By David Chan on Thursday 30 April 2020
Monitor, adapt and do right by your customers and employees, writes David Chan CEO of Monedo.
The coronavirus pandemic is spooking fintech investors and alternative lending companies alike.
When the crisis began to unfold, the media was rightly focused on the effect on the health of the population in countries where the disease was spreading. But now the focus has shifted to the economic impact of the government lockdown policies. It is now clear we are in a global recession, caused by a massive drop in consumer spending, driving rapid employment losses.
Similar to the Global Financial Crisis (GFC) of 2007-2008, we have seen an impact on available capital and debt for companies. Funding in the fintech sector has dropped to a three-year low, according to analyst firms CB Insights and Forrester Research. Many alternative lenders are also facing a rise in bad debts, and are battening down the hatches and withdrawing access to lending, just as consumers and businesses need it the most.
While ducking for cover might work for some alternative lenders, it will show what some have suspected, lack of a strategy to make the business model resilient through the economic cycle.
In recent years, the fintech market has been characterised by companies looking to stand out from the crowd, prioritising growth and customer acquisition over profitability. As the lockdown dramatically changes consumer spending and borrowing habits, many fintechs with high “cash burn” are likely to see cashflows run dry.
From my 20+ years of working in financial services, working as a Risk Officer and a CEO, it’s clear that fintechs need to focus on managing cash flow and profitability as a matter of urgency. In an economic downturn, cash is king.
Investors want to see management teams demonstrate leadership, adaptability, and risk management expertise during a crisis. Here’s a few thoughts on how fintech’s can do this and emerge stronger from the storm:
Rapidly Monitor Your Company Data For Change
One of the biggest drawbacks for traditional banks is the time it takes to make and execute decisions. This is due to bureaucratic processes, and a lack of access to real-time customer and business data to inform you that conditions have changed.
It’s different for fintechs. Data and superfast decision-making technology are our lifeblood. So, make use of the data to give yourself a competitive advantage during this recession.
If you haven’t already, get a tight grip on the key data you need to monitor and react to changes. In the lending market this could be payment rates, contact rates or promises-to-pay from your customers. Also listen to qualitative indicators, such as what your customers are telling your customer service agents. Your customers will tell you when things are changing.
Rather than saying: “I can’t assess the risk, so I’m not going to lend,” make sure you know how to assess your key customer metrics and other data to detect changes in their behaviour. This knowledge is vital to making smart business decisions.
By combining knowledge and experience with the speed and agility of a fintech, there’s a clear opportunity to outperform traditional banks.
Be prepared: Have a Business Continuity Plan and Stress Test
A few months into the pandemic and most companies will already have contingency plans in place for the current lockdown. But it’s also vital to think further out and consider the ramifications of a recession. How strong is your supply chain? What external partners do you rely on for core services? Do you have back-up plans in place if critical systems fall over? It’s easier and cheaper to put these plans in place now rather than when a backup service is at a premium. Document your plan on what you will do if the performance of your business deteriorates. Don’t wait for it to happen first!
Do Right by Customers and Employees and Build Trust
During the GFC, financial firms were a big part of the problem. This time around it’s different. The financial services market, with fintechs at the heart, can play a key role in helping those worse off.
Companies should always treat their employees and customers with consideration and respect, especially during a crisis. Actions during the tough times will leave a lasting impression. Companies that act honourably will be those that will be trusted and fare well in the future.
If you’re asking your employees to take a pay cut, founders and CEOs should make sure they lead by example. Also do what you can to help customers during these tough times. Be prepared when they ask you for a way to manage repayments during this time. They will remember this and remain loyal when the tides turn.
Cash Conservation is a priority
We don’t know for certain where “the bottom” of this recession will be. And we’re already seeing a liquidity freeze as investors focus on defensive investments. Until there’s light at the end of the tunnel, cash conservation should be a top priority. Review all your financial outgoings, stop non-essential spend, and look for opportunities to renegotiate contracts where you can.
It’s also worth remembering that there will be distressed businesses out there. For some companies this will be a good time to look in to merging with or acquiring other companies, whether that’s to move into new markets, gain talent or build capability. But you need to do your best to make sure you are “acquisition ready,” so that you aren’t trying to fix other things while executing a merger.
Keep On Top Of Regulation
Governments were slow to move during the 2008 recession and were criticised for it. But, this time around the rate of regulatory and legislative change is astounding. Politicians are looking to calm the markets by taking decisive action… often before the detail is available on how to implement it. Keeping on top of this will not only ensure you’re abiding by the new rules, but also understanding what potential financial and employment packages are available, should you need them.
Remember: This will end! We will get through this!
The Covid-19 pandemic is unlike anything I’ve ever seen in my lifetime. We’re losing loved ones, it’s bringing severe financial hardship and from a business perspective, it’s clear some companies will cease trading.
But remember: while it may seem like a distant possibility right now, this crisis will end. The distrust of traditional banks caused by the 2008 financial crisis, and unemployed bankers turning their knowledge to a better use, helped birth the fintech market we know today.
So, be prepared for growth again. If something good can come out of this time of corporate soul searching and reflection, it’s green shoots, new opportunities and new innovation for fintech, and the world at large.
If China, with around a fifth of the world’s population, can start getting things back under control then there’s some encouragement for the rest of us. Snippets of positive news and new information will help investors regain confidence, and this is the key to unlocking investment again. I think the worst-case scenario is that this recession will last a maximum of 18 months. Fintechs that show they have a solid business model, can manage risk and adapt, will be the first in line to receive investment again.
David Chan is CEO of Monedo. The views and opinions expressed are not necessarily those of AltFi.