Covid-19 has created a fintech boom. Two years to the day
after the World Health Organization declared that the world was in the clutches
of a new pandemic on March 11, 2020, it’s clear that the financial technology
sector has enjoyed record investment and skyrocketing adoption of its services.
Two years ago, few industry stakeholders would have dared to hope for this turn
of events.
Back then, fintech leaders were growing increasingly worried
about Covid-19. They had reason to be – the virus with the official designation
SARS-CoV-2 was terrifying. The first reports about people falling victim to the
new disease had started to leak out of Wuhan at the end of 2019. Since then,
the novel coronavirus had become a global threat, infecting tens of thousands
of people every day. Two years later, the contagion has infected more than 453
million people worldwide, ending over six million lives, according to the WHO.
With the mounting waves of infection came the uncertainty.
The coronavirus was a massive unknown and its impact on societies was
undetermined. Fintech leaders didn’t know how to respond to Covid-19, and had
no idea what it would mean for their ability to attract customers, expand
services or raise fresh capital to fuel growth.
It didn’t help that world leaders responded in very
different ways. President Sergio Mattarella’s government, for instance, moved
quickly and put all of Italy in lockdown in early March. Donald Trump’s White
House, by contrast, oscillated between downplaying the escalating international
crisis and calling his own response a massive success. That was before he
proposed treating the illness with bleach injections.
In the UK, Boris Johnson’s government followed a similar
pattern, but slowly started to admit the severity of the crisis by ending
non-essential travelling and, eventually, announcing the first national
lockdown on March 23, 2020.
By that stage, Covid-19 had wreaked havoc on markets,
creating massive volatility. Analysts warned at the time that this would make
consumers less likely to invest their savings, meaning digital wealth managers
and share-trading apps like Robinhood would likely get fewer customers.
Instead, it would turn out that the pandemic saw more people sign up to use
trading apps, which would eventually be one of the contributing factors behind
the meme stock trading chaos at the start of 2021.
Payment processing giants Visa and Mastercard both warned
that they would struggle to meet expectations in the second quarter of 2020 due
to people being less likely to travel. Block, then Square, warned traveling
restrictions could disrupt its supply chain and, consequently, the production
of new devices.
In Europe, challenger banks like Starling Bank, Monzo, N26,
Revolut and bunq all issued statements about how their employees could stay
safe and how they were enabling remote working.
Monzo also postponed the salaries of its board members as
well as its rollout in the States. The UK neobank didn’t move out of beta into
a public US launch until February 2022. The coronavirus delays also contributed
to it suffering a downround in the summer of 2020 that saw its valuation drop
form $2bn to $1.4bn. It has since regained some of that momentum. Monzo
achieved a $4.5bn valuation on the back of a $500m round in December 2021.
The struggles in those early days also underlined the fear
that investors would be spooked by market uncertainties, meaning they would be
less likely to back startups. However, data from research firm GlobalData shows
that this fear was premature. As it turned out, Covid-19 would result in a
fintech boom.
Fintech industry enjoyed more funding because of the
Covid-19
To begin with, there was a slump in investment in the
fintech sector in 2020. The value of the venture capital deals in the industry
dropped from $35bn in 2019 to just $30bn in 2020. The number of deals dropped
from 2,065 to 1,786 over the same period.
However, those figures jumped in 2021. Last year, fintech
companies attracted $88bn across 2,528 deals, according to data from
GlobalData.
The numbers for 2022 look equally promising. By the end of
February, the fintech industry had already raised $88bn in total across 312
deals.
“The pandemic hasn’t necessarily made the investment process
easier, but it certainly hasn’t hurt fintech investment in general,” Laurel
Wolfe, VP marketing at cloud banking platform Mambu, tells Verdict.
At the start of the pandemic, early-stage startups feared
they would struggle to raise money as they hadn’t had a chance to prove
themselves yet.
It does seem that this fear was somewhat unfounded, with the
majority of funding being recorded by GlobalData going into investment rounds
worth up to $50m. In 2020, 1,640 deals recorded were worth up to $50m. In 2021,
that figure had jumped to 2,120. In other words, several small startups
successfully topped up their coffers during the pandemic.
The proportion of investment deals worth $50m or more of the
total number of deals has grown over the past two years. In 2019, 8% of deals
were worth more than $50m. Last year, that figure had jumped to 22.8%.
This suggests more mature ventures have been able to tap
into the deep coffers of investors more successfully than before.
“Established fintechs and those in the scale up stage, were
able to secure further capital and the pandemic has helped bring clarity on
market opportunities, especially digital-centric trends such as online
payments, digital banking and investing,” Wolfe says.
Fintech trends in the age of Covid-19
SARS-CoV-2 accelerated digitalisation efforts across the
globe. Businesses scrambled to enable their employees to work remotely without
loss of efficiencies or cyberattacks. That latter part was one of the reasons
behind a jump in cybersecurity investment deals over the past two years that
coincided with the fintech surge.
Clearly, the fintech industry benefited from Covid-19. There
had already been a push towards more online shopping over the years – a trend
accompanied by a seemingly never-ending string of doom and gloom reports about
the death of the high street.
Once the coronavirus crisis kicked off, this trend
accelerated thanks to people being confined to their homes, unable to shop in
physical stores. The UK Office of National Statistics estimates that ecommerce
sales grew by a record 46% in 2020, the highest increase since records began in
2008.
Understandably, people need to pay for their digital
shopping sprees, which meant that companies providing payment solutions or ways
for people to shop without breaking the bank became more popular.
“Embedded finance, led by buy-now-pay-later (BNPL) and
remote lending at the vanguard, is another segment that’s on the rise but
competition is high,” Alex Woodhouse, SVP financial services at Endava, tells
Verdict.
Other segments of the fintech sector that enjoyed a boom
included B2B lending platforms and businesses empowering banks to offer remote
digital services. The coronavirus also contributed to accelerating the trend
towards a cashless society, with people worrying that the illness could spread
via physical money.
“Reliance on cash has been diminishing over the last few
years,” Bala Kumar, chief product officer at know your customer company Jumio,
tells Verdict. “With the pandemic, we saw a real acceleration of the move to
digital financial services, even more bank branches closed and the general
population embraced a digital-first lifestyle. With this growing shift, we saw
increased investment in the fintechs providing these solutions.”
The pandemic also contributed to surging numbers of people
investing in bitcoin and other cryptocurrencies, seeing the value of these
digital assets reach record heights and the suggestion was made that they had
become safe haven assets like gold. Bitcoin’s recent plunge has somewhat
dispelled those delusions, and now there is talk of an imminent cryptocurrency
winter instead.
While they have enjoyed a boon thanks to Covid-19, fintech
companies still face the challenges of new regulation and increased competition.
The question is what these challenges and the prospective end to the pandemic
will mean for future fintech investment.
“Investment in fintech is currently still going strong,”
Philip Taliaferro, VP of product management at Finastra, tells Verdict.
“However, we may see it start to flatten in the coming months.
“In the public markets over the last few quarters, we have
seen that investors are more willing to give companies the space to prove their
business model and generate strong top-line growth. If that growth
materialises, then fintech stocks will continue to perform well. If not, we may
see a big pull-back in valuations. We can expect to see this trend present in
the private markets too, as the exuberance turns into practicality and a demand
for financial returns.”
While both January and February saw fintech companies raise
multi-million rounds, there were fewer rounds than during the same period
during the record year 2021. Some analysts have suggested this apparent
slowdown may be due to Russia’s invasion of Ukraine and the resulting market
uncertainties. However, just as we learned at the start of the pandemic, it
might be too early to start to panic just yet.
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