As the coronavirus outbreak tears through the global economy, some fintech startups may see long-term benefits as consumers turn to digital-only financial services in an age of social distancing.
A newly released report by venture firm Finch Capital says that, despite short-term pain, the pandemic will ultimately drive adoption, creating a virtuous cycle for fintech companies through the COVID-19 crisis.
“Fintechs have been trying to advocate for the world to move to digital [alternatives] and away from the expensive, costly and slow incumbent, and that is being accelerated,” said Radboud Vlaar, managing partner at Amsterdam-headquartered Finch. “It will be a bumpy ride, but those with cash will be able to grow faster.”
In January, Finch participated in a £7.5 million Series C (around $9.3 million at today’s conversion rate) for Trussle, a UK provider of online mortgage brokering services. Then in March, the company co-led a £10 million Series B for Goodlord, the developer of a proptech platform.
Fintech startups that have recently raised cash are expected to have a runway to weather the storm, while more mature startups could be in a position to acquire other fintech companies. UK challenger bank Revolut, for example, raised $500 million in a round led by TCV in February and is now reportedly valued at $5.5 billion.
“With a recent US launch and the launch of their kids’ accounts, it doesn’t show their pace of development slowing at all,” said Rob Moffat, a partner at London-based Balderton Capital, which took part in Revolut’s Series C in 2017. “It’s a purely remote experience that shows the advantages of a mobile-first bank as opposed to a bank with a branch.”
James Green, DeVere Group‘s divisional manager of Europe, agreed that the pandemic and the steps taken to combat it have significantly accelerated fintech adoption. This week, the financial advisory said isolation and lockdowns have driven up the use of its financial apps by its European clients by 72%.
“The fintech sector in many ways is in a good spot during this crisis when compared with different categories,” said Luca Bocchio, a partner at Accel. “I’m seeing great examples of how these companies are nimble and agile, and can quickly adapt to differentiated situations.”
Trying times may still be aHead
However, the potential negative impact of the crisis isn’t easily discounted. The Finch report noted that a pullback of corporate VC investments and higher hurdles for companies’ access to funding may put pressure on valuations. Bocchio also noted that some fintech subsegments are more exposed than others. Payments companies, for example, that rely on large volumes of consumer spending may struggle to cope.
Lending companies that are overexposed to consumer and small business loans may struggle in a downturn as well, he said. Earlier this week, it was reported that peer-to-peer lender RateSetter is considering a sale due to the increasing risk of loan defaults among small businesses. The company has lent north of £3.8 billion to over 662,000 borrowers since it was founded in 2010.
Vlaar said the fintech sector is expected to remain in crisis mode until Q3 2020, with overvalued, capital intensive companies being the most at risk.