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perfectirishgifts · 4 years ago

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Will A COVID-19 Vaccine Inoculate FinTech Startups Or Lead To Their Demise?

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Will A COVID-19 Vaccine Inoculate FinTech Startups Or Lead To Their Demise?

Despite the global pandemic, substantial venture capital investments fueled a massive wave of challenger bank startups in 2020. Challenger banks, which are digital banking startups, have gained traction in the last few years by offering consumers a digital banking experience through mobile apps, APIs, software integrations, and much more. Although it may seem counterintuitive given the economic uncertainty, 2020 was a banner year for such startup businesses. The big question now is whether they will continue to thrive.

Fintech electronic banking mobile network technology

During the early stages of the pandemic, startup doom and gloom captured headlines. Uncertainty drove startups into survival mode—many laid off employees, terminated leases and prepared to cut as many of their costs as possible. Yet, despite the gloomy predictions, the worst never came. In fact, the opposite seems to have happened, at least for FinTech startups.

Despite the raging pandemic, FinTech startups are raising more funds than ever before at very high valuations, and even getting overwhelmed with new funding offers from investors that are fighting each other to give the startups money. For example, Robinhood, the stock trading app, pulled in $1.25 billion in 2020, reaching an $11.7 billion valuation. Likewise, in 2020, neobanks such as Chime, Varo, MoneyLion and others gained millions of new users and massive amounts of money in funding, both of which highly appeal to investors. In the third quarter of 2020, startups raised $36.5 billion in funding, a 30 percent increase from the prior year.

The FinTech startup investing rush is powered by more than a rising demand for digital services. It is also fueled by low interest rates, which are driving investors into ever-riskier assets as they seek higher returns, as is apparent from Bitcoin’s recent new peak. Moreover, the booming stock market positively impacts startups’ IPOs, including Fintech IPOs. Finally, big tech acquisitions continue to motivate investors seeking healthy returns to focus on smaller tech companies.

Investing in FinTech during the pandemic has paid off. Most FinTech companies have prospered not only despite the pandemic, but because of the pandemic.

A man in a face mask using smartphone joyfully while shopping.

There are several logical reasons for this seemingly counterintuitive phenomenon. First, the shelter in place mandates forced both the markets and consumers to adopt new technologies within several months, when such adoption normally takes many years. Second, with traditional banks’ branches being closed, and people encouraged to stay at home, FinTech services became more than a convenience, they became a necessity for banking needs. Third, as in any time of economic uncertainty, consumers and business became more cost-conscious. FinTech startups were able to leverage their technological innovations to offer their users cheaper services with improved, tailor-made, customer experiences. Fourth, the pandemic had a significantly greater impact on the operations of brick-and-mortar banks than it did on their digital rivals. That meant that traditional banks—who typically move more slowly than startups even in a non-pandemic environment—were at an even bigger disadvantage than usual in terms of turn-around time. In a rapidly-developing global pandemic, consumers and small business sought urgent help and immediate services. Thus, it was only natural for them to turn to FinTech startups to process loans, payments, transactions and even data when their regular banks told them to wait in line. Even the Federal government eventually relied on FinTech companies to join the banks in helping to quickly distribute some CARES Act PPP funds to businesses in need. Finally, as systemic racism was front of mind for almost everyone in the United States in the wake of the George Floyd tragedy, FinTech companies proved themselves to be faster (and better) at lending to minorities than traditional banks.

Inclusion And Multi Colored Pawns

But what will happen after the pandemic ends? Can the market support so many FinTech startups?

In answering this question, we must first be reminded that FinTech startups began to rise well before the onset of the 2020 pandemic. They gained traction in the years following the 2008 financial crisis (and continue to gain traction) by focusing on, and serving the needs of, specific niche clientele. For instance, a startup named Daylight focuses on LGBTQ customers, and another named Step focuses on teens. FinTech startups enhance financial inclusion, through catering to less-serviced groups like immigrants, gig workers, or college students, and through helping bring unbanked and underbanked populations under the financial services umbrella. As a result, they are likely here to stay, particularly in a Biden administration where financial inclusion is a priority, as it should be.

FinTech startups also gained traction on traditional banks through their focus on AI and the automation of financial services. Not being subject to all the traditional banking regulations, and using advanced technology tools, FinTech startups offered customers various automated services including online investing, early access to wages, tracking budget apps, and even automated credit-building tools for low fees. Consumers are currently accustomed to those services and are unlikely to willingly part with services that they now take for granted.

