The coronavirus crunch will speed up the inevitable fintech market shakeout
- Finance apps have seen a boom in downloads since the start of coronavirus lockdowns in Europe.
- The pandemic will likely result in consolidation among finance challengers, as stronger, well-funded players acquire cash-strapped smaller firms.
- "Post-crisis, disruptive winners will 'take all', as we expect surging demand from financial services for technology to master digital-only interaction, enabled by AI and big-data analytics," said Radboud Vlaar, managing partner at Finch Capital.
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The coronavirus pandemic could speed up a market shakeout in the booming fintech sector.
Research indicates that more people, restricted by lockdowns, are using online financial services, including challenger banking apps and stock-trading apps.
Data from financial advisory firm deVere indicates that fintech apps saw a 72% spike in usage in the final week of March. And numbers from App Annie showed average weekly app downloads for finance apps had jumped 20% between the fourth quarter of 2019 to the end of the first quarter of 2020.
Big winners included PayPal, UK neo-bank Monzo, and Barclays' mobile app. Stock-trading apps Robinhood and Acorns also saw download spikes in the US.
Not every company will be a winner, however. Although engagement is up, the pending economic crisis and investor jitters will make life tougher for unprofitable newcomers who don't have sufficient cash runway.
At the current pace, funding to emerging fintech companies for the first three months 2020 will likely settle at around $6 billion. Although a large figure, that's the lowest amount going into the sector since the first quarter of 2017, according to CB Insights.
That's mirrored by evidence that venture capitalists (VCs) have been pulling term sheets, slashing valuations, and renegotiating startup deals as they come to terms with the economic strain brought about by the coronavirus.
The uncertainty may end with the fintech winners snapping up the losers, according to new research from Finch Capital.
Finch's research indicates that the challenger banking space will see one or two key players emerging in Europe and the US respectively.
The payments space is also ripe for consolidation, with Finch Capital citing PayPal's $2.2 billion acquisition of iZettle as a good example of the M&A trend in the sector.
Venture capital investors will also back their existing winners rather than take risks on new, smaller players.
"There is a lot of dry powder of raised funds, but it will be more selectively deployed and at lower valuations," Finch Capital managing partner Radboud Vlaar said. "Secondly, as the bar rises for getting funded, especially for later-stage [firms] where valuations have risen a lot over the last three to four years, more companies will look to sell resulting in more consolidation, liquidations, and M&A."
Green shoots for the challengers
After a boom period for funding and growth, Europe's fintech firms are now eyeing survival. Fintech is the continent's best-funded startup sector, with startups raising an estimated $9 billion in 2019.
The CEO of buzzy UK challenger bank Monzo, Tom Blomfield, will forgo his salary for 12 months, while Monzo's senior management team and board will take a 25% pay cut. The company is also offering two months of voluntary paid furlough to up to 295 employees (175 for employees in customer support and 120 for employees in other parts of the business). Overall Monzo employs more than 1,500 people.
Starling Bank, a rival to Monzo, has also furloughed some employees.
Although App Annie's data shows an uptick in downloads for neo-banks, the coronavirus is still a hit to the bottom line. For providers that make the bulk of their revenue from associated payments - like challenger banks - the UK lockdown has probably resulted in a dip in revenue.
The hope is that the survivors resilient enough to survive will go on to experience a real boom after the coronavirus.
"Digital challenger banks are well positioned for future customer demands, they have a distributed workforce, no bricks and mortar, and better customer service i.e. online and voice, than incumbents," One prominent UK fintech investor told Business Insider. "This crisis will probably help to crystalize those that are better positioned than others."
"Not all companies will survive but it's not going to negate the value that's been created in the sector," they added. "The crisis will show that fintech is not a fad, it's a trend towards making financial services more resilient and consumer-centric."