Evaluating Fintech Market Scenario Amid Coronavirus Outbreak

The coronavirus pandemic has taken a terrible toll on the global economy. The crisis is affecting various industries. However, tech and digital companies along with fintech are most certainly prepared and combating well with the circumstances. Where on one hand some businesses are shutting their doors, others have opted for work from home as per government orders. The shift to a remote working environment has given a boom to digital industries including fintech.

In Bahrain, fintech solutions provider and telecommunications firm, STC Bahrain, announced recently that it would introduce new working procedures to ensure the safety of its workers while continuing to offer fintech services to support the country's residents.

Similarly, in the United Arab Emirates (UAE), more than 37% of domestic companies are planning to shift to remote work.

Across the UK, several fintech have even ramped up their responses to the spread of the coronavirus with at least one running rehearsals for a worst-case outbreak. Earlier this month, Curve closed all its offices and ran a "remote test day" to ensure its services remain up should the company be forced to enact a compulsory work from home policy.
Frank Zhou, CEO, and founder of Zeux, isn't too worried about the fintech sector as companies in the field are naturally agile and flexible.

"Fintech companies are traditional – and necessarily – fast adapters: from adopting paperless and cashless approaches to implementing new software and cloud-based systems, as well as remote working capabilities," Zhou told Fintech Magazine. "Fintech companies are often built better to withstand impacts that we are seeing sweep across other industries at the moment."

Evaluation of Fintech Market Amid COVID-19

A report by Rosenblatt Securities says that "Fintechs with lower fixed costs will outperform and gain favor with investors over those with big, rigid fixed costs. The flexibility in business models and the ability to dial-up/down costs will become critical for fintech and will determine which firms survive. Firms that rely heavily on large marketing expenditures to generate growth will come under investor scrutiny as they can no longer justify large customer acquisition costs due to weak transaction volumes. "

Moreover, traditional financial institutions will gain a competitive advantage over fintech in this highly uncertain market environment as they are better capitalized, have bigger brands, and benefit from customers becoming more risk-averse, believes Rosenblatt. Fintechs with recurring revenue and long term contracts will be impacted less than firms with transaction-based business models.

As funding sources dry up, struggling fintech firms may be forced to seek collaboration, investment, or acquisition by traditional financial institutions, PE funds, or even non-financial strategic buyers.

Online alternative lending, digital wealth management, and consumer banking are sectors most likely to see M&A deals, believes Rosenblatt, as incumbents use strong balance sheets and wider distribution to snap up bargains.

Most will be lured by a decline in valuations, with a protracted downturn forecast to wipe off $76 billion of Unicorn market value, which currently stands at $510 billion for the sector's 58 fintech Unicorns.

"The next segment to feel the pain and suffer declining investor interest would be early-stage companies (Series A and prior) that have yet to fully validate their business models," states Rosenblatt. "Series B-D companies would fare better than their less-mature peers and could trade at par or even at a reasonable premium if they can demonstrate healthy growth, have unique IP and resilient business models."

Analysis

"2020 will be challenging for FinTechs to navigate, but there are better times ahead. Post-crisis, disruptive winners will "take all", as we expect surging demand from financial services for technology to master digital-only interaction, enabled by AI and big-data analytics," says Radboud Vlaar, Managing Partner at Finch Capital.

According to a Finch Capital report, the fintech market can expect crisis mode until Q3 2020, followed by a 12 – 18-month recovery. Also, digital-only becomes the new industry norm in financial services, greatly accelerating a trend that started in the last decade. The market will also witness a shift to digital-only triggers a "Big Pocket" battle between incumbents and challengers to win the (newly) online customer. Financial Institutions will turn to Tech companies rather than in-house solutions to accelerate digital transformation.

As the report suggests, consumer and SME lending platforms: best-adapting mechanism to swiftly and efficiently deliver capital to key segments of the economy will be a winner overcoming pandemic challenges. Mortgage and life insurance digitalization leaping forward with technology to disrupt the role of intermediaries, whose role was often face-to-face will also come out shiny.

Moreover, fintech 'enablers' around AI, IoT, and software solutions are in high demand. However, some of the challenges will include a pull-back of corporate VC-led investments in combination with higher hurdles for companies' access to funding put pressure on valuations in later-stage rounds and increased M&A and trade-sales in under-$250 million category of fintech companies, as fewer IPOs expected.