhaps predictable that the survey found that the more stringent the market’s lockdown, the greater the increase in fintech transactions. While these patterns held true for all regions, growth was highest in the Middle East/North Africa (MENA) region. That could be a statistical blip, since MENA-based firms make up only 4% of the survey’s respondents, and a mere three countries—United Arab Emirates, Egypt, and Israel—dominate the MENA responses. Even so, the numbers are striking: MENA transaction volumes in digital payments were up 51% in the first half of 2020, and in digital banking volumes were up 66%. In general, fintech growth in emerging markets outpaced growth in more developed markets such as Asia and Europe.

One final finding of interest, and not directly related to COVID: the UK is the undisputed fintech leader in Europe (and, by some measures, the world); the years of anxiety around Brexit seem not to have altered that position, contrary to what many feared. But one aspect of the British fintech market is a little surprising: equity crowdfunding has cooled off considerably. In 2012, equity crowdfunding represented 0.69% of all early stage investment in the UK. By 2016, that share had ballooned to an astonishing 17.37%; no other large market has a share anything like that. But it has since fallen, and in 2019 was down to 11.29%. In that same time period, the amount of seed and venture capital funding in the UK startup market has doubled. That trend of VC funds displacing crowdfunding seems likely to continue, and will no doubt affect the kinds of fintech firms that get funded.

Crypto Crossroads

Tyler Cowen is a thinker always worth consideration, even if one (frequently) disagrees with him. (Creative Destruction is a great book; The Great Stagnation is debatable but an engaging read; Big Business: A Love Letter is superficial and skippable.) He published a Bloomberg Opinion piece this week that frames the future of cryptocurrency simply and thoughtfully. Cowen observes that cryptocurrency today stands in the middle of a tug-of-war between the fringe and the mainstream; each camp has priorities that are not only different, but mutually exclusive.

The quality that has attracted so many Bitcoin investors, for example, is the potential to both store money and make profit—but this makes it a poor candidate as the basis for a genuine, stable monetary system. “Crypto assets can be either useful hedges, or useful forms of payment — but not easily both,” Cowen writes. Moreover, central banks and other traditional outlets are taking steps to copy what’s useful about cryptocurrencies: “It is not obvious that crypto will be the market winner once more mainstream institutions learn some lessons from the success of crypto.” FIN made the same argument back in November: “A modestly successful development of digital central bank currencies might well split the cybercurrency market into at least two sectors: One that is largely speculative and also favored by people trying to avoid authorities and value debasement (Bitcoin, Ethereum, etc.), and a second that is designed more for consumer and institutional use.”

Cowen doesn’t cite any specific research, but his argument is consistent with the findings of this working paper. The authors studied three major cryptocurrencies and found that changes in their value almost never corresponded to things like fiscal or monetary policy, or movements in the value of major global currencies or other asset classes (notably precious metals). Rather, they tend to move according to momentum and investor sentiment. To Cowen’s point, that may be fine for an individual investor with a speculative thirst, but it’s not what authorities look for to build a monetary system on.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

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