Covid-19 dictates how banking and financial services are used. Traditional banking shifted to digital in order to keep on servicing clients. Due to the lockdown measures and social distancing requirements, most of the bank branches are closed, increasing consumer demand for digital banking. From the opening of a new account to the application for a loan, digital banking is the new standard. In Germany, Deutsche Bank received 2.5 million applications for online bank accounts on day one of the lockdown. In the UK, cash withdrawals decreased by 60% during the first weeks of lockdown and the adoption and usage of fintech apps increased by over 50%. What kind of implications does the current Covid-19 pandemic have on traditional financial institutions and disruptive fintech companies?
“Many say that the long-term legacy of Covid-19 will be an increasingly digital and an online driven society. The question is who will thrive in such an environment and who will stay behind?”
As Rabo Frontier Ventures, we would like to share some of our insights on the impact of Covid-19 on the fintech space and venture capital market.
Digitalisation of banks before Covid-19: a lack of urgency?
“Lipstick on a pig”. Ironically, that’s how fintech companies call the digitalisation efforts of traditional banks. Over the years, traditional banks have made incremental steps in becoming more digital. Think about apps that categorize consumer expenses and the online opening of bank accounts. Despite these efforts, the underlying IT structures of banks remained largely unchanged and the overall banking system is still largely built around branches and physical identification instead of a true digital consumer experience. Banks are working hard on creating a digital banking ecosystem, but have difficulty keeping up the pace of change demanded by consumers, and the speed at which some fintechs are able to deliver. Especially these days. The reason behind this? One could say that before Covid-19, the sense of urgency for banks to truly digitalise was not strong enough. These days are over. If there is one thing that this crisis demonstrates, it is that consumers can do without visiting stores, having a lot of cash in hand and even owning bank cards. Once consumers get used to digital banking, it is unlikely they will revert back to the traditional ways of banking. Although the trends of digital banking and the rise of Fintech companies was already underway, Covid-19 can be seen as a super accelerator for digital financial services.
Covid-19 as an opportunity for fintechs
By being digital from the outset, Fintechs are well adapted to operate in a world that suddenly exists primarily online. Fintechs that offer services to banks can support in accelerating their digitalisation process, modernizing their legacy products and bringing digital banking solutions to the market.
Some examples in promising segments
|Segment||Example||During Cov-19||Post Cov-19|
|Mortgage challengers||Shift to online and remortgages. Due to the partial lockdown of the UK housing market, Trussle can gain market share from traditional brokers that only offer face-to-face services.||Accelerated shift to digital disruption.|
|Digital remittances||Shift to offline remittances as brick and mortar providers closed down. 40% growth in transaction volume and 100% growth in customers in March 2020.||Increased shift to digital remittances because of reduced fees and less hassle.|
|Digital identification (KYC)||Increased fraud and people taking advantage of people working from home and companies with scattered technologies in remote locations. Biocatch’s behavioural authentication solution to secure transactions in high-demand.||Increased need for security tools to protect their digital channels with more people working from home.|
|Digital wealth management||Trading platforms see a large increase in retail do-it-yourself investors that aim to benefit drop in stock prices. High demand (DeGiro reports 5000 subscriptions per day instead of 500) leads to waiting lists.||Increased traction because of preference for do-it-yourself investing.|
|SME focused challenger bank||Tide and other fintechs got lender accreditation by the British Business Bank (BBLS) enabling the platform to offer term loans between £2k and £50k to struggling SMEs amidst the COVID-19 pandemic.||Increased trust, traction and features (term loans) due to corona implications|
The role of fintech companies during the Covid-19 pandemic
In addition to Fintech segments that benefit from the increased need for digital financial services, Fintechs can also play a role in dealing with the economic consequences of this crisis. To avoid companies defaulting and people going bankrupt, governments are supporting the economy through financial aid programmes. Due to their legacy technologies and the inability to use alternative data for credit assessments, some banks may struggle to provide households and SMEs with capital quickly. This is not the case for fintech companies. Fintechs that have the digital, technological and fraud and risk assessment infrastructure in place to verify a borrower’s identity quickly, approve loan applications and deploy capital instantly. Most households and SMEs need capital in a swift and efficient manner, fintechs can meet those needs in a much faster and efficient way. Take Tide for example, Tide’s subsidiary Tide Capital is accredited by the British Business Bank as a lender under the Bounce Back Loan Scheme (BBLS). The accreditation is expected to enable the platform to offer term loans between £2k and £50k to struggling SMBs amidst the COVID-19 pandemic. Tide has stated that it will begin the delivery of Bounce Back Loans from the 18th of May onwards. This illustrates that fintechs play a crucial role in supporting small businesses that have to rework their business model to support online sales. Digitally sending and receiving payments, although not necessarily native to retailers, can serve as a lifeline for small businesses during the corona crisis.
Adverse Covid-19 effects on fintechs
It’s not all good news for fintechs though. Many say that the fintech sector will be hit hard due to the Covid-19 pandemic. Unless a start-up had excellent pre-Covid metrics (e.g. growth, retention, unit economics) and opportunity (e.g. need, market size, team) and is not heavily impacted by the pandemic, fintechs will have a hard time attracting funding. The reason behind this is that physical meetings, where deals are often done, are cancelled and that investors focus on their current portfolio and have a decreased appetite given the prospect of an economic recession. Q1’2020 was one of the worst quarters for VC-backed fintechs as the global amount of investments dropped to $6.1 billion, a 9 quarter low. Furthermore, the total amount of deals dropped to 404, a 13 quarter low. Investors tend to pull back on early stage deals bets and focus on fortifying existing portfolios. Startups with a recurring business model, commercial traction and sufficient cash will probably manoeuvre through this period, but for some fintechs Covid-19 will lead to the end of the startup adventure. Some fintech segments such as challenger banks are expected to be hit hard as traditional banks accelerate their digital transformation and clients returning their savings to ‘old friends’. Various challenger banks, such as Monza, see a drop in application downloads.
Fintech investments and deals per quarter
Figure 1: Fintech investments and deals per quarter. Source: CB Insights
Although the adoption of digital financial services was already steadily growing before the Covid-19 pandemic, the forced exposure to fintech and digital banking apps will sharply increase the number of converts and further enforce the position of fintech companies. The lockdown offers an opportunity for fintechs to prove their value: using advanced technology for the benefit of customers who need better money management, access to credit and digital identify services when branches are closed. Despite the altered investment conditions, we at RFV consider technology to be an irreversible long-term trend that can even see accelerated investment, adoption and innovation fuelled by this crisis. Even in these challenging times, our doors remain open and we will continue to back the best Fintech and Agtech entrepreneurs. Feel free to reach out to Harrie.Vollaard@rabobank.nl to get further acquainted.