The growth in the impact of fintech firms did not abate as we entered 2020, with venture capital funding for private U.S. fintechs coming off a strong 2019, where $18 billion was invested compared to $13 billion in 2018, according to CB Insights and PwC. Much of the growth was focused on firms that used data, analytics and advanced technologies to deliver improved consumer experiences.
Fintech firms globally also benefited from more flexible regulations in both emerging and mature countries, as organizations sought to improve financial inclusion and serve a broader digital economy. According to a report from Ecosystm, there were five key trends that were expected to shape the Fintech market during 2020. These included:
- Greater investment in platforms supporting financial inclusion.
- Increased collaboration and investment in fintech firms by traditional banks.
- Awareness of Asia being the center of the fintech universe.
- Rise of importance of advanced data and analytic start-ups.
- Regtech firms providing improved automation of compliance.
Over the past few weeks, it is clear that there is another major trend that will impact investment in fintech firms while also driving greater digital banking usage …
6. Shift in fintech valuations due to coronavirus outbreak.
Negative Impacts of Coronavirus on Fintech
The impact of the coronavirus outbreak is impacting both financial markets and consumer behavior as never before. At least in the short term, there has been a significant flight to safer investments by consumers, which could negatively impact VC funding of existing and new fintech firms. This potential drying up of financing to non-traditional financial services firms could force many firms to find collaboration or investment partners from traditional banking organizations. Some early-stage fintech firms may need to shut down.
Also on the negative side, especially for fintech firms in the payments sector, is the impact of the expected drop in transactions at all levels of the economy worldwide. This means fewer fees collected by companies on the payments side of the fintech sector, impacting profitability as well as valuations for traditional payment firms as well as fintech firms such as Chime. Hardware shortages could also impact firms like Square, that rely on digital devices to support transaction processing.
Positive Impact of Coronavirus on Fintech
Alternatively, consumers desire for digital banking services will most likely increase, forcing many traditional financial institutions to fast-track digital innovation efforts. As a result, many legacy banks and credit unions may look to fintech firms for assistance in bringing better digital banking solutions to the marketplace. This increase in demand for digital solutions could provide a lifeline to fintech firms at a time when VC funding may not be an option.
In addition, weakening economies may force government organizations and regulators to stimulate the expansion of fintech solutions. For instance, South Korea is planning to temporarily ease regulations on fintech and ten other industries in March, in an attempt to jumpstart its economy amid the coronavirus outbreak. The World Health Organization has also encouraged contactless payments.
Finally, for those fintech, regtech and advanced data and analytic firms that can weather the current coronavirus storm, more venture funding will most likely be available. According to many reports, private equity and venture capital firms have significant cash available once the market stabilizes.
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Recent Increase in Fintech Activity
Before the recent coronavirus outbreak and resulting market instability, several large acquisitions occurred in late 2019 and early 2020. As the marketplace adjusts to some new realities, many more acquisitions, partnerships, and collaborations may occur that could completely change the banking ecosystem as we know it.
The recent activity has been focused on data, advanced analytics, payments, lending and investment opportunities. These combinations provide an excellent perspective on trends in the much broader banking ecosystem that every bank and credit union executive should be aware of. More importantly, it is helpful to look at these recent transactions as a rationale to relook at all strategies that were set before the coronavirus update.
Recent activity includes:
Fiserv + First Data. Illustrating the importance of data and insight as part of the new banking ecosystem, Fiserv purchased First Data in July 2019. This acquisition strengthens Fiserv’s position in the marketplace as an information partner for both traditional and non-traditional financial firms.
Apple + Goldman Sachs. These giants jointly launched a new consumer credit card last August. The new Apple credit card works with the iPhone’s digital wallet app. This partnership was followed up in 2020 with the announcement of a partnership with Amazon to handle credit needs of small businesses that use the Amazon platform for sales.
PayPal + Honey. PayPal expanded its reach into e-commerce in November by acquiring the shopping assistant and rewards program company Honey for $4 billion. This acquisition illustrates the importance of building a platform for financial services that becomes an integral part of a consumer’s daily life.
Schwab + TD Ameritrade. The acquisition of TD Ameritrade by the larger brokerage firm Schwab was seen as primarily a cost-cutting move to allow Schwab the ability to cut commissions in response to increasing competition from robo-trade fintech providers.