But to survive, FinTech startups cannot rest on their laurels. They must continue to innovate because traditional banks have started adopting many of the technologies as well as the innovative spirit that characterizes FinTech startups. Some banks have launched their own digital banks, offer more custom-tailor services, and started reaching out to niche groups too.

Digital Piggy Bank

Moreover, technological competition might not be the only thing causing a bumpy ride for FinTech startups once the pandemic ends.

First, although the pandemic did influence more consumers to use digital services and rely on FinTech apps, there is a growing gap between what customers believe they know about the startups’ methods of gathering and using consumers’ financial data and what actually happens. And a reckoning might soon be in order regarding how consumer financial data is collected and shared. As I have written about (see Show Me (the Data About) the Money!), consumers want to use FinTech apps to get cheaper, faster, effective and custom-tailored services, but surveys show that they also want to keep their information private and secure, and to control how their data is accessed and used.

In October 2020, the CFPB announced that it is looking into regulating consumer financial data sharing under Section 1033 of the Dodd Frank Act. With a new administration that is more open to regulatory requirements, it is clear that the regulatory landscape will change for FinTech startups, but how this will impact their liability exposure, operations, and even appeal in the eyes of investors, is yet to be seen.

Second, customers still probably trust Fintech startups less than they trust the incumbent banks. So although some FinTech startups will likely continue to be successful in providing an online replacement to community banks by targeting specific demographics with high value products, others are currently overvalued because they have only a temporary appeal to specific niche groups, and could find themselves in trouble if trust issues take hold of those groups.

Third, additional financial regulation might be coming to Fintech companies. Although the currently less strictly regulated operational framework of FinTech startups allows them to quickly put innovation into action, and also facilitates faster services enabling them to quickly process various types of transactions and data, this regulatory arbitrage can have consequences. For example, in the case of distributing the CARES Act PPP funds, for instance, PPP Scammers made FinTech companies their lenders of choice, taking advantage of how companies such as BlueVine, Kabbage, Square SQ and PayPal tried to move quickly and not limit their activity to their existing ecosystem.

The CARES Act PPP loans

Finally, tech giants such as Amazon AMZN , Google GOOG and Facebook can and will present competition to both traditional banks and FinTech startups. For now, we have yet to fully realize how powerful the tech giants will be as financial service providers, but with their omnipotent tech abilities, seemingly infinite funds, and scale of operations, they will be hard to beat.

Google recently hinted about its plans to become a bigger financial service when several weeks ago it announced major advancements in functionality for its Google Pay GOOG digital wallet, and revealed information about its partnership expansion with banks and credit unions, which will start operating in 2021 under the name ‘Plex By Google Pay.’ This move reveals some of Google’s near-term interests in the financial services business, and is a good indicator of what we can expect from the tech giants.

Will the entry of BigTech into the space help FinTech startups’ continuance growth? Probably not. The tech giants’ size and business models reduce innovation as they create a chilling effect on funding of small startups. Why? Because investors are aware of the tech giants’ potential ability to outman, out-fund, and immediately compete with any new innovative player, and are wary of that. So, if and when the tech giants start seriously competing in the financial industry, FinTech startups will have a harder time raising those funds. But like the other FinTech companies, BigTech is likely to face additional regulatory scrutiny in years to come. And the recent lawsuits against Google and Facebook by the DOJ and the FTC in October and December 2020 indicate that regulators may not look kindly on further acquisitions or expansion of BigTech.

So where will FinTech startups be at the end of the pandemic? Probably larger, better funded, and more ubiquitous. But if FinTech is to continue its meteoric rise, it best prepare for a bumpy road ahead, as only the strong and adaptive will survive.

More from Fintech in Perfectirishgifts

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vegas-glitz · 5 years ago

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Trump Wins Trade War As Global Markets Plummet

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It is early July, well before this article goes online, yet the landscape is pretty clear from where I stand. The US and China both raised tariffs on $ 34 billion worth of goods Friday, July 6. This did not deter the S&P 500 from continuing its charge up to the January 26 all-time high. To boot, unemployment is historically low and the Fed is set to raise rates twice before the year ends - all this amidst a stealth discretionary spending recession.

