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Benefits & Tips: Fintech Investing During an Economic Downfall

Written by: 
Richard C. Fay, CPA

COVID-19 has greatly slowed the U.S. economy, negatively impacting businesses across all industries. The sudden social distancing measures have decreased commerce and majorly disrupted cash flow—resulting in sweeping layoffs, a spike in unemployment, and business closures. Many businesses that have been destabilized by the pandemic will never open their doors again. Businesses that do survive the pandemic (and the upcoming recession) will either experience a drag on financial performance, or be positioned to excel in the new culture that emerges post-COVID-19. 

Although investing in new endeavors during a pandemic isn’t at the top of every business' priority list, making investments during an economic downturn can benefit you in the long run—setting your company up for long-term success once the economic recovery begins.

One of the most beneficial investments a financial institution could make right now is in itself, opening the door for new channels, streamlined operations, and a better customer experience. While investment appetite during this current uncertainty will depend on individual business circumstances, it may be necessary to explore innovative fintech opportunities in order to compete in the emerging economy. Let’s look at why the environment created by the pandemic is actually an excellent time for financial institutions to invest in fintech, and the steps you can take to ensure you’re investing properly.

Economic Downturn Turned Investment Opportunity

It’s no secret that COVID-19 has shocked the U.S. and global economy, and fintech investment isn’t immune to its disruption. Ultimately, these disruptions could prove beneficial to financial institutions looking to invest.

Effective Pricing

Just as in most recessions, economic and monetary conservation concerns are diminishing the amount of people and businesses actively investing in the market—leaving less competition, and possibly leaving many fintech companies searching for investors. This lack of competition, paired with the increased demand for investments by fintechs, could lead to a lower cost than one that would have been presented prior to the recession.

Top Tech Talent

Investing in fintech doesn’t solely refer to investment in a fintech company. The current job market is seeing a massive wave of layoffs, with Bank of America predicting the unemployment percentage to reach 15.6% in the next few months. This creates an immense pool of innovative tech talent searching for jobs, creating an ideal time to employ these workers and begin investing in your own fintech proceedings.

All of the employees that might’ve been laid off from fintech companies could now be searching for employment. As a financial institution, your business could capitalize on this new workforce emergence, hire the right talent, and build internal fintech solutions. Also, expected college graduates are walking into a poor hiring market, making high-performing tech students available when they may have been otherwise employed in a well-performing market.

Even before the recession, fintech was becoming a booming industry and one of the “next big things.” Bringing that type of innovation in-house could be crucial to your company’s ability to get ahead of the game now, and surpass the competition during the economic recovery—all at a lower cost.

New Fintech Startups

Believe it or not, recessions are actually a popular time to start a business due to a lower cost of labor and a lower cost of capital for private equity firms. If you’ve found it difficult to find the right fintech to invest in, new fintech companies that meet your specific needs and align with your goals may begin to form during the recession.

Set Your Business on the Track to Success

For financial institutions, investing in fintech now could significantly benefit your company in the aftermath of the pandemic. You’re surviving the recession now while positioning yourself for success during the recovery.

There are many reasons to invest in fintech, with this technology being used to streamline processes, reduce costs, and increase revenue. One should always be cautious of the risks associated with investing, especially during a recession. Investing in fintech now, while the talent is abundant and the cost of innovation is low, will set your business up to remain sturdy during the recession, and then quickly advance during the recovery.

How to Invest in a Fintech

Once you’ve decided that you want to invest, there are some critical steps that financial institutions need to consider in order to create a successful, profitable investment.

          1. Conduct a “Needs Analysis”

Take a look at what technologies or uses of technology will enable your business to withstand an economic downturn. This includes analyzing ways to lower costs, streamline processes, and generate new revenue lines. Then, look at what possible new technologies or technological services will enable you to thrive in the new economy after the recession.

          2. Develop a Fintech Strategy

Based on your needs analysis, begin to outline a fintech strategy. This entails:

  • Looking for strategic partners
    • Get active in the current fintech ecosystem
  • Investing in your company
    • Take advantage of the increased pool of tech talent available and hire in-house
    • You now have the opportunity to hire college graduates that may have otherwise been employed by other companies
  • Working with a Fintech incubator
    • Solicit early-stage fintech companies
    • Banks have resources not available to early-stage tech companies, so set up a mutually beneficial agreement with an emerging fintech company that fits your needs
    • Develop relationships with fintech entrepreneurs

Conclusion

The current economic climate might not seem like the ideal time to begin investing in new opportunities. But taking advantage of the greater need for investors in fintech, increased talent availability, and emergence of new businesses could set your company up to prosper in the changed economy.