Romolo Tavani - stock.adobe.com
Covid-19 will decimate fintechs, but those that survive will prosper
The coronavirus will wipe out some fintechs, but those that get through it will share in the next growth phase of the industry's development
News of cuts of 30% of staff at an established financial technology company (fintech) is a sign of the massive impact the Covid-19 coronavirus is having on the sector, but after inevitable consolidation, the pandemic could be the spark that lights the next iteration of the entire tech startup industry.
According to analyst company Forrester, the current crisis will be no different from previous economic downturns in making investment funds – the lifeblood of fintechs – scarce.
It paints a bleak picture for the fintech sector, where thousands of small companies are currently existing on capital investments alone, with revenues at a very early stage. “The last two economic downturns saw a huge reduction in private financing,” said Forrester in a recent report. “This time won’t be different. Only fintechs that had market traction, were profitable or had secured a big funding round before Covid-19 struck will survive the upcoming consolidation.”
As a measure of the impact of the pandemic, even established players are having to take drastic action. LendingClub, which was an early market entry after being launched in the US in 2007, recently announced it was laying of hundreds of staff as demand for its peer-to-peer lending service falls during the Covid-19 crisis. The company is cutting its staff by 460, about one-third of its total workforce, and has also announced temporary 25% pay cuts for senior executives, with the salary of its CEO being cut by 30%.
Peer-to-peer lenders have been one of the early success stories of the fintech sector, with companies like LendingClub and Zopa growing quickly. Startups such as LendingClub will take quick action to ensure they can continue to operate. The company said in a statement: “Covid-19 is having an unprecedented effect on consumers, small businesses and the broader economy, including the credit markets, and has resulted in a current reduction in platform investor demand for personal loans.”
The coronavirus pandemic is the first major challenge to the survival of companies such as LendingClub. Alternative finance providers enable people to make investments which become part of loans to individuals and businesses. They grew quickly partly because traditional banks became extremely cautious after the financial services crash that began in 2007. The banks were also seen in a bad light following the crash, making alternative financial services providers more attractive to customers.
Russ Shaw, founder of tech startup network Tech London Advocates, said LendingClub’s announcement was no surprise in view of what is going on globally. “Most companies are battening down the hatches, furloughing people if they can, laying people off or people taking pay cuts or not being paid at all,” he said. “This is due to uncertainty and the fact that they are seeing softness in their business.
“LendingClub probably wants to get ahead of this quickly, which makes sense.”
Read more about fintech response to Covid-19
- Banking and financial services trade body UK Finance to increase spending limit for contactless payments to £45 from the start of April.
- Technology startups in London are fighting for their existence, with business plans for the next three months geared towards survival.
- Financial technology professionals have created a tool that will support self-employed people claiming financial relief from the government.
Difficulties in the fintech space are magnified because many fintech companies are focused on one specific product line. When, for example, businesses stop borrowing due to an economic downturn, a fintech focused in this area will see its revenues decline suddenly, which is a challenge for many fintechs, said Shaw.
“I do think it is important that fintech businesses try to diversify in terms of products and services,” he said. “If you look at many of the challenger banks, for example, they went in with a single purpose but now offer other products and services. This protects them if one area of their business struggles.”
Shaw said there is a mixed bag in the fintech sector at present and while some are making drastic cuts to their workforces, others are recruiting extensively. “It depends on what aspect of fintech they are involved in, what their size and scale is and what kind of support they have from investors,” he added.
But Shaw pointed out that the startup sector could emerge from the crisis stronger after digital services become more mainstream, for example contactless payments, videoconferencing and online shopping. He recently told Computer Weekly that the tech startup industry could prove its worth during the current challenges.
“There is some underlying optimism that when we come out of this, the digital and tech world, and the things it can offer, are going to become even more important and critical,” he said. “I don’t think we will go back to the way we have operated in the past.”
There will be consolidation
Fintech entrepreneur Matthias Kroener, who set up and later sold Fidor, one of the earliest digital challenger banks, said there will be consolidation because fintech is a very young industry with vulnerable companies that have taken on high costs up-front.
He agreed that fintechs with a single product line are most vulnerable, but said all fintechs are lucky to have had government help. “They are all lucky to have supportive and quick-acting governments in the current crisis,” he said.
Kroener added that these are extremely stressful times for fintechs, but many are driven by the thought that there will be a huge opportunity when the crisis is over. “It is an evolutionary moment and is accelerating the fintech industry, which could see companies move into new business lines,” he said.
“Covid-19 could accelerate the arrival of the next iteration of the fintech industry,” said Kroener.
This next wave will be strengthened by the fact that digital laggards have suffered more than their more digitally developed competitors during the crisis, he said. “This does not mean it is going to be easy, but the sentiment is that even the last company to wake up on digitisation will invest.”
Kroener said there will also be a much bigger consumer audience for digital services. “Due to new ways of working and living changing during the pandemic, digital living is not a myth any more. Even people who had never done a video conference before now know Zoom.”