The year of COVID-19 is characterized by one word, ‘remote’, as is remote work, remote schooling, remote living and remote financial services. Fintech is defined as utilizing technology to improve existing financial products or deliver new ones regardless of location. Although this pandemic should have benefited the Islamic fintechs as it did in other parts of the world, but due to their position in the life cycle curve and low capitalization, many have suffered. This pandemic also presented an opportunity for incumbents to bridge the gap with the struggling fintechs, but a large percentage of Islamic banks were caught unprepared to provide the same digital services. 2021 would be the year of corrective actions to address these issues in the fast-paced, less structured fintech world.
Review of 2020
Since the 2008 financial crisis, the global fintech ecosystem has enjoyed acceleration in growth and coverage. Despite Islamic fintechs’ late arrival, we have seen interest from the public and private sectors in developing this fintech ecosystem which serves 1.9 billion people and manages US$2.4 trillion of assets and, according to IFN, it has 142 fintechs worldwide. Many Islamic countries have created fintech associations to act as catalysts to develop their ecosystem. Some created regulatory sandboxes sponsored by their central banks to enable these start-ups to connect to the country’s financial system. In 2020, COVID-19 lockdowns and social distancing arrived to shake all these up.
The pandemic, coupled with the oil crisis, had a devastating impact on the Islamic economy by widening Islamic governments’ budget deficits, spiking unemployment, shrinking public spending and causing supply chain disruptions. Most countries’ GDP suffered economic contraction, plunging to negative growth rates and some reaching negative double digits. This economic slowdown impacted the start-up business model which is based on continuous funding by investors, because investors have become extremely cautious with the deployment of their funds, especially in the early stage rounds to which many of the Islamic fintech start-ups belong. Although the number of deals has declined this year, funding continued to be strong in a few strategic deals — Wahed Invest, an online investment platform, was able to raise US$25 million in June to expand its operations into Saudi Arabia.
Conversely, COVID-19 has accelerated the transformation to digital, allowing remote access to financial products. This fueled all types of online commerce. Global digital payment grew in 2020 by five to 10 points. Peer-to-peer and mobile payment providers have benefited from this increase, especially since lower costs have allowed more users to enjoy the ease and benefits of this new trend.
Most of the Islamic fintech start-ups have failed to capitalize on this opportunity. As the crisis hit, trust became most important to customers, and Islamic banks enjoyed higher trust compared to unproven business model start-ups. Suddenly, fintechs and especially digital banks came under pressure. Being highly capitalized and more accessible, BigTechs such as Google, Amazon, Facebook, Alipay, WeChat, PayPal and Apple were in a much better position to take advantage of this new boom, and this was reflected in their higher stock prices. According to PayPal, people over 50 made up the company’s fastest-growing segment in the second quarter and they have remained active.
Preview of 2021
In 2021, the world will contain the pandemic, the global economy will recover and despite low oil prices, most Islamic countries will experience positive GDP growth.
The shift to digital is a genuine paradigm shift and there will be no return to the normal use of cash, cheques and physical branches. The overall customer behavior to shift to digital services will be a permanent change. The post-COVID-19 era will be the new normal.
2021 will be the year of partnership and recovery across the Islamic finance ecosystem. Fintechs need access to funding, and financial institutions need access to a variety of innovative products and services.
Digital payments offer tremendous opportunities for MSMEs in the Islamic world. These businesses are realizing the digital gap and will try to address their digitization issues such as digitally uploading and marketing goods and services with physical delivery to the last mile. Fintechs and more specifically Islamic ones will compete with BigTech firms to provide the technology that helps these businesses to get online.
Fintechs will move to rebundling after years of unbundling banking services to diversify their offerings and expand their customer base. Fintechs and digital banks will evolve from being a secondary provider to becoming a primary provider considering customer engagement as a ‘long-term investment’.
Financial products will shift to intelligent products with the utilization of behavioral science technology. Fintechs and BigTechs will move aggressively to embedded finance, by integrating their fintech services at the core of other apps into the user experience; ‘Buy now pay later’ is an example of such a service.
COVID-19 in 2020 harmed the world economy, stressed the financial ecosystem and caused damage to many fintechs, but it also provided a wake-up call to many, speeded up digital transformation and self-service, and will surely force collaboration that will enhance and strengthen the Islamic financial system. It is true that 2020 brought unprecedented challenges to humanity but nevertheless, it definitely set a new normal that will continue for many years to come.