Fintech for the social-distancing world

Financial technologies continue to grow despite a worldwide pandemic

By Justin Walker

Financial technology—commonly referred to as fintech—has revolutionized the way financial services are delivered. From crowdfunding to budgeting apps, technological advancements are changing the way companies and consumers operate.

Recently, fintech companies have been adapting more than ever to the ever-changing landscape brought on by the COVID-19 pandemic, Qinxi Wu, assistant professor of Finance at Baylor University’s Hankamer School of Business, said. Consumer habits have shifted due to lockdowns and social distancing measures, changing the way certain technologies are being used and optimizing others.

“The fintech industry is booming, but not every technology is growing at the same level,” Wu said. “Currently, blockchain is outstanding. Online payment technologies are also doing really well right now. But there are other technologies that are still emerging but are not as mature as the others.”

Blockchain has become an important technology for companies and consumers, Wu said. According to Euromoney Learning, blockchain is an information recording system that decreases the likelihood of the system being changed, hacked or cheated. The system is decentralized with each transaction being timestamped and stored on multiple devices. Therefore, it is easier to identify hacked or changed information based on discrepancies across the devices, Wu said.

The technology is focused on security, she said, and is being utilized in the supply chain to help companies protect their products and build trust with consumers during the pandemic.

“It is hard to think of the relation between supply chain and blockchain but it is happening,” she said. “Take food for example. You want to make sure that food is fresh enough for consumers, but no one can guarantee what occurred during the process of transferring the product from the supplier to the customer.”

Using blockchain allows companies to record every step of the food’s journey from farm to checkout, Wu said. This technology removes the need for human auditing during the process, as the information cannot be changed within the entire system.

Blockchain is one of the few technologies Wu sees as a tool against COVID as well. Soon after the pandemic first hit the United States, reports of large outbreaks within meatpacking facilities across the country began. This raised concerns among many consumers about the security of their food, Wu said.

“Using blockchain, we can easily track where the food is coming from, whether that facility is clean and if they are following the right protective protocols,” she said.

This isn’t the only technology that has seen a spike during COVID. Online payment technologies have been influenced by the pandemic, Wu said, with many consumers moving away from in-person transactions to avoid human interaction when they can and relying heavily on e-commerce shopping.

Businesses, especially local suppliers, have also increased their focus to online sales as safety regulations impact their business models. Creating an easy way for customers to purchase their products is more important than ever, Wu said.

This is where online payment solutions companies such as PayPal Holdings, Inc. and Stripe are seeing a boom in business, Wu said. PayPal announced an increase of more than 21 million new users during their June quarter, while others in the industry are also reporting significant rises in transactions.

It is hard to forecast whether this trend will continue or not, but it is possible COVID-19 has shifted consumer behaviors for the long-term.

“Once the behavior of the customer changes, it takes time to change back,” Wu said. “Previously, consumers may not have been familiar with e-commerce and online payments, but now they recognize the convenience.”

While not surprised by the success these companies have seen, Wu believes there are still challenges ahead for companies working with online payment technologies.

“One thing they potentially face is a rise in competition,” she said. “Because the payment technology is not very difficult, there could be other startups that want to join this sector and share the profits.”

This opens the door for innovation, Wu said. Existing companies should be looking at how they can advance their current technologies and lower their costs to make sure they stay atop.

Insurtech, which is designed to maximize savings and efficiency within the current insurance industry model, has also seen significant virtual and digital advancements in technology, Haofeng Yu, an actuary with 12 years of experience in the insurance industry, said. Although he began to notice this trend in the years prior to COVID-19, the pandemic certainly sped up the process of utilizing the technologies.

“COVID-19 was originally seen as a hindrance to the insurance industry but it is now seen as an accelerator of innovation,” Yu said. “It has forced us to shift how we do things and allowed us to be more efficient.”

These innovations represent a golden opportunity for digital growth, Yu said, especially in the areas of distribution and underwriting. Typically, agents or brokers would interact with policyholders directly in a face-to-face setting. That has changed with social distancing measures in place and many of these meetings now take place in a virtual setting.

The underwriting process has also been adjusted to meet COVID restrictions. In the past, certain insurance policies would require a visit with a paramedic team to discuss the holder’s health history and take samples.

“This is not going to happen during the pandemic,” Yu said.

But over the past five years, accelerated underwriting has become a hot term in the industry. In this process, underwriters use more data-driven technologies to classify and group applicants into risk categories. Additional information collected during the application process negates the need for visits with paramedic teams or medical records from primary physicians, greatly speeding up the process.

There are privacy concerns when it comes to the use of these new technologies but Yu believes the insurance industry in the United States is one of the most strictly regulated entities in the world. In most countries, there is just one regulatory body for insurance companies. In the US, there are hundreds, Yu joked.

Privacy is not an issue for investment companies utilizing robo-advisor technologies, Wu said. Robo-advisors are a form of artificial intelligence (AI) that provides financial advice and investment management with little to no human interaction. This technology has altered the organizational structure of some investment firms, Wu said, and the economic impact of COVID may cause some tradeoffs.

“On one hand, many people have lost their jobs during the pandemic. They have lost that income and they likely lost the money they would have invested and they will not need the robo-advisor,” Wu said. “On the other hand, companies can use the robo-advisor to lower costs because they do not have to hire human advisors.”

The COVID-19 pandemic has caused many changes in the way the world operates and that rings true for many financial technologies as well. Trends in online payments, investments and insurance continue to show growth for fintech in these areas and Wu does not see that changing anytime soon. There is room for these technologies to operate as efficiently as possible even after the lockdowns and masks are lifted.