Despite a wavering market, flexible and innovative firms are poised for new opportunities
Because of their digital nature, fintech firms are theoretically in a better position to weather a crisis of the scale the world has witnessed with COVID-19 than traditional banking counterparts. But, in many ways, they have found themselves more vulnerable to the fallout of a spiraling economy than legacy corporations due to the very structure that has seen them boom over the past decade. Startups, in particular, have borne the brunt of the impact, with more than 40% of tech startups worldwide polled by Genome in March saying they did not have sufficient capital to survive past June and two-thirds not expecting to make it past September.
After a long, interrelated history of finance and technology, the fintech sector finally took off following the 2008 crisis. Massive job layoffs in both industries ushered in a new wave of startups at a time when the public was losing trust in legacy banking institutions and, especially among the younger generation, looking toward digital options to coincide with the newly popular smart phones. Having been born of a global crisis, fintech firms must use this current COVID-19 crisis to redefine their business for an age when digital solutions are not merely a preference or a luxury but a necessity.
The crisis has led many fintech firms to make adjustments to their operations, but it hasn’t necessarily spelled disaster for the sector as a whole. While their heavy reliance on market sentiment and investor funding leaves them open to a dropout of the bottom line, fintech firms are unique positioned to quickly pivot their business model and services to better serve a savvy and yet hesitant marketplace by scaling up their products and reacting quickly.
Taking The Hit
Even before the COVID-19 crisis started to spread around the world, fintech firms were already flagging in the first quarter of 2020. Data from CB Insights shows that financing activity in Q1 was far below the historical average and that funding had fallen to levels last seen in 2017. Furthermore, the number of fintech deals has nosedived for eight consecutive months. And in Q2, fintech deals were down 30% quarter-on-quarter. May and June showed a slight bump, but the figures still tracked well below historical averages. In a worldwide drop, fintech startups based in Europe and Asia saw the lowest quarterly deal count in Q2 since the fourth quarter of 2016; for their North American counterparts, it was the lowest since 2015.
All of this was further exacerbated by the market conditions starting in March. Funding became increasingly scarce and difficult to obtain as governments and companies around the world took measures to scale back exposure to the novel coronavirus, which affects every level of a fintech’s operations from courting investors to interfacing with customers.
“A sustained economic slowdown would reduce consumer and business spending more than what has already occurred. In turn, this would result in lower transaction-based revenues for many fintech companies,” writes CB Insights in its report. “Ultimately, in a frozen economy, fintech companies will have serious financial challenges ahead if they are unable to reduce costs or rely on their balance sheets to get them through this difficult period.”
Most fintech firms have been in existence for less than a decade, and more than other industries they rely heavily on investor funding, which is why although they have been the darling among customers in the modern era traditional banking institutions are better able to withstand the shocks of a market that has largely pulled the rug out from under speculative investments. Few startups have cash reserves or ample lines of credit, and they have found themselves competing for a highly limited pool of resources when it comes to government relief packages and venture capital funding.
But not all fintech firms are equally feeling the pinch. Small, early-round fintech startups may see fewer rounds, but larger, seasoned firms are continuing to raise capital and are the most likely to be already working to implement a digital transformation to respond to customer needs quickly. Additionally, according to BCG, the fintechs that will be impacted the most severely are those who trade in international payments, unsecured and secured consumer lending, small business lending, and high-risk ventures. As a whole, firms that focus on B2B banking are less susceptible to market fluctuations, whereas smaller, non-traditional firms lack the same level of access to capital.
The silver lining is that while the number of deals has dropped and startups are facing even more difficulty getting off the ground, funding to the fintech sector has seen only a limited impact from the COVID-19 crisis, meaning that established relationships with investors are paying off. Global funding to fintechs was actually up 11% quarter-on-quarter in Q2, and up 1% over 2019.
Finding A Way Forward – Embracing Change
Fintech firms have a level of flexibility that, ultimately, will help them weather this crisis. Comparably low fixed overheads and their embracing of advanced technology and artificial intelligence give them a leg up over brick-and-mortar institutions that are not as well-versed in the digital era.
Those firms that embrace innovation are poised to take advantage of the situation. More than ever before, there is a need for secure online payment platforms and a whole new range of insurance policies that can be applied for online – providing all the services that people need during the crisis and will most likely continue to prefer long after the crisis has passed.
For those that are struggling at the moment, an option could be to consider a partnership with – or an acquisition by – another more well-established fintech firm or a traditional banking institution that is looking to integrate digital solutions. And leadership that is visionary has never been more important as firms are faced with big decisions about their future viability in a market where continued uncertainty seems the only reliable indicator.
About the Author:
Manos Panorios is Managing Partner of the Stanton Chase Athens office and also Global Leader for the Financial Services Practice Group.