What does a recession mean for fintech giants?

Apr 05, 2024

In general, a recession means an economic slowdown. During a recession, there will be low production and consumption, lesser jobs, and there will be a plunge in overall economic activity.

This is bad for companies, especially those who are in debt, as their revenue can downsize to an all-time low. But, what does a recession mean for Fintech? Is the banking and payment industry strong enough to combat the challenging downturn period?

To start with, the recession period attacks the buying power and capacity of consumers, which is the essence of the fintech industry. And recession doesn’t present a pro-growth ecosystem for growing startups, particularly fintech startups

There is more to it that affects fintech during recessions. But with the right strategies, many fintech companies actually bloom and achieve their desired growth.

Solutions fintechs have for recession

The always thriving fintech industry has some plan of action to tackle the unpredictable economic crises. Listed below are the solutions fintech companies follow to grow steadily.

1. Disruption of traditional financial services

Long gone are the days when we went to banks to access financial services. The evolution of financial services has reached the rooftop, which fetched these services at our fingertips

Both individuals and business customers benefit from these modernized services. This disruption of financial services eases the job of professionals who employ them.

If fintech companies start rendering services that disrupt the status quo, they will become an inevitable part of the ecosystem and generate constant revenue. By creating this significance, a fintech during recession can sustain and even thrive.

With many innovators in the fintech industry and technologies like artificial intelligence, analytics, and machine learning, financial services will keep evolving to be in their best shape.

2. Help businesses build credit scores

The role of nonbanking financial companies is endless in the B2B world. Recession or not, businesses need money to survive. They tend to circulate money to manage cash flow and clear as many bills as they can.

Fintech companies who render credit help businesses manage their tough financial times. Borrowing monthly credits and repaying that at the end of the month is similar to using a business credit card. But a business credit card has some limitations too.

For more information on the most flexible and easy-to-obtain, no-collateral credit, check Volopay’s in-built credit solutions. As Volopay is itself a payment management application, you can borrow and use the credit within the application.

You can use them to make vendor payment transfers, card payments, international payments, employee salary settlements, and many more.

In testing times like recession, fintech companies or any other industry can utilize credit lending applications to manage cash flow and take risky steps.

3. Efficient onboarding that saves time and money

The actual customer journey starts at the time of the onboarding. If you make your customer wait around forever, they will do their own research and land at your competitor’s website

It tells your customers the kind of relationship that you both will embark upon. Due to the importance that onboarding holds in the customer journey and retention, fintechs during recession must focus on this part

By setting a great first impression, you can retain your best customers and reap the rewards through referrals too.

4. Use of technology that solves customer problems

Those who design products that fix major problems of their customers survive any extreme recession.

The fintech industry should focus on developing products with the help of trailblazing technologies and tools by understanding the inefficiencies in the current banking system. The purchase power might decline, but not the need for better and resilient systems that are also affordable.

5. Faster adoption of technology

As discussed earlier, fintech companies must adopt advanced technologies to fabricate innovative solutions. Fintech has come a long way and evolved so much with the help of technology.

Today, we are living in the world of automation that simplifies monotonous and repetitive tasks, thanks to technology. The higher number of steps you take, the better and safer position you will be in when a recession happens.

Internally, when you have the right technological solutions to fix the regular concerns of every team, your company will run like a well-oiled machine smoothly. And this is possible even for remote teams. Together, you can storm against socio-economical nosedives.

6. Lower fraud rates

When money is involved, the odds of fraud, scam, or sharp practices are too high. The increasing number of fintech digital products and applications also triggers an alarm about whether they are safe to use or not.

Fintech companies take big steps to keep their products safe to use and fraud-proof as it directly is related to customers’ privacy. When a recession and slow economic growth happen, customers rely on fintech products more to manage their wealth better.

Lower fraud rates will be an additional favorable factor to get picked by customers and investors.

7. Faster approval rates

Cash flow and fund circulation will be affected high time during a recession and a promising way out of it is securing a loan. But financial institutions that stall the applications forever are a turn-off.

The same goes for credit cards and other fintech products too. Unpredictable delays happen when you use manual verification methods and approval methods. 

To secure customers for a long time and capture the major moneymaking audience, fintech during recession must employ an automated approval process.

8. Injection of automation into industries

A recession doesn’t just mean dealing with layoffs. But, if you can have the right size team, you can save both time and money. That’s what automation empowers you to do.

Many fintech products inject automation into the most boring departments of a wide range of industries. For instance, Volopay makes accounting automation happen by streamlining expenses from receiving invoices to paying them off.

Use of online services

1. Shift from traditional to digital banking

We don’t visit our banks anymore, do we? Customers see it as inconvenient to walk down to their branch to fix an issue or use a service. Banks understood their assignment and created powerful and secure mobile and net banking applications.

It’s not just banks. We see many financial institutions simplifying their onboarding process and other functions by going full-on digital. Gadget-friendly applications and customer service by bots are the way to keep your customers hooked to your solutions.

2. Fix, automate, and streamline faulty online/digital experience

No industry can operate without the help of banks and payment applications as they mark the end of a purchase process. But if you ask whether digital banking users are highly satisfied with its functionality and speed, it’s a big no.

They either have to spend a lot to spend their money or wait for ages to hear the confirmation. The onus is on the Fintech industry to fix this broken, faulty, and slow-paced payment system and improve customer experience. 

However, there are many innovative startups like Volopay on the rise with game-changing solutions to disrupt the payment industry.

