How will COVID-19 affect FinTech?Introducing the Three Waves

Commerce Ventures
Published in
5 min readApr 2, 2020


The impact of COVID-19 has already been severe. It’s impossible to fully assess the economic consequences until we have stabilized the near-term public health shock and solved for managing the virus on an ongoing basis. As illustrated in Figure 1, we need to stabilize the rate of infection before we can identify the severity of its economic damage and likely well before we hit the trough of the economic correction.

While economic disruption will continue for the foreseeable future, the immediate consequences of COVID are not evenly experienced. The near-term correction is driven by losses from non-consumption in primary impacted industries: travel, hospitality, entertainment and retail. These businesses have experienced a sudden and severe collapse in revenues resulting from the crisis — including forced closures, furloughs, and general lack of demand.

Figure 1: Impact trajectory of COVID across public health and economy

Secondary sectors — including financial services — have not yet seen similar levels of disruption. This does not mean that these sectors are unaffected — in fact, many players are currently seeing changes to business operations. It simply suggests that the impact is a step removed from (and largely dependent on) the degree of correction seen by players operating in these primary affected industries.

Figure 2: Market performance across key sectors

For financial services and FinTech, this marks a key difference from the 2008 crisis. The Great Recession originated in the financial sector and the first wave hit banks, insurance and other lenders before spreading to other parts of the economy. We believe that the current crisis will also impact financial services and FinTech — but that impact will occur over three different waves.

Figure 3: Three waves of COVID-19 impact on Financial Services and FinTech

As illustrated in Figure 3, the impact of the First Wave is largely centered on financial services that have the greatest direct exposure to primary affected sectors. Even for these entities, the current wave is more likely to provide an indication of what may come rather than a clear outcome. Lagging the more immediate shock to discretionary spend, few areas of financial services will see immediate, material impact from this First Wave (save for certain segments like payment processing, POS financing and SMB lending).

The Second Wave is centered around contagion effects created by the sudden downturn in economic activity. This wave will hit financial services and FinTech with significant force. Beneath this wave, we expect riptides to be generated through the collapse of small businesses, the exponential increase in unemployment, and the looming insolvency of major enterprises will reshape the credit, lending, payments and personal finance markets. Our projections indicate that just commercial real estate (CRE) and consumer lending could see $800 billion of exposure — with cumulative CRE defaults topping $340 billion and consumer delinquencies hitting nearly $460 billion.

The Third Wave is centered on business and industry transformation coming out of the crisis. The sudden move to a fully digital environment will force many entities to confront a reality that may have otherwise seemed a few years out. Some financial services providers will use the crisis as an opportunity to accelerate growth and capture market share. Others will retrench and may find themselves as take-over targets in market consolidation. In a newly emerging market, all will have to prioritize digital capabilities, experiences and products — and deliver these with better data and unit economics.

WAVE 1: Triage (Now)

The market is currently experiencing a severe consumption shock. The sudden and dramatic closure of major parts of the economy has evaporated demand. It is important to emphasize that we are still in the early stages of this shock and we do not know the impact of rising unemployment and enduring business closures on long-term discretionary spend.

The near-term focus for financial services and FinTech players is to understand potential exposure within their market and customer base. The scope and timing of exposure will vary — potentially widely — based on individual segments. For instance, the payments industry is already seeing the impact of business closures on processing volume — with certain categories down more than 90% in year-over-year volume. Likewise, companies operating in consumer and small business lending have already seen a surge in volatility. Initially marked by a significant increase in demand, many of these entities are now confronting a reality marked by tighter access to capital and unclear exposure to underlying credit risk.

Even for these entities, it is still early days. Without knowing the full extent of closures and unemployment, it is hard to predict how severely individual financial services will be impacted. However, we know a few things for certain. First, a national shift to work-from-home has created greater urgency around digital experiences. While not limited to financial services, this is a moment where providers will be uniquely confronted with the quality of their digital capabilities and products. Second, the majority of venture-backed FinTech players were not around in 2008 and have not experienced a major economic downturn. Many of these players will not survive. Third, the largest banks are better capitalized than during the Great Recession, with an average $134 billion in Tier 1 capital, which represents a 48% increase from 2007. Some of these banks may still be severely impacted, but investments and policies enacted since the last crisis should (hopefully) prevent this wave from leading to a deeper financial crisis.

As for the unknowns, financial institutions have one benefit over the last recession: an ability to see the next wave coming. The time until this next wave hits and its size are still unclear. In our next post, we will cover the forces that are likely to shape these answers and discuss potential implications for financial services.


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Commerce Ventures

Early-stage venture capital firm investing in technology innovators in the retail and financial services eco-systems.