[Matrix Moments] Amid COVID-19 crisis, overreacting is the only reaction acceptable for all fintechs: Vikram Vaidyanathan, MD, Matrix India Partners

The COVID-19 outbreak is clearly a black swan event, and in this episode of Matrix Moments, Vikram Vaidyanathan, Managing Director, Matrix Partners India, and Rajat Agarwal, Director, Matrix Partners India speak about what fintech startups can do. 

Vikram says, 

“We've been speaking with a lot of the founders in our portfolio and outside of our portfolio and we're trying to put together all of these learnings and hope you take these as learnings - some of it might work for a particular situation and not necessarily for all situations and with that caveat, let me share why I think fintech and financial services is different from all other sectors that we're investing in and that is why overreacting is the only reaction acceptable for all fintech startups.”

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A multi-edged sword

He explains fintech startups are unique as they have four stakeholders –borrowers, lenders, regulators and political constituents, and investors. Each is going through a once-in-a-lifetime event. Usually, financial services are affected by a risk of fear of losing money. All of these four constituents have a fear of losing money and therefore they will react in a certain way. 

Vikram explains, 

“This is a fear of losing money plus a fear of losing their lives and the health of their loved ones. It's a deep-rooted fear, a psyche that's taking over. Now all of these four constituents are interrelated. For example, if some borrowers have refused to pay some lenders, those lenders will not lend to the other fintechs, which means an investor who was affected in one part of the portfolio will not invest in another part of their portfolio. A regulator might say, ‘I want to save one constituent that is badly affected, therefore they don't have to repay’, and this might trigger off all these events and you end up with a vicious cycle. And that vicious cycle is immediately a falling knife, where things can just happen overnight.”

Vikram believes this is why fintech and financial services are different from other sectors where everything goes wrong together and immediately. This fear, he adds, is playing out in public markets, and it is going to hit private markets. 

Everything that can go wrong… 

“Therefore, overreacting is the only reaction and you have to plan for the scenario where everything's going to go wrong at the same time. You need to plan on how you're going to react because you also have multiple parts of your business your assets, your liability, collections,” says Vikram. 

Therefore, fintech startups need to plan for the worst. Overreact as a team and then execute daily and weekly. Vikram says this way when you sense certain triggers, you know how to act.

While the Harvard Business Review makes the coronavirus pandemic out to be a V-shaped scenario—quick downturn and very quick upturn—Vikram believes fintech startups need to prepare for a U-shaped scenario, where some factions will bounce back quickly and some will take time. 

Essentially, what this means is that there's a big falling knife and it will take a long period of time to return to the same level.

“And then the second is a scenario, which is essentially an L shape, where you never come back to that same level, at least in the 12-to-18-month runway that we are all planning with. That, of course, assumes that the global pandemic will take long to subside. It will make a resurgence in the US and in Italy and might make a resurgence in India and all of these are interlinked, which essentially accounts for an L-shaped scenario,” says Vikram. 

Understand your risk pockets 

All this indicate that it is important to have an understanding of your risk pockets. For some companies, it will be geography, some branches, or products. If it is a multi-product company, it can be segments of consumers and SMEs and almost all of them shut down all high-risk products. 

The next is to organise the company and collections by all those high-risk segments. 

“I spoke to a startup that had the best collections last week because they did this. They essentially said that they will collect everybody who's high-risk, and saw the best collection they've ever had from the high-risk portfolio just because they had this granular understanding,” Vikram explains. 

Collections is going to pose a huge challenge in these days as you cannot visit your borrowers. So fintechs need to look at new methods and ways. 

“If I had one statement to make on your collections and on your borrowers is: keep the relationship alive. Even if you're not able to fully collect during this time, you're able to re-trigger and renew the relationship when this is all over and be able to get back with them,” Vikram says. 

He lists ways to keep the relationship alive. “First, by collecting much smaller instalments than there are willing to pay, therefore acting in a more human way. Second, try to figure out how a relationship is continuing to be active while becoming an NPA; while not making an instalment, but with a very high degree of frequent and transparent communication happening with the borrower. Lastly, tweak your incentives across your organisation towards the collection,” says Vikram. 

Listen to the podcast here.

(Edited by Evelyn Ratnakumar)