Fintech is expected to play a crucial role in the post Covid-19 world of finance. That said, some fintech companies will need to adapt to the ‘new normal’ in order to stay relevant. Starting with banking, fintech has significantly shaped many areas of finance whether that be investments, insurance or financial planning. The question then becomes, which fintech firms are the best positioned for the future post Covid-19?
In the case of e-commerce, social media and alternative technologies, some companies are thriving and a few players are consolidating their position. This can be seen in the banking sector too, where government programs are primarily distributed through incumbent institutions. For example, while PayPal and Square received permission from the Internal Revenue Service to distribute funds, neobanks did not. This furthers the perception, and probable reality, that powerful firms will not only remain powerful but are growing. In the US alone, billionaires have added $380 billion to personal wealth, while unemployment claims skyrocket.
Bad news for small players
The effect of Covid-19 on smaller fintech companies, however, has been devastating. Some companies cannot continue due to lack of funding, while others are killed off because investors are demanding unreasonable terms for investment. Of the latter, if companies accept these terms they could lose real potential to scale funding later, and if they don’t accept they run the risk of becoming obsolete. Fintech companies that will be affected most by Covid-19 will be those in the hardest hit sectors such as economy travel, in-person engagements, restaurants/bars/clubs and marketing and advertising. This is pervasive throughout all approaches to fintech, be that solutions, apps or services, and specific to pre-Series A companies.
In the banking sector, there are two main points of pain: customer engagement and business performance management. Banks have been pushed to engage with consumers to drive better customer experiences and have been looking to leverage fintech partnerships or acquisitions to do just that. As the Covid-19 crisis continues, many of these projects have been put on hold in favor of other major topics for banks, such as enabling staff to work from home (which is operationally very hard), ensuring access to core systems (i.e money and credit) as well as managing own company costs and operating pressures. We now see a massive shift in focus at banks from fintech for customers to fintech for the business and its systems.
Covid-19 has completely dried up any funding for pre-Series B startups in terms of new investors, and has caused delays and drops in funding from existing investors for pre-Series A startups in the areas of the market most hit. For existing companies on the market, funding is only there to extend the runway around 18 months, alongside massive cost reductions with the priority of company survival. For startups that find themselves outside of these critical verticals, valuations have decreased significantly in anticipation of economic slowdown for the coming months and startups looking to raise Series A or later have to meet higher annual and monthly recurring revenue to secure funding at good terms. In general, terms for funding have also deteriorated, with older clauses seen in the market again.
Who will survive?
Companies in B2B technology, operation core functionality or remote engagement, be that through gaming, social media or media content, will survive and in many ways will do very well. Those who are well capitalized and have high resaleability of their product will also do well during this period. Needless to say, companies that can deploy remotely, produce remotely or where users can consume products without face-to-face engagement will thrive in the coming months.
The impact of this will last longer than the time it will take the economy to recover. We will see investors hesitant to get straight back in. They will first see which companies really survived, what the economy is doing, what consolidation will happen and what the market consumption and engagement looks like post Covid-19, before really making major capital available again for new funding, or new startups. Conversely, for existing companies that successfully navigated the crisis, massive amounts of capital will be available and will be invested to scale these solutions and enable mergers and acquisitions, market capture and expansion activities.
While it is early days yet, it is apparent that we should expect changes to how we operate in terms of both traditional and digital finance functions post COVID-19.