|With the coronavirus now having infected over 700,000 people worldwide, banking apps across the world have recorded strong upticks in usage. Rizal Commercial Banking Corp. in the Philippines has seen more than the double the usual registrations for its online banking service. Forbes notes that Coronavirus has driven a massive 72% rise in the use of fintech apps deployed by Swiss-based deVere Group in Europe. One gold-purchasing app, Glint Pay, reported a monumental 718% increase in its traffic last week.
Recent data from financial software provider FIS found that mobile wallets could make up 38% of e-commerce spending by 2023, surpassing credit card and credit card use. Additionally, digital wallet use in retail stores is expected to reach 10% by 2023 and U.S. consumers spent $944 billion in 2019 online and $9.4 trillion inside stores.
Dirty Dollars Could Fall Out of Favor
The use of cash might be the common activity most permanently impacted by the Coronavirus outbreak. While most people did not think twice about the 26,000 types of bacteria present on the average banknote, along with whatever viruses it could be carrying as well, that’s likely to change as people around the world become more and more aware of what could be living on the things they touch. The Federal Reserve has taken the threat of currency-borne Coronavirus that they delayed processing of Dollars that had been repatriated from Asia earlier this month.
South Korea’s central bank went as far as to take all banknotes out of circulation for two weeks — and burn some — to reduce the spread of the virus, according to Reuters. That followed China’s massive initiative around deep cleaning potentially infected cash with ultraviolet light and high temperatures, and in some cases, destroying it. The treated cash comes from high-risk infection areas, such as hospitals. However, this was less of a problem for China than many other places as more than 80% of consumers in the country used mobile payments last year, according to management consultancy Bain.
TechCrunch notes that startups in Africa are currently implementing measures to shift a greater volume of payment transactions toward mobile money as well. Kenya’s largest telecom, Safaricom, implemented a fee-waiver on East Africa’s leading mobile-money product, M-Pesa, to reduce the physical exchange of currency in response to COVID-19. The company announced that all person-to-person (P2P) transactions under 1,000 Kenyan Schillings (≈ $10) would be free for three months. Like China, Kenya has a very high rate of mobile-money adoption in the world. Across Kenya’s population of 53 million, M-Pesa has 20.5 million customers (more than a third of the country) and a network of 176,000 agents.
While we are still in the early days of mobile payments, accounting for just 2% of U.S. in-store sales in 2019, previous economic and cultural disruptions have demonstrated their power to accelerate digital payments.
For example, Indian E-payments soared after a surprise cash crunch in 2016. During that time, Nicolas Crouzet, an associate professor of finance at Northwestern University’s Kellogg School of Management, and Filippo Mezzanotti, Kellogg assistant professor of finance, observed that a free e-payment system in India (similar to PayPal’s Venmo) saw a “huge increase in usage” after the cash crunch. The number of transactions nationwide jumped 150%, then roughly doubled each week over the next three weeks.
“Although the cash crunch was temporary, it had a very persistent effect on use of electronic payments,” Crouzet told CNBC in a phone interview. “There are network effects to these electronic payments. The shock forced people to start using that technology.”
While US major mobile payments apps maintain adoption rates of less than 10% and have previously struggled with retention, the mark that mass quarantines and overcrowded hospitals in many regions across the country will leave on the American psyche should not be discounted. Digital payments have a unique chance at simultaneously gaining steam in the consumer market and improving public health at the same time.
Fintech Fights to Provide Small Business Stimulus
Top names in the fintech industry are already looking to capitalize on the disruption presented by Coronavirus, while also helping to provide small business with desperately needed funding.
The recently-passed $2 trillion coronavirus relief bill could also inject a jolt of energy into fintechs, possibly allowing firms in the sector to to provide Small Business Administration (SBA) loans. Under the Paycheck Protection Program, which allows the SBA to distribute $350 billion to small businesses with 500 or fewer employees, lenders that are not participants in the SBA’s 7(a) program would be able to provide loans directly through the Treasury Department.
While the Treasury is still to define a definition for which institutions qualify to distribute SBA loans, the trade group Financial Innovation Now (FIN), which represents fintechs Square, PayPal, Intuit and Stripe, has also been vocal in its calls to waive regulatory roadblocks and allow nonbank lenders to participate in the coronavirus relief effort.
On Sunday, Treasury Secretary Steve Mnuchin signaled the fintechs might get their wish. Appearing on Fox News Sunday, the Mnuchin stated “Any FDIC bank, any credit union, any fintech lender will be authorized to make these loans” to a small business subject to certain approvals, Mnuchin said.
In a letter sent to Congress last week, cited by Banking Dive, the group asked that its members be included in emergency US government funding and noted that they were concerned that many traditional financial institutions would take too long to service small businesses. CNBC notes that Fintech firms are touting automated underwriting processes that take only a matter of days, versus much longer wait times for standard SBA loans.
Ryan Metcalf, head of U.S. regulatory affairs and social impact at Funding Circle, a peer-to-peer lending marketplace that allows the public to lend money directly to small and medium-sized businesses, told Forbes nonbank online lenders have a critical role to play in the crisis. With a warehouse facility from the Federal Reserve, Funding Circle could lend up to $80 million a month, Metcalf said.
“Funding Circle approves loans in under 24 hours and funds them in three days, whereas banks take on average a little over a month,” he said. “Looking at SBA disaster relief funds, it’s over 30 days for those.”
Timing is key for small businesses. Half of all them hold a cash buffer of less than one month, and a quarter of small businesses have fewer than 13 days of a cash in reserve, according to a 2016 JP Morgan Chase Institute survey of small businesses.
Kabbage, Square, PayPal and Stripe have become lenders of choice for many small businesses that use other payments products from the companies. These companies have access to transaction histories of sellers on their platform and often use that merchant’s sales data instead of a credit score – an advantage over some U.S. banks. Square’s bank charter license application was approved by the Federal Deposit Insurance Corp. last week and is expected to go into effect in 2021.
Investors can gain exposure to fintech and digital payments via the Global X FinTech ETF (FINX) and the ETFMG Prime Mobile Payments ETF (IPAY), respectively.