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|How the pandemic is altering fintech, Photo Shutterstock|
By Lucy Demery - Global head Fintech Banking Standard Chartered
All signs point to fintech being a standout sector during the coronavirus pandemic and beyond. COVID-19 has accelerated secular trends already underway – pushing larger swathes of the population online – and the sector is well positioned for the new global reality that is starting to emerge. After an initial fight to protect employees, customers, and local communities, the fintech sector is now coming through the crisis comparatively well. With lockdowns imposed across much of the world, large digital payment platforms have flourished, and the most effective businesses are pivoting towards the fintech use-cases in highest demand.
It is true that public and private funding has contracted, which is threatening early-stage fintechs. Financial investors need to double down on fewer assets and prioritise profitability. But looking ahead, we see interesting opportunities for investment and consolidation – with more buyer-friendly pricing and terms. Strategic acquirors will be on the hunt for fintechs that provide access to new customer segments or product capabilities. Three key themes set to shape the future of fintech follow.
Despite the challenging outlook and the global recession, there is some silver lining for the fintech sector. The trend towards digital payments has accelerated, along with the opportunities to offer new products and support consumers and businesses.
With many “brick and mortar” outlets closed, fintechs powering digital commerce have seen a significant boost. In Europe, social distancing measures prompted a 72 per cent increase in the use of fintech apps in a single week at the end of March, according to deVere Group.
During the crisis, people and businesses are adopting new digital platforms by necessity. We expect this to endure beyond COVID-19, as these online users acquire a new pattern of behaviour, discover new efficiencies, and adapt to a “new normal” of digital life. This is especially true for fintech use-cases that are dominant during lockdown – health, consumer staples, online communications, education, and digital content.
Fintechs that go out of their way to support customers during this difficult period are likely to drive outsized growth post-crisis. Investors are therefore pushing their portfolio companies to refocus on their core product roadmap, customer service, and mission. Founders are asking themselves, who do we want to be in the post-COVID world and what is the critical path forward from today to that new future? Large, diversified payment platforms are performing well, seeing higher volumes in select e-commerce verticals. The leading challenger banks will also benefit from a new focus on digital user experience, provided they can monetise their apps through traditional revenue streams. Recent funding rounds should be deployed to acquire underwriting capabilities and business banking products. Select lending platforms will benefit from the rise in demand from small-ticket borrowers, backed by government support schemes, provided they have invested in robust risk management. Resources are likely to be diverted away from other areas of fintech. Lockdowns have undermined physical point-of-sale technology. Restrictions on cross-border movement will reduce travel payments and forex volumes. An economic recession will undercut mass-market consumer fintech. Geographically, countries with weaker health infrastructure will be slower to recover. The fintech sector is not without its challenges, so entrepreneurs and investors will need to be discerning in their focus.
Funding is contracting in the near- to medium-term, in both public and private markets. Fintech deal activity in the first quarter of 2020 dropped to 2017 levels, with half the number of deals relative to the same period in 2019. Many fintechs are struggling to preserve their cash runway, as revenue milestones are difficult to maintain when the real economy is under pressure. Venture capital funds now need to double down on fewer portfolio companies to the detriment of others. For more mature fintechs, private equity is constrained by frozen high-yield bond and leveraged-loan markets, while public equity markets are also challenging.
In a capital-constrained environment, we see outperformance by agile fintechs that have lower fixed expenses and an ability to pivot from “growth at all costs” to profitability. Consolidation will be an important theme. Fintechs are likely to seek revenue and cost synergies via mergers or partnerships. In March, we saw TransferWise partner up with Alipay, while in February, Rapyd signed a deal to collaborate with Visa. Partnerships such as these will be an important lifeline in the absence of fresh capital for organic growth. Late-stage fintechs that recently completed funding rounds should also drive consolidation.
In this rapidly evolving market, we see interesting angles for investors. As financial investors pull back, fintech valuations are likely to compress, with an increase in down rounds, side rounds, and convertibles. This will yield new investment opportunities for incumbent banks, mature fintechs, and big-tech platforms.
Fintech segments that previously appeared expensive may become more accessible – such as digital retail banking. As IPO markets cool, mergers and acquisitions will become the most viable exit option for fintech founders and investors, so strategic buyers will benefit from improved pricing and terms. Acquirors will be on the hunt for fintech targets that offer product innovation, streamlined infrastructure, or access to new customers. We may also see financial institutions expand into adjacent “ecosystems” – in ecommerce, health, and online content. As a result, fintech is likely to become more integrated with digital life.
These three themes combine to show how the fintech sector can emerge stronger from this difficult period, with a renewed focus on innovation and fundamentals. Along the way, this will create opportunities for strategic investors – if they can react quickly to market dislocation and think beyond the horizon.
The pandemic has caused intense distress in our communities, but we hope the fintech sector will continue to transform financial services for the benefit of us all.