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  • Jan 10
  • Vinit

If there is any sector that benefitted the most from COVID-19, it is financial services. Governments and banks all over the world poured in money to avoid another global financial crisis. Banks had set aside loss provisions, but they never materialized, while government stimulus’ helped consumers and businesses repay debts. According to Pitchbook Q1 Outlook, Dow Jones US Financial Services Index yielded a return of 77% in the last financial year, versus 60.8% for the S&P 500 Index.

The shift to work-from-home (WFH) accelerated the transition towards digitization and online channels. In lockdown, retail investors directed their funds in mobile trading applications. While areas such as buy now pay later (BNPL) and real estate lending platforms grew and attracted public capital, other areas such as decentralized finance (DeFi) and autonomous finance started to raise early-stage institutional capital. In Q1, 2021, fintech companies globally raised $21B across 900 deals.



Autonomous Finance


The trend toward full automation of financial management is increasingly harnessing momentum. Focused on the CFO suite, emerging enterprise applications are finding ways to use artificial intelligence (AI) and machine learning (ML) technology to automate processes across three core functions:

  1. 1. Controller: payments, payroll, expense reimbursement, collections, reconciliation, financial and tax reporting, compliance
  2. 2. Treasury: cash flow and liquidity planning, financial risks such as foreign exchange and interest rates, credit rating management, capital structure optimization
  3. 3. Financial Planning & Analysis (FP&A): budgeting, forecasting, financial planning and analysis, management reporting

Technologies such as optical character recognition (OCT), invoice automation, order to cash workflows (O2C), and robotic process automations (RPA) have been developed to help the “controller” function speed up tasks and improve decision-making. Fintech startups are using cloud-based, lightweight technologies to fully automate the “controller” function.



Earned Wage Access (EWA)



Also known as on-demand pay, EWA allows employees to gain access to accrued wages before a scheduled payday. This service first became popular with ride-share services such as Uber, which allowed drivers to receive earnings at the end of the day. Employer-based EWA models are delivered as an employee benefit with the potential to improve workers’ financial wellness. EWA programs can serve as a recruitment tool, helping to increase employee retention. EWA enables faster digital payments, which could reduce usage of the biweekly/bimonthly payday model currently utilized by majority of the companies.

While EWA programs present as an evolution of traditional payroll and an improvement over payday lending, challenges nonetheless remain. Limited usage data means it remains inconclusive whether the service truly improves financial wellness or potentially creates debt-trap cycles where none previously existed. Moreover, EWA regulation remains unclear, while companies that offer EWA must have compliance measures in place.



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Bibliography


Pitchbook. “Fintech Q1 2021 VC Update,” n.d.

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