Radboud Vlaar, founding partner of Finch Capital.
In the immediate aftermath of the U.K. lockdown, ATM operators reported a 50 percent drop in usage. That probably shouldn’t come as any great surprise. Customers were — as instructed — staying at home and those venturing out for legitimate reasons might well have thought twice before using a service that involved touching hard, and potentially virus-infected - surfaces.
Fortunately, we live in an age when accessing, moving and spending cash does not necessarily mean touching either banknotes or the machines that dispense them. We can sit safely in the comfort of our own homes doing everything — or mostly everything — online. And in the midst of the current crisis, many of us will probably be using phone or tablet-friendly services and apps that we haven’t previously considered.
So what does this mean for the fintech industry? Will the Covid-19 crisis accelerate an existing trend towards the widespread uptake of smart financial tools? Or will the industry — like so many others — find itself crippled by the financial and social shock of the epidemic? And will startups be particularly vulnerable?
According to a new report published by Amsterdam-based fintech investor, Finch Capital, the sector will face some real difficulties over the next few months and while the post-crisis outlook seems to be positive for many businesses, others will struggle to regain any momentum that has been built up so far.
Fintech Insights
As founding partner, Radboud Vlaar, explains, Finch Capital is an investor in early-stage fintech businesses and, as such, the purpose of the report was to provide insights into the medium and long-term prospects of startups in the sector at a time of huge economic uncertainty. “We needed a perspective on how fintech businesses would be affected by the crisis,” he says,
The first thing that has to be said is that Finch Capital is not expecting the effects of the epidemic to rise and subside quickly. According to the report, the fintech industry is likely to be in “crisis mode” until the fourth quarter of this year, with the recovery phase taking up to eighteen months.
Digital First
But during this period, the VC is predicting rising interest in digital-first solutions.
In the consumer market, this will trigger a battle between what the report describes as “big pocket” incumbents and small, innovative startups. Meanwhile, financial institutions will be turning to tech innovators to provide the apps and systems that will drive their own (increasingly important) digital-only strategies.
A Boost for (Some) Lenders
But not everyone will benefit. For instance, the report says that “lending platforms” are likely to benefit from a rising uptake of digital delivery tools. However, even in this section of the market, some businesses will be held back while others will benefit. It depends on positioning.
Vlaar cites mortgages. “ At the moment there is no market for new mortgages,” he says. “However, in the U.K. 80 percent of players focus on remortgaging.” Those falling into the latter group have an ongoing opportunity to build their customer bases. Similarly, the digitization of the life assurance market is expected to continue apace.
Within the business-to-business/enterprise arena, the report sees opportunities for those providing know-your-customer authentication solutions and A.I. driven bots. Again, this aligns with the digital transformation agenda of corporate financial service providers.
A Challenge For The Challengers?
Perhaps surprisingly, Finch Capital sees the challenger banking sector facing difficult times. Challenger banks such as Monzo, Revolut and Starling have, in many respects, been the public-facing poster children of the fintech revolution. But as the report sees it, some challengers — particularly those with high burn rates — will be vulnerable in a post-crisis economy id levels of economic activity remain subdued.
“We would expect to see consolidation in a section of the market where you have a lot of players going after the same pot of gold,” Vlaar says. Payments companies also face challenges due to a decrease in transaction activity.
A mixed picture then. According to this report, at least, the financial services industry’s digital transformation will continue, but early-stage companies in some sections of the fintech marketplace are facing a difficult 2020 and beyond.