By fixing the loopholes and shortcomings, we can expect better performance with respect to money transfers across all industries during an economic slowdown. And that explains the crux of what does a recession mean for fintech.

3. Fintechs leverage customer segmentation data

You can come up with an outstanding product that serves a very particular niche. Eventually, you will be forced to wrestle with new competitors.

What can help you sustain for longer terms and not get affected by economic constraints is serving what your customer needs. Fintechs during a recession should keep them updated about what their customer expects from them. Customer requirements aren’t constant.

They change, especially a lot in recession times. Businesses should tap into their segmentation data and be keen on what their key industries look forward from them.

Also read: 10 advantages of invoice approval automation

Does economic slowdown affect the Fintech industry?

Despite having the above list of solutions and many other innovative methods to tackle the recession, companies still get affected by what does a recession mean for them. Any product can suffer without vision and clarity.

1. Dip in stocks

During an economic downturn, companies don’t make much profit and slow down their activities. When this slowdown is consistent for a long period, production reduces along with company growth and revenue, due to reduced consumption.

Even if a product is desirable and is sold at better prices, consumers’ affordability index changes based on their needs and wants.

The fall in these economic factors putting together with the inconsistent market will affect the country’s GDP, job occupancies, its home stocks’ prices, and several other factors.

People will sell their stocks to avoid the risk of facing a loss. And investors will be very careful about their next buying move, stalling the stocks for a prolonged period.

Unfortunately, fintech companies suffer too as their valuation gets reduced if they don’t make a profit. Also, fintech applications that act like mediators between stock exchanges and the public face a hit too.

2. Workforce layoffs

A recession is a period where companies will be too careful to reduce their expenses and increase the profit margin to sustain, if not make profits. Employee wages and benefits expenses hold a huge share of a business’s expenses.

Hence, business owners will be forced to cut down a considerable number of employees in their workforce to even things out.

The recession for fintech, fortunately, hasn't led to any huge workforce layoffs in recent years, except for a few mass layoffs here and there. But that doesn’t mean that they don’t face any distress.

Cash flow maintenance has always been a crucial factor and to not reach a negative value here, fintech companies strive hard. And layoffs are one of the strategies they have to follow to keep them afloat.

3. Market volatility

Market volatility denotes inconsistency, unpredictability, and sharp changes in stock prices.

A volatile situation is very common both during times of economic slowdown and growth. Should fintech companies be worried about market volatility that happens during tough crisis times? Yes, as it decides how investors value, sell, and pick their stock and their competitors’ stock prices.

To describe market volatility visually, think of a graph that looks like an ECG graph with sharp and close peaks and troughs. Volatility can happen due to many reasons like socioeconomic factors, poor company or industry performance, and is actually considered normal by investors.

But when pricing fluctuations happen along with a recession with more dips, it can worry investors as they are already picky about their choices.

4. Pressure from VCs and investors

The percentage of fintech companies that VCs and investors fund is more than 60%. During times of slump, investors can't sit peacefully and get worried about their returns

And companies who get benefited from them are obligated to answer them and show signs of scope for growth. Handling this burden is an additional task for fintech companies while they wade through the recession.

5. Loss of Sales

Fintech applications make money through their application fees, interests, add-on features, etc. As a part of cost-cutting strategies, businesses tend to stop using paid versions of applications and switch to low-cost or free ones.

This can impact your sales as well as customer retention. The new signups will reduce and the old customers will start looking for affordable options to reduce their expenses.

If your major income is through the SaaS fees you collect from customers, then you could get affected too this way.

What does the future hold for fintechs across the globe?

So, what does a recession mean for the fintech industry? Is it just an unfortunate phase that gets normal over time or shakes things up so badly? Recession isn’t always bad and unwelcoming for the fintech industry.

It has worked well for many. There are many good and positive changes that it can lead to.

1. Opportunity due to shifts in consumer behavior and market change

Customer behavior has changed after the COVID era and it can work in favor of the fintech industry. They want super-fast and efficient products that can simplify their work and expedite it. The spending habits of customers have changed and also what they want to spend their money on.

The fintech industry can utilize this, fine-tune its product, and create its own niche audience. They can create an irresistible and desirable product or service to solidify their presence in the competitive market.

2. Opportunity to innovate, reimagine, and rebuild

You don’t have to sell the same product for good. Making tweaks, rebuilding, or starting from scratch once again is totally acceptable.

3. Improve technology to disrupt traditional banking

Using traditional banking services is a pain for B2B customers. Safety, speed, versatile features, and affordability are their top priorities. But that’s not what they get with traditional banking. Here is where disruptive technology can help you to build better and more resilient products

By observing the pain points of customers and understanding the statutory regulations, you can come up with advanced products that will replace traditional banking.

4. Ideation of safeguards to make the future recession-proof

It’s not in anyone’s hands to prevent or accurately predict a recession. But one can work consistently to build an organization that’s recession-proof. No matter how unstable the business environment gets, your business will remain unaffected if you do the above.

To recession-proof your business, you will need the help of the latest technologies like Artificial Intelligence.

AI actively sets your business in full-on action mode with its intuitive nature. From making your business fully digital to introducing automation to reduce manual work, you can trust artificial intelligence with this.

You can even automate cognitive tasks that require human intervention and intelligence. With such magnificent technology in place, you can create a system that works incessantly despite the ups and downs in the economy and continue adding value to your customers’ lives.

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