Fintech Startups and Pandemic Challenges
The pandemic has brought several challenges to the fintech industry. First, investor attention has shifted toward current companies rather than new companies. The traditional approach to seeking investment, including in-person pitch meetings and conferences, has also been disrupted, which means that fintech startups requiring new funding have faced problems.
Like other lenders, fintech’s focus is on lending money to consumers, and these businesses are facing a significant challenge this year. To estimate the impact, consider that three of America's largest banks set aside $28 billion for losses in the second quarter of 2020.
Fintech companies with smaller balance sheets, like Funding Circle, established in 2010, may suffer significantly in 2020. According to the company's website, retail trade is the company's second-largest sector for lending. In the second quarter, US retail sales fell approximately 8%, according to CBRE. Fintech firms with significant exposure to the retail sector are likely to experience more losses this year if they do not change.
For Funding Circle and other firms founded in the past decade, 2020 is the first significant economic downturn they have experienced. That means that management teams, investors, and customers do not have the same recession battle scars and experience as bankers. As a result, lending focused fintech firms may have to adopt bank style practices like more extensive capital reserves and lower profit margins to survive.
When there is an economic downturn, it creates new opportunities for some companies. Take Credit Sesame, for example, a company that helps people to improve their credit scores. That's a service that is likely to become more prevalent in uncertain economic times as borrowers look for ways to improve their financial situation.
These Fintech Companies Are Still Growing Despite the Pandemic
Other parts of the fintech industry are finding growth opportunities like payments. Historically, payments are one of the largest segments of the fintech industry. These companies typically earn a fee with each transaction, similar to credit card companies. When customer spending fell this year, payment fintechs faced a question: Would there be enough payment volume from online and essential businesses to survive? Let's take a look at PayPayl's results to measure this area. In their second-quarter results, PayPal reported that it had achieved a new milestone of more than $5 billion in quarterly revenue. Further, the company reported a 21% year-over-year increase in merchant accounts. These results suggest that payment fintech companies have benefited significantly from the move to online sales.
The PropTech niche focused on real estate has continued to receive investment while smaller firms may not survive. This segment has already witnessed some acquisitions like CoStar's acquisition of RentPath, which offers analytics software and advertisements in properties such as Rentals.com, Lovely.com, and Rent.com. Expect to see more fintech companies find buyers if high unemployment rates continue.
Whether or not the pandemic continues, many people still want to buy, rent, and sell real estate. According to the National Association of Realtors, in July 2020, real estate sales in the US were up 8.7% compared to July 2019. That's surprising given the economic turmoil in the broader economy. It also tells us that fintech and PropTech companies with housing market exposure may yet find an opportunity to prosper in 2020.
For example, TechCrunch sees the opportunity for a new wave of PropTech firms that focus on the fundamentals: making transactions cheaper and safer. For example, take the boom in "virtual home sales" where buyers use software to view a property rather than exclusively relying on in-person tours.
The Next Phase of Fintech Growth
Many fintech founders long for the profits of the major financial service companies. Founders and investors see markets like the trillion-dollar residential mortgage market or the vast credit card industry and imagine the possibilities. The 2020 downturn has revealed a few inconvenient truths for the fintech industry. These dreams of growth - and achieving the "Unicorn" status of $1 billion valuation - are facing a challenging test this year.
Fintechs and Banks: Frenemies in 2020 and Beyond?
Fintechs have a complicated history with traditional banks and insurance firms. On the one hand, many fintechs aim to take market share from these established companies. On the other hand, we have projects like the Apple credit card, which involves a partnership with Goldman Sachs. Still, other fintechs have chosen to minimize their regulatory burden by acting as suppliers to banks.
The COVID-19 pandemic has demonstrated that traditional banks retain remarkable advantages. Large banks have unparalleled access to funding in the form of deposits, low-cost bonds, and even emergency cash from the government. Further, banks have entrenched relationships with customers that go back decades or longer. Therefore, fintechs that find a way to partner with and sell to established players in the financial industry are more likely to get through this crisis.
About the Author
Luigi Wewege is the Senior Vice President, and Head of Private Banking at Caye International Bank. Outside of the bank, he serves as an Instructor at the FinTech School which provides online training courses on the latest technological and innovation developments within the financial services industry. Luigi is also the published author of: The Digital Banking Revolution.