So, how about that trade war? Let's recap. Most folks would agree that the free trade of goods would be best for all concerned. Goods would be less expensive and those that could not compete on price would do so on quality, leading to a beneficial improvement of goods. All is well and good until protectionism and nationalism rear their ugly heads. Some nations have goods that find it difficult to compete on the basis of price and / or quality. Globally, world leaders of such nations are unapologetic in pursuing their nation's interests at the expense of others. In trying to avoid the image of the ugly American, we have often placed ourselves at a disadvantage. Nowhere is this more evident than in trade were our trading partners often have a clear advantage.

US Census Data shows that we have a trade deficit with every trading region except for South and Central America and Australia / Oceania. At only $ 33.14 and $ 14.38 billion, respectively, the last four years and a combined trade of $ 310.44 billion this pales in comparison with the deficit for the rest of the world, - $ 844.66 billion, whose combined trade is $ 3.578 trillion. Below are 2014-2017 averages for most of the world in billions: Canada: - $ 20.01 European Union: - $ 149.61 Asia: - $ 547.49 Africa: - $ 2.60

China is a case in point. Aware of the huge financial benefit that comes with their 1.38 billion consumers, they extract huge concessions from their trading partners, including the US When they have not barred certain US business sectors, they restrict or regulate business, place tariffs on goods, or coerce intellectual property release. Note this goes one way; there is no intellectual property sharing.

These noncompetitive business practices are not fair, but until now, US companies have accepted them without much push back as the cost of doing business there. That is until Trump. What Chinese leaders need to realize is that they are not in a good bargaining position and the longer they hold out the more harm will come to their economy.

Here is why. Leaders of the government-run economy are well aware of their history and realize the huge Chinese population is not going to put up with poor conditions forever. To keep discontent at bay, they have a policy of inflated economic growth. According to Trading Economics, they have averaged 11.7% GDP growth for the past 10 years but chinks in their armor are showing. From the 2010-2011 heyday, where GDP grew 19% and 24%, growth has dropped steadily and sometimes precipitously. It was 5.56% and 1.14% in 2015 and 2016, respectively. Little wonder that worried central government figures have made a big push since then for increasing their global exports, including those to the US, resulting in a resumption of GDP growth to 9.35% in 2017. The prospect of increased tariffs, which would make their goods less competitive, runs afoul of those plans. China's economy is struggling and their stock market is testament to that. The smaller Shenzhen composite moved into bear market territory in February and the Shanghai composite closed in bear territory on Tuesday, June 27. The indexes went as low as -26.5% and -25.0 on July 5 but have recently recovered to -22.5 and -21.2 %, respectively, as global markets have climbed in tandem with US markets. That is still in bear market territory, which will curtail much need foreign investment. Meanwhile, US GDP is growing steadily, the economy seems to be healthy, and the stock market is nearing new heights. Trump can ratchet up the tariff game longer knowing he has more economic wiggle room. Moreover, he can inflict more pain to the Chinese economy than they can to ours.

To see why, let's look at the trade numbers. The trade deficit with China has averaged - $ 358.68 billion the last four years in a rising trend. While US exports have vacillated between $ 110-129 billion since 2012, Chinese imports have steadily increased from $ 315 to 375 billion. Last year the deficit was - $ 375.58 billion, of which $ 129.89 billion were US exports to China and $ 505.47 billion were US Chinese imports. Not only is trade unbalanced, so are tariffs. Prior to this year, US tariffs on Chinese agricultural and non-agricultural goods were 2.5% and 2.9%, respectively, while Chinese tariffs on US goods were 9.7% and 5% for the same. True, these had been going down from a 14.1% average prior to 2001 when China joined the World Trade Organization but that was part of the price and tariffs are much higher for some industries.

Below are the top 10 US exports to China in 2017 according to the International Trade Center Trade Map http://www.intracen.org/marketanalysis : Aircraft, spacecraft - $ 16.3 billion Vehicles - $ 13.2 billion Oil Seed - $ 13 billion Machinery - $ 12.9 billion Electronic equipment - $ 12.1 billion Medical, technical equipment - $ 8.8 billion Mineral fuels including oil - $ 8.6 billion Plastics - $ 5.7 billion Woodpulp - $ 3.4 billion Wood - $ 3.2 billion Total - $ 97.7 billion

Together they account for 74.8% of all exports that year. Note that except for oil...seed, mostly soybeans, the rest are non-agricultural products. But their tariffs are not the same and depend on how strategic the product is. For example, Chinese cars cannot compete with American ones so the latter have duties ranging between 21% and 30%. Compare that to a maximum of 2.5% for Chinese car imports to the US

Therein lies the rub. The Chinese can only raise imports so much more on these goods, some of which have few suppliers outside the US As a result, some of the announced tariff hikes are empty rhetoric with few teeth. Just as an example, China announced 25% tariffs on aircraft, but not all aircraft - just those with an "empty weight" of 15,000 to 45,000 kilograms. While it may seem like China is taking aim at Boeing, it turns out the stipulations only target older 737's being phased out of production, while not touching the larger models comprising the bulk of Boeing's trade. China desperately needs to grow their airline industry. It is estimated 7000 new planes will be needed in the next 20 years. With Airbus working at near full capacity, there is no alternative but to turn to Boeing for the remainder.

