Since the beginning of 2020, we have been experiencing a new economic reality. The effects of the Covid-19 pandemic are affecting the lives of most people around the world and sectors of the economy, including fintech.

The current situation may be an opportunity for dynamic development for many fintechs. In many cases, efficient digitization has become a necessity, and partnership with fintechs will be an effective way to achieve it. Shortly we can expect an increase in the number of new projects, established partnerships with banks or other financial institutions in the areas of online identity verification, online payments, data analysis or other flexible solutions. There is the other side of this coin too. The operating model “fake it till you make it” probably will not work anymore. Until recently, numerous startups, including fintechs, could focus on the development of services/products and obtain further rounds of financing based on promises of future profits. Now, however, the stream of investment in many cases may get stopped. Operating costs will have to be cut, and at the end of the day, what would matter is the ability to provide valuable services and profit of it. The market can painfully verify who can meet these conditions.

‘May you live in interesting times’ lenders

The lendtech industry is an example where the strong impact of a pandemic can be clearly observed. Over the past two months, we have observed a significant constant decrease in the number of granted loans, some entities have suspended their activities or even withdrawn from the market.

The reason is the pandemic crisis, but it’s worth breaking it down into the prime factors. First of all, the legal environment has changed – the Covid-19 special act changed the basic rules of the industry’s functioning. But not in the regulation itself lies the main reason for the slowdown in the industry. The main factor is the capital outflow. It is natural that in the event of an uncertain market situation, investors are much more cautious when making investment decisions or just cut cash inflow to be safe. What’s more, investors’ confidence is not built by constant uncertainty. Instability in the regulatory environment and numerous, usually unexpected, changes in this area are a strong base for a limited trust. If we connect this with lockdown and limited demand the conclusions are obvious.

However, this should not be associated with predictions proposing the collapse of the industry, but the fact is that the market will have to reorganize. What we can probably observe in a short time is market consolidation. Moreover, current market practices need to be changed, e.g. inflated broker cost will be lowered and first free loans have to disappear. Only the most competitive entities that will be able to remodel their way of operation, adapt to the new reality and rebuild investors’ trust will remain on the market.

When ‘to be, or not to be’ means ‘online’

Some problems will be solved by technology. For many offline players moving to online channels will mean “to be, or not to be”. The approach to credit risk assessment will also change. It will be crucial to work with the most up-to-date data and on this base track and measure changes in critical areas describing creditworthiness. In the era of open banking, when we can get access to real-time data from users’ bank accounts, traditional credit bureaus with data update delay may be less useful for risk assessment.

After the entry into force reorganization steps, stabilization in the financing issues area, the market will begin to return to effective operation. The first effects can be seen already in June – flexible companies will not only find themselves in the new reality but may even strengthen their position.

The Covid-19 epidemic forces us to act – for some it will be a threat, while for others an opportunity. Flexibility and efficient response to changes, supported by new technologies, seems to be the best response to a new economic reality.

Michał Łukasik is the CEO of Kontomatik – a Warsaw-based fintech that allows financial institutions to access customers’ banking activity. Extracted data can be used to identify a customer (KYC) online, build broader financial behavior profiles, perform a detailed credit scoring, and customer segmentation in a more precise way.