For most of my career, I have kept a keen eye on the startup industry. When I started in quantitative finance, people used to ask, “are you a finance guy or a tech guy??” Perhaps unsurprisingly, fintech has remained a key area of interest. I’ve been looking forward to diving into a few of my thoughts.
Fintechs vs Traditional Startups
We all know that startups are generalized as ‘innovators’ and ‘disrupters.’ They pop up with high-tech improvements to existing services, often leaving the industries they tackle scrambling to stay afloat (ex. rideshares). Fintech startups, however, are notably different. While fintechs can also be disruptive, they tend to innovate in ways that are helpful beyond a new stand-alone entrant – providing solutions to the gaps larger firms are unable to envision or quickly solve, and thus creating more opportunity for partnership rather than swift industry takeovers.
This has been occurring for decades. The innovation of today’s real-time P2P payments can be likened to the introduction of ATMs in the ‘60s, electronic stock trading in the ‘70s, though the e-commerce boom of the ‘90s, all the way up until now: fintech’s have been effective at both disrupting and integrating.
Disrupting Expectations
Throughout the last few years, emerging fintech companies touting capabilities such as cloud, mobile, and machine learning have been delivering transformational approaches to financial services. These emerging players have reset customer expectations by:
- Simplifying financial tasks through instant P2P concepts
- Delivering personalized advice at scale, as roboadvisors have done
- Redefining value, including eliminating trading fees
- Making it easier for people to lead responsible financial lives, ranging from services that support autopayments towards high interest debt to those that allow for small-scale saving over time
- Opening access to new products through crowdfunding platforms (1)
No matter the history of positive integration, change can be difficult. It can be scary for an incumbent, and exciting for a startup. Take funding for example: from 2010 to 2019, the total value of VC investment offered to fintech companies increased from just under $2B to more than $53B (2). This exponential growth has led industry incumbents to actively invest in, acquire, and collaborate with fintech innovators in order to maintain market share (3).
Fintech in a Post COVID-19 World
This brings us to today – the looming question over everything we read: what about the impact of COVID-19? How will fintechs respond to this new, intense environment? According to a Business Insider Intelligence survey conducted in late March, executive decision makers expect that fintech funding will suffer in the near term, “but a shift in focus from growth to sustainability could help them weather the storm” (4). The ability to pivot will be an important test for many, as nearly four thousand fintechs were founded worldwide since 2008 (5), and therefore have never weathered this magnitude of a downturn in the market.
Beyond speculation, it has become clear that the era of social distancing will necessitate innovation. Over the coming months, P2P payments have the potential to move through small business transactions to transferring monthly rent or distributing government stimulus payments. Digital wallets have become the instant way to avoid physically touching anything at a grocery store register. The use of blockchain security may be a clear answer to safeguarding our personal financial data. Even meetings with financial planners have gone completely digital.
In a post COVID-19 world, relative to the fintech booms following both the dot-com bubble and the 2008 recession, there is likely an optimistic 3rd wave on the horizon. I am anticipating these new and improved startups will move fast and fall into one or more of the following areas:
- Continued focus on scaling personalization and customer preferences
- Integrating into platform businesses that drive usage first and monetization second
- Rebuilding savings levels and consumer-friendly lending as a response to the COVID economic downturn
Lastly, for the industry incumbents strategizing for continued market share, it’s important to reflect on how the fintech space continues to evolve. Earlier this year, we saw a telehealth company introduce wallet features that allow users to manage their employer’s health benefits and pay for services through the platform. A healthcare non-competitor enters the payments space and becomes a competitor to traditional payments systems! These types of shifts in the financial landscape have incumbents and startups looking up, down, and sideways at their competition for growth opportunities.
Nothing like a crisis to spur innovation!
Brian
Views are mine and are subject to change and are not intended to be investment advice or a recommendation. References to individual companies or securities is for illustrative purposes only. Past performance is no guarantee of future results.
(Thanks to Shelby Davis for her help refining my thoughts, helping edit this note, and collecting sources.)
Sources:
1. Thanks to Megan Kelly for her insights surrounding emerging players
2. Szmigiera, M. (2020, February 28). Value of global VC investment in Fintech 2019. Retrieved from https://www.statista.com/statistics/412642/value-of-global-vc-investment-in-fintech/
3. Nonninger, L., Tesfaye, M. (2018, December). The Fintech Ecosystem.
4. Nonninger, L. (2020, March 26). Executive decision-makers think that fintech funding will suffer under the coronavirus pandemic. Retrieved from https://www.businessinsider.com/fintechs-shift-from-growth-to-sustainability-amid-coronavirus-2020-3
5. Szmigiera, M. (2019, October 18). Number of Fintech companies founded 2008-2018. Retrieved from https://www.statista.com/statistics/915552/number-fintech-companies-founded-by-industry/