Visa + Plaid. A relatively aggressive acquirer of fintech firms, Visa agreed to buy startup Plaid for $5.3 billion in January. Plaid’s data network allows consumers to securely connect their traditional bank accounts to fintech firms such as Venmo, Robinhood, Acorns, Betterment and Chime.
Morgan Stanley + E-Trade. Morgan Stanley announced that is is buying discount brokerage E*Trade Financial Corp for $13 billion, representing the biggest deal by a Wall Street bank since the financial crisis.
Ally + Cardworks. The acquisition of CardWorks further diversifies Ally’s product offerings, adding an established credit card platform, full-spectrum servicing and recovery operation and a nationwide merchant acquiring business.
LendingClub + Radius Bank. The first example of a fintech acquiring a traditional bank, integrating Radius Bank within LendingClub will enable the fintech to accept customer deposits and gain a new (and lower cost) funding source for loans.
Intuit + Credit Karma. In February, financial software maker Intuit acquired Credit Karma for $7.1 billion. Many had previously viewed Credit Karma as a likely IPO.
Ant Financial + Klarna. The minority stake in global payments and shopping provider Klarna by Ant Financial aims to offer Klarna’s solutions to consumers and merchants within the broader Alibaba ecosystem. Klarna already provides their “buy now, pay later” solution to AliExpress customers.
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Speculation on Upcoming Fintech Activity
Despite the current equity market conditions, many believe the current market is ripe for additional fintech activity. For instance, CEO of JPMorgan, Jamie Dimon stated, “We’re going to be much more aggressive in acquisitions across the board,” during an investor day presentation. Just like the majority of activity that took place in late 2019 and early 2020, the most likely targets will be those fintech organizations that are large and scalable, have strong data analytics platforms, can generate revenues and provide efficiencies and digital differentiation in the marketplace.
Some possible future transactions include:
Stripe + Payment Firm. While Stripe has recently received a $250 million funding round, both Visa and American Express are also investors in this fintech. Similar to PayPal, Stripe’s customers integrate their payment app into smartphone apps and websites. Stripe also is a payment processor for Facebook Pay.
Robinhood + Investment Firm or Traditional Bank. While Robinhood has had some very poorly timed challenges (the app was down at the beginning of the market drop), it is still a very prized potential target due to its large customer base (10 million clients) and strong market potential.
MoneyLion + Traditional Bank. According to Business Insider, “While MoneyLion’s target demographic of financially-stressed customers isn’t unique, it’s a ability to build a customer base on a subscription-based model is a bit of an outlier in what has largely become a no-fee environment among fintechs.” With more than 5 million customers, MoneyLion uses customer insight to cross-sell and for product development.
Chime + Traditional Bank. There are many who believe that Chime may try to work around current regulations and acquire a traditional bank similar to what LendingClub did with Radius Bank. This would simplify regulatory challenges and reduce operating costs.
Winners and Losers During Coronavirus Period
Business downturns are not uncommon, and are often caused by unexpected circumstances. During these periods of change, the winners and losers will be defined by those firms able to make quick and decisive transformation reflecting the new environment. This is not just true in banking, but in every industry. How will airlines react? How about retailers and restaurants? How about the housing market and investment services?
During downturns, revenue and cash flow can fall much faster than expenses, putting pressure on firm’s everyday existence. While credit may be cheaper than ever in the recent past, the ability to get credit is not always easy.
The most important quality of winners during difficult times is the ability for organizational leaders to remain calm and transparent, while being decisive and willing to change business models to reflect a survival mode as opposed to building false expectations. Most importantly, leadership must “be present” across the organization. Employees will be looking to their senior leadership for guidance as well as comfort at a time of massive distractions.
It is worth noting that as with any major market pullback, opportunities will eventually arise for investors and organizations that are looking for expansion. While nobody wants to make a definitive declaration as to the correct timing for jumping into the market or reassessing the strength of financial firms, The Motley Fool believes that the same payment organizations that were the impacted most significantly by the market pullback may be the best investments once the market begins to recover. Their recommendations were Visa, Mastercard, PayPal, and Square. I’m sure there are dozens more.