The financial technology (FinTech) startup space has long been positioned as an alternative to mainstream banking and financial services, as customers go mobile or move online, seeking out flexible, friction-free services.
- The mainstream banking sector is examined in our separate coronavirus report this week.
As reported on Transform Finance last year, new banking customers such as students, young adults, and the previously unbanked, choose digital services when they first enter the market.
According to 2019 research from Fujitsu, more than one in ten consumers (11 percent) now exclusively use ‘challenger’ banks instead of established high-street names. In five years’ time, less than half of consumers (48 percent) will solely bank with traditional brands. Seventeen percent will solely use challenger services, while 35 percent will bank with a combination of new and traditional outlets.
Speed is part of the attraction for all age groups, with 42 percent of respondents saying that they appreciate faster and better access to their financial information.
But a lot has changed since November 2019 when that report was published. The coronavirus has hit the world, impacting the UK just weeks after a disorderly Brexit that left it with no trading deal with its former partners and the prospect of regulatory divergence.
The pound and UK economy are in free fall – the former hitting its lowest level against partners’ currencies this week, and the latter shrinking by up to two percent, by some estimates, prior to lockdown.
The prospect of one of the most severe recessions the UK has ever seen may be on the cards – a situation that is part circumstantial and part self-inflicted. Other countries face similarly alarming prospects, as they struggle to inject cash and incentives into the economies; a shot of adrenaline to the chest.
So how is the FinTech sector responding? At this point in history, some people’s response might be Who cares?, but as more and more people turn to digital solutions – especially Generation Rent – its health and wellbeing is worth considering.
Many citizens may have little choice but to bank online or from their phones in the weeks ahead, and use other digital financial services to keep their businesses running. In this sense, the sector will need to be reliable, stable, resilient – and well supported with cash.
The latter is a challenge, however, as global financial stress may cause wealthy investors to flee to lower-risk alternatives. Gold, rather than the ‘new gold’, may seem more attractive.
There have been a number of FinTech stories in recent days. These include:
- PayPal has reported a significant drop in ecommerce activity in nearly every type of item due to the virus, while mobile payment platforms such as Stripe or Square face losses from dramatically reduced footfalls in shops, restaurants, and bars.
- Wealth Adviser reports that iCapital Network, a platform that provides financial advisers and their clients with access to a curated menu of private equity and hedge funds at lower minimums, has closed a $146 million funding round. This suggests that how private and offshore capital behaves will be a significant trend to watch, given the prevalence of the shadow banking sector.
- However, a report published on Ameinfo.com paints a far less rosy picture. According to brokerage Rosenblatt Securities, FinTech unicorns could see $76 billion wiped off their valuations by the crisis, while some smaller, more nimble players with lower fixed costs could find favour with investors. That report forecasts that the globe’s 58 unicorns in this space could each contract by an average of 15 percent in the event of a prolonged recession. Other startups will struggle to turn valuations into payroll in the coming months.
- Rollcall.com has a different take, suggesting that FinTechs that are working to improve backroom and front-office market functions, such as exchanging securities or making lending decisions, could help markets recover much faster than they did in previous financial crises. Data will be the key.
- Elsewhere, Betakit.com reports that the Canadian Lenders Association, which includes FinTechs and alternative lenders, is calling on the government to expand its stimulus package to include alternative lending options.
- In Europe, Italy has been one of the countries most severely affected by the pandemic. However, in an interview with eu-startups.com, Alessandro Longoni, Head of Italy’s FinTech District, said that the sector is “probably more prepared than others for this shift”.
“The first reaction we have seen has been proactive: our community (both FinTech startups and corporate members) has come together with a number of initiatives to support the fight against COVID-19, either via fundraising or via free advice. We believe this is a pragmatic and generous approach.”
The community has published its own report on the industry’s response here.
- Finally, Forbes is publishing a regularly updated list of FinTechs that are providing free technology during the pandemic. You can find it here.