The same goes for soybeans, the bulk of Chinese agricultural imports. China is the world's top pork market and they need soybeans for feed. It turns out Brazil and the US are the top two global soybean suppliers. Brazil has been cranking up production for years and now constitutes 57% of Chinese soybean imports. This came mostly at the expense of the US, but Brazil does not have the capacity to make up for the remaining 31% in US soybean exports to China. As a result, the planned 25% increase in tariffs will hurt Chinese pork farmers directly.

Ultimately, the sheer size of the trade imbalance will play in Trump's favor. With $ 500 billion dollars of goods at risk for China vs. only $ 130 billion for the US, China's fate is sealed. That is, provided Trump is persistent in raising the bar while keeping disgruntled American businessmen at bay. Historians may recall a similar unrelenting raising of the bar eventually caused Russia to capitulate during Reagan's tenure. It does not help China that it is already running up against its tariff limit.

We are already seeing that endgame play out. Just four days after both countries raised taxes equilaterally, Trump announced 10% tariffs on $ 200 billion in Chinese goods. There was no equilateral retaliation China could muster after the late Tuesday, July 10 announcement. Instead, China announced it would hit back in other ways - probably by selling US Treasuries, which would flood the medium-and long-term bond market causing bond prices to fall and yields to rise.

Regarding the latter, Trump's victory will come at a cost. Bolstered by his success with China, Trump will continue to pursue his trade normalization agenda with other trade partners. Although trade is fairly balanced with the UK, the European Union had a $ 173.58 billion trade advantage last year on a $ 839 billion trade. Not only that, but the EU has made it a habit to go after American tech giants it cannot compete with. Think Qualcomm in 2018, Google in 2017, Facebook in 2017, Apple in 2016, and Microsoft in 2013. Japan is on the same boat. Our deficit with Japan averaged - $ 68.59 billion from 2014-2017 and stood last year at - $ 68.88 billion on a $ 204 billion trade. Although government regulations have eased under Prime Minister Abe, Japan has a culture of impeding foreign investment, particularly in the financial sector. Moreover, they have high tariffs on dairy (up to 40%) and meat (38.5% on beef) products, which account for $ 6.1 billion of US exports to the country. Trump has made it clear they are also in play and they have fired salvos in return.

Given the posturing by all parties involved, tariffs will be higher going forward than they were before. This will raise the price of US goods abroad, making them less competitive. This will, in turn, impact earnings for our larger, international firms. Our stock market may be flirting with highs right now, but I believe this will be the catalyst to the market downturn as Investors, looking ahead, bid down these stocks. Moreover, tariffs on imports will inevitably lead to inflation. We are already at the Fed's 2% comfort level so any visibility on higher inflation will incite the Fed to head it off by hiking fed funds rates beyond their current path. Their incentive to do so will be bolstered if China retaliates with a Treasury selling program, as higher 10-year Treasury rates relieve the Fed of yield curve inversion worries.

A stock market downturn will reverse the wealth effect we have been seeing recently on our economy and combined with export losses, this undoubtedly will lead to job losses and higher unemployment. On top of all that, the stealth discretionary recession we have been experiencing, will make itself clearly evident as US peak spender populations continue to decline all the way until 2023. This is not an incident unique to the US World population growth increased from 1946 to 1968, peaking at 2.09% per year that year, coinciding with the bulk of our Baby Boomer bulge. Since then it has been steadily decreasing until it reached 1.09% at the beginning of this year. Peak spenders are those 46-50 years old and if we take 1968 as the mid-point of their population zenith, they topped out in 2016. That is a main reason populous nations, like China, have been concerned with slowing consumerism the past couple of years. The upshot is we will see a global drop in discretionary spending for at least the next five years. This will result in an accelerated global economic downturn for the next five years and plummeting global stock markets for the next few years.

Source by Karl De Jesus

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