We keep hearing about the economical crisis, but, funny enough, the financial ecosystem doesn’t seem to be suffering that much. Fintech companies are experiencing an unexpected boom in terms of using their applications and getting big-time financial aids from governments of the UK and the USA.
At the same time, some of the representatives of the sector are facing funding uncertainty during this period, many have to offer their services for free, or with huge discounts. That’s reshaping the industry as a whole, as fintech startups have to cover specific customer needs during ongoing coronavirus crisis, and some of the products won’t be of big necessity as the pandemics are over.
Elinext often partners with fintech firms as a software development company. No wonder, the future of the industry worries us, and we keep a closer look at all the changes fintech companies are facing.
In this blog post we are going to have a look at forecasts in regards to the industry made before the COVID-19 existence, and speculate on which of them are still relevant. We will also discuss both positive and negative changes coronavirus brought, and, naturally, will have a look at future fintech activities.
The view of Fintech in 2020 before the Year Started
Venture capital funding for private U.S. fintech is coming off a strong 2019, where $18 billion was invested compared to $13 billion in 2018. The significant growth was mostly caused by focus on firms that used data, analytics and advanced technologies to deliver impeccable consumer experiences.
Also, fintech companies benefit from their flexible regulations (at least in comparison with traditional banks) and that also improves their overall economy.
The above-mentioned reports offered the following conclusions:
- Increased collaboration and investment in fintech firms by traditional banks
- The growth of venture investments into US fintech developers
- Awareness of Asia being the center of the fintech universe (that might also lead to the race to become the next super-app, now a vacant position)
- Rise of the importance of advanced data and analytic start-ups
- Regtech firms providing improved automation of compliance
- Africa becomes a player, both for online and offline payments
CB Insights and Mastercard highlighted the following obstacles to modern fintech companies’ development: diverse regulatory stances, incumbent competition, and challenging macroeconomic environments.
However, there was “little doubt 2020 would be a big one for global FinTech”.
“Entering 2020, the discussion is no longer about how FinTech startups will find mass adoption and scale, but when”.
As you can see, the macroeconomic climate hasn’t improved, to put it mildly. And the answer to “when” above is now closer to “later” than “sooner”.
Negative Impacts of Coronavirus on Fintech
The impact of the coronavirus outbreak is significant to both the financial markets and consumer behavior.
In the short term, there has been a significant flight to safer investments by consumers, which could negatively impact VC funding of existing and new fintech firms. Business Insider admits Chinese companies might be the ones suffering from the lack of investments the most.
Non-traditional financial services firms could be forced to find collaboration and funding from traditional banking organizations. Naturally, this is very bad news for early-stage fintech firms – some of them will inevitably shut down.
Also on the negative side are fintech firms in the payments sector. There is an expected drop in transactions at all levels of the economy worldwide. However, now fintech startups experience a boost of payments at the moment.
Hardware shortages could also impact firms that are connected with the Internet of Things or produce devices that help to process payments in the physical world (Square, for instance). Fintech startups that rely on traditional retail might experience a decline really soon.
Positive Impact of Coronavirus on Fintech
On the other side of the spectrum are companies that serve consumers who are new urge for digital banking services. Surprisingly, coronavirus improves fast-track digital innovation efforts in the financial sector.
Legacy banks and credit unions are expected to look to fintech firms for assistance in bringing better digital banking solutions to the marketplace.
This increase in demand for digital solutions could provide a lifeline to fintech firms at a time when VC funding may not be an option.
Also, coronavirus has driven a massive 72% rise in the use of fintech apps in Europe, according to new research published by deVere Group.
In addition, weakening economies may force government organizations and regulators to stimulate the expansion of fintech solutions.
For instance, South Korea is planning to temporarily ease regulations on fintech and ten other industries in March, in an attempt to jumpstart its economy amid the coronavirus outbreak.
CNBC reports that British financial companies are lining up to get financial aids to get a piece of UK’s coronavirus relief measures.
