As the COVID-19 outbreak wreaks havoc on the U.S. economy and abroad, investors grapple with a second economic downturn in just over a decade. Although the 2008 financial crisis and the coronavirus pandemic are very different, both events have led to market volatility and enabled the emergence of new technologies.
The economic disruptions caused by the pandemic also highlight the importance of helping people currently outside the financial system, in both developing and developed countries. According to the World Bank, there are 1.7 billion unbanked people in the world today.
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Since the financial downturn, people have started to question established companies and traditional systems like banks. With more than half of the world’s population under the age of 30 and 55% of the world’s 7.7 billion citizens now online, the search for alternative solutions to existing financial structures has become far more than a niche. Twelve years after the 2008 financial crisis, people still seem suspicious of banks. According to a household survey by the Federal Deposit Insurance Corporation, unbanked people cited high fees and minimum balance requirements as reasons for not having a checking or savings account, as well as a lack of trust and privacy when dealing with banks. Taken together, a lack of trust (16.1%) and a lack of privacy (7.1%) account for almost a quarter (23.2%) of the top reasons the unbanked don’t have an account.
The lack of trust in banks has created a demand for alternative financial services, resulting in an increasing number of such alternatives for people to invest their money in. A popular option was technology companies. This idea really took off after the launch of the iPhone in 2007 and its App Store the following year. Apple has not only opened up possibilities for products and services, but also created a new way to distribute software quickly while keeping the world connected via the internet.
Several groundbreaking startups have been born out of economic downturns. Instagram, WhatsApp, Uber, Airbnb, Twilio, Dropbox and Slack are just a few of the successful startups launched during the last recession. In the years that followed, not only were billion-dollar brands built, but fintech startups like Kabbage, LearnVest, and Betterment popped up in Silicon Valley and made great strides in digitizing banking. Not only have these fintech apps eliminated some intermediaries, they have drastically changed the way people interact with money on a daily basis.
Related: Crypto banks will gobble up fiat banks in three years, or even less
financial exclusion
Uncertain times pave the way to a better world as people seek more reliable alternatives to the financial institutions that have failed them. Just as the recession in 2008 forced successful start-ups out of the rubble, so does the COVID-19 pandemic in 2020. Today we are witnessing an increase in the unemployment rate due to COVID-19. This fall, the United States Bureau of Labor Statistics reported that the number of long-term unemployed, i. Although some people have returned to work, the data shows a significant increase in unemployment rates over the past seven months.
With concerns at an all-time high, both consumers and businesses are looking to banks and credit unions for financial relief, access to government help and guidance to weather the ongoing economic storm. However, institutions are failing and unfortunately the systems put in place to protect us, such as health care, testing, protective equipment and supply chains, have collapsed due to poor leadership and delayed responses. Just like in 2008, consumers are turning to technology for solutions.
An opportunity for DeFi
This represents a tremendous opportunity for fintech today, especially for decentralized finance given its ability to provide access to financial services to a large part of the population. As the hot new cryptocurrency trend of 2020, DeFi reduces the number of intermediaries like banks, increasing the speed of transactions. According to industry site Defi Pulse, the total value of DeFi platforms has increased by about $12 billion in a year. At a time when central banks are cutting interest rates and the policy rate is near zero, investors are looking for new yields and are now ready to explore DeFi.
Over the years, raising finance for fintech companies, especially early-stage companies, has been a challenge as investors tend to focus on established startups with clear business models. However, the economic slowdown has significantly changed the narrative surrounding Bitcoin (BTC), DeFi, stablecoins, privacy, and more. The value locked in DeFi projects continues to rise, but a milestone that is less talked about is that the industry surpassed $500 million in venture capital funding.
According to CB Insights data on the fintech space in Q3 2020, 60% of all capital raised by fintech startups came from just 25 rounds of $100 million or more. Complementing the trend of growing venture capital funds, the report found that fintech investments from $100 million rounds rose 24% compared to the second quarter, while investments in this space from smaller deals fell 16% over the same period. Overall, fintech deal volume decreased by 24% compared to Q3 2019, totaling 451 global deals. However, dollars invested in fintech startups edged up again in the third quarter of 2020 to $36.5 billion, the biggest result in 2020 to date and the second-best single-quarter result since year-end. Notably, the number of smaller venture rounds — those labeled “seed” or “angel” — is up 20% compared to Q2 2020.
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With all eyes on DeFi, it’s time to understand that it’s less about the insane returns on offer to yield farmers and more about the democratization of finance. Although the sector is still in its infancy, DeFi projects are already exposing inefficiencies in the current system by improving financial inclusion, increasing liquidity and reducing costs. Since the start of Q3 2020, “Deposits from cryptocurrency enthusiasts into DeFi projects have grown from $2 billion to over $10 billion.”
Beyond finance, there is growing interest in DeFi and its potential to enhance existing current systems and infrastructure. It is no longer acceptable for industry players to promote an “incredible tool for inclusion” while not doing any usability work. Despite the industry’s incredible promises, complexity for users is still a major barrier to mass adoption.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.
Tim Frost is the founder of Yield, a fintech app that makes DeFi accessible to everyone. Specializing in early-stage blockchain startups, Frost helped power blockchain companies like QTUM, NEO, Paxful, Polymath, Selfkey, and Everex. He was also a founding member of Wirex, a digital banking platform, and helped grow EQIBank. His expertise in banking, blockchain and technology has played an influential role in developing Yield’s tools and products.
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