Covid-19 has interrupted the wave of FinTech (financial technology) that has been disrupting banking and financial services. What can FinTech startups do to survive and prosper, after Covid-19? Venture capital firms want to hear a new story, less about the tech and more about the business model and revenues, and the crisis has added a new dimension to the story – social utility.
Before the crisis, the valuation of FinTech firms was on average much higher than the big banks because FinTechs are considered to be disruptive, destructive, and capable of stealing market share from the old financial institutions. FinTechs have benefited from low interest rates and highly valued markets, and investors have been attracted to FinTech by the stories coming from these firms. Stories play an important role in the sector, building expectations about what technology could do – for example, blockchain, AI, and Big Data wiping out the big banks.
But banks are giants, as we have seen again during this crisis. The banking sector is a stock market favourite and high valuations prevail, even in the crisis while markets have trended lower, dragged down by energy and real estate stocks.
What has changed?
Generally, the tech sector has benefited from the pandemic and is now in a stronger position than financial companies. The digital payments sector has benefited significantly as people have stayed at home and used services such as PayPal, which has been adding new accounts at the rate of 250,000 per day. Younger people use digital payments and older people are more cautious. But during the pandemic, we have all had to use digital payments.
Investors are now more cautious and there has been a flight to the safe havens of cash/gold, with around 40% of FinTechs delaying fund raising rounds. They should be able to find investors when we have passed through the Covid-19 pandemic but only if they tell a new story.
Some FinTechs have had financial and growth challenges with the pandemic but may have been able to learn new skills, such as lobbying, managing cashflows and relationships with other industries; it’s not enough to have good technology and you need other skills to survive.
Of course, FinTechs do not have the same capital base as banks which have the advantage of scale but they also have relatively poor digital infrastructure. FinTechs and smaller challenger banks that can enable banks to digitally transform will see their valuations rise and are likely to be acquired by the bigger banks. So we can expect to see more consolidation – and even bigger banks – after the pandemic.
But the Covid-19 crisis has added another dimension and perspective to financial services and banking, and an opportunity for some FinTech companies. For example, one player decided to be more socially useful and help the charity sector to continue raising donations.
Another launched an app to help the elderly and vulnerable people at home to protect themselves against fraud.
After 2007 and the Global Financial Crisis, the FinTech story was the positive impact on customers and innovation, as banks needed more competition. But FinTechs can reinvent themselves and emphasise their social usefulness in the Covid-19 crisis. They are not just disruptive but are becoming more socially relevant and indispensable to the post-pandemic recovery.
However, there is a risk and threat of a pincer movement on FinTech during the crisis – from the financially well-capitalised big banks, which are now working with the central banks; and from the tech side, with companies such as Facebook and Google starting to look at providing more financial services.
So, FinTech needs a clever strategy to make sure it remains relevant in the post Covid-19 era.
FinTech with a purpose
Before the crisis, FinTechs could achieve high valuations because they were competitive and disruptive. After the Covid-19 crisis, their disruption is less relevant but now they can be linked to a more socially useful purpose, helping financial customers when incomes and jobs are disappearing, by identifying needs and responding faster with better solutions than the banks.
Banks tend to support SMEs poorly at times like these so there are still opportunities even for FinTechs. This is a good time for FinTech to support SMEs and increase the customer base and revenues but it comes with risk as no one knows how long the drop in economic activity will last.
Will FinTechs continue to attract VC interest? This will be more difficult as most VCs are now more cautious but the money is still there and they can win VC support, if FinTechs present stronger business models and business plans, not just technology. VCs are looking for different skills and new stories. This means changing the pitch strategy and FinTech must identify niche areas that will benefit from Covid-19 with well-designed companies and products and an interesting story to tell, which includes social utility.
FinTechs do need to reshape the way they do business and stop using the term FinTech after Covid-19 – they must be much more specific about the space they occupy in the broad range of financial services, and find a distinctive and new story to tell, such as SME lending, HealthTech, and InsureTech.
Banks and FinTech will continue to co-exist and even cooperate more as the banks will buy into or acquire successful FinTech companies, who will never have the capital base to compete with the banks on their own traditional territory.
Ismail Ertürk is Senior Lecturer in Banking at Alliance Manchester Business School, The University of Manchester.