The World Health Organization encouraged contactless payments. Consumers are increasingly ready to embrace digital wallets. In Germany, more than half of payments currently made by card are contactless, compared with 35% before the coronavirus crisis hit.
Finally, for those fintech, regtech, and advanced data and analytic firms that can weather the current coronavirus storm, more venture funding will most likely be available. According to many reports, private equity and venture capital firms will have significant cash available once the market stabilizes.
Recent Fintech Activities
What are the sectors that will continue to grow in the fintech domain? According to the deals made just before the COVID-19 outbreak, most of the movements, collaborations, and investments were made between companies involved in data, advanced analytics, payments, lending, and investment sectors.
It makes sense to have a look at the recent transactions to figure out the strategies that were set before the coronavirus update.
Fiserv and First Data. Fiserv acquired First Data in July 2019. This acquisition strengthens Fiserv’s position in the marketplace as an information partner for both traditional and non-traditional financial firms.
Apple and Goldman Sachs. These giants jointly launched a new consumer credit card last August. The new Apple credit card works with the iPhone’s digital wallet app.
PayPal and Honey. PayPal expanded its reach into e-commerce in November by acquiring the shopping assistant and rewards program company Honey for $4 billion. This purchase illustrates the importance of building a platform for financial services that becomes an integral part of a consumer’s daily life.
Visa and Plaid. Avery aggressive acquirer of fintech firms, Visa agreed to buy startup Plaid for $5.3 billion in January. Plaid’s data network allows consumers to securely connect their traditional bank accounts to fintech firms such as Venmo, Robinhood, Acorns, Betterment, and Chime.
Morgan Stanley and E-Trade. Morgan Stanley announced that is buying discount brokerage E-Trade Financial Corp for $13 billion.
Speculation on Upcoming Fintech Activity
Despite the current equity market conditions, many believe the current market is ripe for additional fintech activity.
Jamie Dimon, CEO of JPMorgan, claimed the following: “We’re going to be much more aggressive in acquisitions across the board”.
Common target fintech for acquisitions by financial giants is startups with high software scalability, strong data analytics potential – “the next big thing(s)” that can help with generating additional revenue and get digital differentiation in the marketplace.
Most likely companies that are about to find partnerships:
Stripe allows its customers to integrate their app into smartphones, or use web-versions. The companies that invested in the fintech were Visa and American Express. Facebook Pay’s main payment processor is destined to partner with another payment firm, time would show who will be their partner.
The investment platform Robinhood has a customer base of more than 10 million clients and strong market potential. The app experiences a market downfall at the beginning of Q2 2020 but is still considered to rise up even stronger and partner up with a traditional bank or investment company.
Another company with multiple millions of users. It managed to gain success thanks to quick loans popular offers. Business Insider predicts several rounds of investments in the future, despite noticing that they are built on the target demographic of financially-stressed customers.
Those are just several examples of (more or less) successful fintech firms. Not much has changed for them in times of starting crisis, and we can extrapolate this picture on the entire fintech ecosystem
Winners and Losers After Coronavirus
Business downturns are not uncommon and are often caused by unexpected circumstances. In economics, such events and times are known under the term of Black Swan.
During these periods of Black Swan impact, the winners and losers will be defined by those firms able to make quick and decisive transformation reflecting the new environment.
This is not just true in banking but in every other industry.
During downturns, revenue and cash flow can fall much faster than expenses, putting pressure on the firm’s everyday existence.
As with any major market pullback, opportunities will eventually arise for investors and organizations that are looking for expansion.
It’s hard to declare the correct timing for jumping into the market or reassessing the strength of financial firms. The Motley Fool believes that the same payment organizations that were impacted most significantly by the market pullback may be the best investments once the market begins to recover. They believe in everything connected with the payments: Visa, Mastercard, PayPal, and Square.
Naturally, the crisis is a hard time for new beginnings, but some financial sectors are crying for innovations and getting fundings even during the hardest times.