Connect with us

Featured

How did the COVID-19 pandemic influence investments in the fintech sector

With decrease in financing, focus of investments towards dominant technology fields, and seed funds abandoned, the second quarter of 2020 is the worst Q2 since 2018 in terms of financing. One effect of the crisis is that the fintech companies that are attracting investment are those in advanced stages and concentrated on large financings, which are considered to be more secure.

Isaac Atwood

Published

on

This picture show a person using a credit card.

In its latest report “Fintech Funding Roundup, Q2 2020”, Forrester provided an overview of fintech funding by venture capital firms, investors, and financial institutions. The COVID-19 pandemic and its economic impact does not spare fintech companies.

If you want to find more details about the impact of the corona crisis on the fintech sector and to read the latest economic news, download for free our companion app, Born2Invest.

Worst quarter since 2018 with $6.34 billion in financing

Polluted by the economic climate, the financing of the fintech sector has grown significantly over the last decade, from $1 billion in 2010 to $39 billion in 2019. The year 2020 promises to be different, with a sharp drop in investments recorded. Already noted in the first quarter of 2020, the fall is accentuated in the second quarter.

In these deleterious months, it should be noted that the American payment provider Stripe nevertheless raised $600 million in April, while the Brazilian online bank Nubank raised $300 million. Forrester noted that “the impact of the crisis continues to vary by geographic region: China recorded no transactions for the second consecutive quarter.”

Another effect of the crisis is that the fintech companies that are attracting investment are those in advanced stages and concentrated on large financings, which are considered to be more secure. Thus, 52% of funds went to late-stage startups, while the 21 companies that obtained financing of $100 million or more accounted for nearly 65% of financing for the quarter as a whole.

A concentration of funds towards digital banks, lenders and payment service providers

The investment trend continues in the fintech sector: money goes to mature, established and frequented technology areas. Investors thus favor fintech companies that improve existing processes.

Stripe is a good example of this. With its $600 million ($1.6 billion in total for a valuation of $36 billion) G-Series, the company fits perfectly into the logic of improving payment processes on the Internet, a use that is itself part of the ongoing migration trend from cash to digital payments. 

In another study, Forrester pointed out the change in payment practices accelerated by the COVID-19 crisis, as cash is perceived as unhygienic and consumers are now moving towards e-commerce. Forrester also stated that the Stripe example is not unique. Checkout.com raised $150 million on its latest round, bringing its value to $5.5 billion.

SEE ALSO  Where is the trucking industry now when it comes to hiring women?

The fintech companies, which fit into the dynamics of the crisis by presenting answers to consumer needs, are also attracting investors. At the crossroads of investors’ concerns and responses to the needs of populations, the new banks are doing well. Nubank, mentioned above, which now has 20 million account holders, reacted quickly during the COVID-19 pandemic by channelling government relief payments and extending credit to vulnerable people affected by the crisis. Further north, the US online bank Varo Money raised $241 million in Series D while supporting its clients by providing timely access to government support measures.

The same logic applies to the fintech companies that support VSEs and SMEs. Public funding amplifies investment in companies that provide answers to the COVID-19 crisis affecting small businesses. Forrester comes back to the example of Judo Bank, which specialises in corporate loans and banking services for small businesses, which obtained the largest financing for fintech companies in the second quarter with $649 billion, including funds from several branches of the Australian government.

Another trend is for established fintech players to acquire others to expand, such as the US online personal finance company SoFi, which was acquired for $1.2 billion by Galileo, a payment software company.

A tough future and consolidations for fintech companies

The impact of the COVID-19 pandemic crisis has been severe for the fintech sector and is far from over. The cards will be reshuffled with a more secure horizon for fintech companies that have obtained large financing and/or have sufficient capital. Forrester’s report thus puts forward some predictions for fintech companies.

In times of crisis, some fintech companies that have attacked traditional banks head-on will be at risk. As financing dries up and the trend is not improving, defaults will increase according to the report and only a few leaders are expected to stand out. With fintech companies in trouble, banks will see opportunities to make “cheap acquisitions”.

The tech giants and other large non-bank companies will continue to take an interest in fintech companies. GAFAs have already started to acquire or finance fintech companies and banks are increasingly fearful of players like Amazon or Apple who could become major players in financial services. 

SEE ALSO  Can blockchain disrupt healthcare and lower costs?

Forrester pointed out that without stealing huge market shares, these players’ investments in fintech companies will increase costs, making it more difficult for traditional banks to acquire innovative digital services at low prices.

Finally, back-office automation will accelerate. A mature field, it should increasingly replace manual tasks performed by bank employees, allowing banks to lower costs. That will enable banks to reduce costs, and banks that invest or make relevant acquisitions will be able to remain competitive with GAFA and the cream of the fintech industry.

__

(Featured image by AhmadArdity via Pixabay)

DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.

This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.

First published in SiecleDigital, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us.

Isaac Atwood is a PR and marketing consultant who has worked with respected names in the financial industry. He has also sat down in many sessions with startups aiming to become the next unicorn. Isaac loves working with CEOs, business executives, and entrepreneurs who wish to enter the following markets: artificial intelligence, cannabis, virtual reality, cryptocurrencies, robotics, wearable and smart tech, and even the much-hyped space race. He is currently managing the brand portfolio of an Asian firm planning for its IPO by the end of the year. While his engagements have taken him around the world, Isaac is proud to call Toronto his home.