Fintech Lecture 10 : Corona Crisis & Conclusion
Volatility is our friend if we could manage it well, not if we stumbled along the way. The volatility and that financial services really stand in managing and helping the economy to handle risks. Taking, transferring and pricing the risk.
What could be more volatile than the pandemic and the great depression of the century?
We learned so many words to be honest. For example, Lockdown, social distancing, quarantine, zoom fatigue(yes, it’s a thing) and many more. In the age of Fine n dine, we had Quarantine.
The whole world had to stop, to save lives. It was not going really well initially because we didn’t know what we were fighting with. We were aiming in the dark. But time passed, we understood the virus and embrace the change. We changed our habits to save our lives and our dear ones too.
An year back, we were in panic but now we have Vaccines.
Every sector of the market it hit by Corona Virus and more importantly, Lockdown. Everyone is waiting for old normal to back, especially the finance market. GDPs dropped, people are not buying but rather saving. Even if people were buying, it was only essentially. But that’s not how the economy runs.
The economy doesn’t flourish by needs but wants and desires.
Take it market leaders, SMEs, startups or small merchants, everyone took some hit and now recovering. Funding which was going high is weak now. Why not, VCs, angel investors and other actors in this segment are very careful now.
Venture Capital
Within the venture capital space, there have been some reports of investors, advising startups just to focus more on their core business operations, scale back auxiliary functions, and generally have a return to core business.
Whether it’s in fintech or more broadly in the economy, companies that were being funded by the venture capital field generally are not yet cash-flow positive. Some are when they’re at series C or D or even E rounds. But certainly early in their lives, they generally are cash flow negative and of course, the venture field itself is being more cautious, and so funding is slowing now.
Oil Price
As the airline industry got hit by corona, it directly impacted the oil market. So since you can’t just stop producing oil, like most of the valves in the US and across the globe, the way it’s structured, it’s not a switch that you can shut off. Airlines obviously don’t operate with the same capacity they did before, so we don’t use oil. But on the other end, we still produce almost the same amount of oil as before. Oil prices took a major hit, forcing a lot of valves to shut down, probably for good, just because it’s not necessarily possible to reopen smaller valves. One of the biggest companies in energy is Zimmer Partners, with a 25-year track preferred of over 20% average return annually, reported a 55% loss in the first quarter and they are among the most renowned funds in the sector.
Economic Crisis
We’ve already been over the last 3–4 decades digitizing the economies, but not uniformly around the globe. So this accentuates that trend to digitization, towards online commerce and in both of those trends, they were happening already. Corona crisis accelerates some of those trends.
Finance, by its very nature, tends to have crises every 5, 10, 15 years and each time, people will have some conversation that this is the worst crisis in 50 or 100 years.
So it seems like we get the once-in-a-50-year crisis every 5 to 15 years and in your careers, you will probably see five or six more.
Now, God willing, they won’t be driven by a pandemic, and there won’t be millions of people or hundreds of millions of people put out of work through a lockdown to protect ourselves against a virus. But you will see other financial crises along the way.
Businesses
You could be a transaction-based business and have been in great shape in January 2020 and really pretty lousy shape right now. So some areas like retail, travel, events, obviously.
Mobile trading, on the other hand, might be up, the Robinhood numbers and others like them. If you’re an auto insurance tech and people aren’t driving, it might be the other way.
Revolut in Europe, helped a small business fill out their forms, apply for the programs in the US and in Europe. That’s an opportunity to actually build customer relations. Numerous of the fintech startups in the US have raised their hand and said to the Small Business Administration, can we be basically part of the PPP program? I don’t mean receive a forgivable loan but help issue forgivable loans.
As I said earlier that there are businesses hit by COVID-19 and lockdown but there are companies who are trying to deal with this crisis to make sure their business is running and trying to innovate as well.
Q1. What are the gaps in the current financial system?
It might be about UI/UX and as mobile phones came along, as we moved from online banking and online trading to mobile banking and trading that, creates opportunities. Many of those opportunities have already happened. They’re not all done, but many of those opportunities of that transition from bricks and mortar to the internet, to mobile phones, have happened.
But they create opportunities for UI/UX. But it has to address some pain points, do something quicker, cheaper, better. It’s an old saw in terms of strategy. But then we need to have financial viability. At some point in time, you have to be able to build a model where revenues are more than costs.
You still have to live within regulatory constraints and social constraints in terms of there’s normative behavior, and this is a highly regulated field, and for good reason.
We’re dealing with trust, and trust is at the center of finance. We’re also dealing with other people’s money, livelihood, savings and investments. So there’s investor protection, there’s consumer protection, and in terms of alternative data, the basic tenets around the globe that when you extend credit or offer somebody insurance, it should be done fairly and unbiased.
Q2: How do you feel about the market right now, bullish or bearish on fintech?
I think it depends on which hat I have on. If I’m an investor or entrepreneur, the market made me more bullish. Lots of opportunities out there.
If I have my citizen hat on, I think I net out at bearish, not so much on the industry, but more on its impact for me. I’m certainly thrilled at the ability to access different forms of payment and lending. But ultimately, I think the long-term costs in terms of the data these companies will have on me, and the just immense role and control over my life, I net out at bearish.
If I’m the government, I’m probably netting out at bearish as well because this is going to mean a gnarly set of regulations and laws to navigate that means a lot more work for me.
Bullish for those who never had access of strong finance infrastructure and more economic inclusion.
Banks and Startups
I think big finance, will still have banks in 10 and 30 years because there is network economics around balance sheets. Any study of diversification would tell you if you have a balance sheet that has thousands of loans on it rather than a single loan, you can lower the risk just through the diversification of the underwriting and the risk allocation. Also, big finance has data.
Startups often have a little bit of an attitude as try it out. If it breaks some rules somewhere, clean it up. Work in good faith with the regulators and because they’re smaller, often regulators around the globe have decided to give a little forbearance. There’s something called regulatory sandboxes to promote innovation. If they were larger, there would be more systemic and customer-facing problems.
For example, Fiat currency is centralized and regulated by government which insures a wide acceptance. But if private companies start cryptocurrencies which will be a decentralized currency, will get enough acceptance by public or not ?
I think startups are going to have to focus, and are already focusing on what we call runway, their burn rates, their cash, their revenue, their adoption and so forth. Challenging times also present opportunities for all of us, for you as individuals, and for these companies as well.
COVID-19 is not only testing the resilience of the human body but of Humankind as a whole and its ecosystem. If we survive this, we’ll become strong and create value for the next generation but yes, it’ll take some time. We just have to maintain consistency, have some patience and trust the process.
As it’s been said, NO PAIN NO GAIN.
Lecture 9 — Insurance — — — — — — — Lecture 1- Introduction
