Over the past few years, the fintech sector in Europe has seen a massive inflow of capital, redefining the rules of the finance industry as we knew it a decade ago. But in a matter of days, the current pandemic has changed the way our world works in the short & long-term. We quickly went from being at a complete halt to realizing the importance of scrambling resources to adapt to these new trends, with a changed and, perhaps, improved vision for our future.
The fintech sector, Europe’s largest venture capital investment category (~20%), also faced the ripple effects of the current economic slowdown. A number of startups have had to announce layoffs – streamlining operations, and trimming the fat. However, one could make the argument that the Covid-19 crisis has provided a unique opportunity to Fintech startups and scaleups, allowing them to take advantage of this newly felt need among traditional finance institutions to move towards being more flexible and digital-first. Startups with considerable capital runway have been able to use this time to develop new partnerships and deepen existing ones. Financial institutions are among the biggest spenders on software, and are looking increasingly likely to double down on technologies like Artificial Intelligence and Machine Learning.
Of course, the state of the overall fintech ecosystem is more nuanced than can be generally stated, there are a few areas within Fintech that are emerging as the clear winners – digital payments, lending/ credit, and insurance.
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Payments
With some notable VC investments being closed in the past few months, digital payments is one of the most well-positioned sub-sectors riding the fintech growth wave these days. There has been an explosion in e-commerce (at the cost of commerce through physical retail), shifting transaction volume to payment gateways on each of these e-commerce platforms.
While payment companies focusing on certain hard-hit sectors (travel, food & beverage etc.) have faced a short term slow down, most payments players – Finix, Stripe, Paypal and the likes – are emerging as the biggest beneficiaries both in terms of valuations as well as transaction volumes.
Lending/ Credit
Large retail banks seem to have benefitted tremendously in the past few months, through schemes such as the Paycheck Protection Program (PPP), allowing banks to earn fees without bearing credit risk despite an increase in loan delinquencies.
Challenger banks such as Revolut and N26, though affected by lower overall spending, have seen spikes in business caused by an acceleration in digital banking as well as lending. More traditional banking institutions are looking at improving their online KYC (Know Your Customer) capabilities to improve credit rating capabilities. Crowdlending and Peer-2-peer lending have also emerged as sought-after alternatives to traditional banking.
Insurance
Covid-19 has put tremendous pressure on SME’s, causing them to book unprecedented revenue losses – thus increasing insurance claims for revenue losses as well as employee compensations. As more companies start to include flexible, work-from-home policies, a larger number of employees will move towards working online. This creates an incredible opportunity for cyber insurance companies to provide services combating the increased threat of cyberattacks. We will likely see lots of cutting-edge innovation in products providing protection against cyberattacks from distributed end-points.
On a longer-term horizon, businesses are likely to demand more holistic coverage for events causing unseen interruptions (such as pandemics). Moreover, as consumers reevaluate their long-term financial needs, life and health insurance markets are also likely to grow.
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During the ’08 economic recession, technological shortcomings of the financial sector provided a one-of-a-kind opportunity for fintech startups to respond to. Perhaps, this is why the industry as a whole seems more prepared to survive the crisis we’re facing today. Not only are we optimistic about the future of Fintech in Europe, we are also extremely excited to witness old habits transform and new opportunities emerge.
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