A majority of senior fintech professionals say Covid-19 has had a negative impact on the industry, but many are more positive about their future prospects now than at the start of the pandemic, according to a report by Pensar Media.
The survey – Pandemic Pains: How the Covid-19 Crisis is Impacting the Fintech Industry – had 105 respondents based mainly in the US, UK and Europe. It found that while 69% of respondents think the pandemic had an adverse impact, some 43% are more optimistic about the health of the industry now than in March, compared to just 16% who are more pessimistic. More than half (55%) expect the industry to bounce back in a year or less.
Oliver Irons, a senior associate in Hogan Lovells’ financial institutions sector, said: “The Covid-19 pandemic raised significant challenges for fintechs but, after the initial panic, also created huge opportunities for expansion as more and more people flocked to digital payments and banking.”
Just shy of half of all respondents (48%) said they expect the pandemic to result in more demand for fintech products and services, with almost a third (31%) suggesting that the pandemic will create new growth opportunities that didn’t exist pre-Covid. The need to accelerate digital transformation across the banking industry is also spurring confidence among fintechs.
Nigel Verdon, CEO and co-founder of banking-as-a-service platform Railsbank, said: “This is a wake-up call to the financial services industry that has spent billions on digital transformation, and all they’ve done is got themselves to the digitised death zone of the CD where they’ve slapped a bit of tech on top of their analogue processes.”
It is unlikely to be a smooth recovery for all fintechs, however. Some 46% of respondents reckon there will be pressure to change or refine existing business models to survive, with 37% expecting to have to make further redundancies over the next 12 months.
The regulatory landscape may also be tougher in the wake of the Wirecard fallout and the Financial Conduct Authority’s move to enhance customer protections in response to the pandemic, according to Irons.
He said: “Both of these have led the FCA, and other regulators, to focus on bolstering the capital and liquidity requirements for fintechs – specifically payment and e-money institutions – and on what they see as over-reliance on group structures.”
That means a requirement for firms to hold considerably more cash, Irons said.
He added: “This is fine for the bigger players in the payments and fintech sector, but is likely to cause massive issues for the rest of the industry… Covid-19 has helped accelerate the move away from cash and adoption of more innovative solutions. It would be unfortunate if the regulatory approach served to stifle this.”
The pandemic is also likely to result in an increase in fintech-related M&A activity over the next 12 months. More than half of respondents (58%) expect to see more deals, with the payments sector expected to attract the most interest. Valuations are also likely to remain attractive for potential suitors, with only around a third of respondents expecting valuations to rise next year.
Richard Diffenthal, a partner in Hogan Lovells’ financial institutions sector, said: “We are starting to see consolidation within fintech and not just from traditional FIs looking to acquire start-ups or scale-ups but even fintechs themselves with strong balance sheets being able to grow through M&A to add users to their platform by acquiring smaller players. At the same time, digitalisation is still driving the agenda within traditional FIs and we expect to see more consolidation and collaboration between traditional players and new entrants.”