In light of the COVID-19 crisis, fintech continues facing economic destruction.
The COVID-19 pandemic has created severe uncertainty in a number of fronts in the FinTech industry. Companies are not getting funding, especially early-stage ventures, making them more vulnerable to this crisis. Recently, McKinsey cited that the global fintech sector faces an existential crisis. The company’s report reveals that after the virus took hold, capital funding for fintech companies went from surplus to scarcity. With growing over 25 percent year over year since 2014, the sector saw a sharp decline in investment by 11 percent globally. Europe, on the other side, fared worse with a drop of 30 percent in the first half of 2020, compared to the same period in 2019.
In the Fintech Almanac’s 2019 report, 2019 was the most advantageous year in terms of financing volume and transactions. Fintech companies raised approximately US$44.6 billion in funding through 1,813 transactions. In terms of M&A, this was the biggest year ever for the industry, with a record total of US$233.8 billion in M&A volume through 989 transactions.
COVID-19 is a Litmus Test for FinTech Startups
As the ongoing COVID-19 crisis has blemished the entire business landscape, it is somewhat testing the business models of the best of startups. The pandemic has accelerated digital transactions allowing fintech companies to adapt to the changing environment. Some are already finding ways to navigate the storm, but many are still struggling.
According to McKinsey, fintechs are largely unable to access loan bailout schemes owing to their pre-profit status. In addition, government-backed wage support/furlough packages have income caps well below the typical salaries of fintech engineers and other skilled talents, which represent a large proportion of the fixed costs of these businesses. The management consulting firm further noted that as the VC and growth investment community will continue to back some companies, they cannot meet the aggregate demand on their own.
In Europe, as fintech faces a lot, the governments’ steps towards lifting the industry are only a stopgap. The UK, for instance, has created a coronavirus Future Fund to invest in growth sectors of the economy, of which £320 million has been dispersed to fintechs through a convertible loan that matches funds raised from venture investors. Germany and France also have launched a similar funding scheme.
Apart from this, many fintech companies have taken robust steps to navigate the crisis. They are looking to strengthen their capital and funding from VCs. Conversely, most are taking a cost-saving approach by cutting costs and reducing headcounts.
A recently published report by PwC India, in association with FICCI, shows that the payment sector has emerged as one of the key pillars of FinTech credited to its capacity to be an infrastructure provider and offer a full suite of cash management services. Retail and MSME lending will come out as two crucial components of alternative lending backed by technological approach.