Fintech in coronatimes: Why some sub-sectors are especially vulnerable in a downturn

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Sifted | Isabel Woodford | March 25, 3020

Covid impact on fintech - Fintech in coronatimes: Why some sub-sectors are especially vulnerable in a downturn

This graphic was created in collaboration with Finch Capital.

A sector-by-sector analysis of what might happen to European fintechs during a downturn. Which are most at risk and which might profit?

During the past five years, financial technology startups have been some of the most hyped, fastest-growing and best-funded in Europe.

But as the coronavirus pandemic begins to weigh on the economy, fears are growing that financial startups will be hit hard, as investors invest less and consumer spending slows.

Yet fintech is a broad sector, making it hard to generalise about the impact of coronavirus. So we’ve analysed how the different sub-sectors within fintech might fare in the short to mid-term amid virus shock and a potential recession.

An overview: Fintech during coronavirus

The graphic above summarises how each sub-sector will be affected by the coronavirus outbreak, according to an analysis by Sifted in collaboration with Finch Capital. Those marked in red are predicted to see a downturn, yellow indicates it’s a mixed bag and green means it will likely see a boost.

Finch Capital Report:  Future of Disruptive and Enabling Financial Technology post covid-19

Our thesis is that digital banks, foreign exchange (FX) companies, wealth manager apps and small and medium-sized enterprise (SME) lenders will struggle the most in the next six months and are likely to see a decline in revenue and users.

It’s worth noting that, of course, these sub-categories aren’t everything; the fate of companies will also depend hugely on the stage they’re at, their market fit and their cash reserves. For some, the crisis will also breed opportunity; particularly cash-rich, lean startups.

Nonetheless, by explaining the logic behind our core conclusions, we hope to help you make sense of how the next six months might play out.

Challenger banks

Such as: Monzo (UK), Monese (UK), Bunq (Holland), N26 (Germany)

Digital banks are still plagued by a trust gap, demonstrated by the fact most users still use them as secondary accounts. A financial crash could amplify that trust gap, leading to fewer users moving their salaries into their challenger accounts, or even causing existing users to withdraw the bulk of their deposits into ‘brick and mortar’ accounts. This could have an impact beyond the immediate crisis, worsened by reduced-interest rates, further reducing the margins they make on their remaining deposits.

Meanwhile, in the short term, payments are declining as consumer spending falls due to the global lockdown. Given the likes of Monzo make a portion of their money on interchange fees, this is a problem.

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Digital banks that charge for their accounts, like Monese, N26 and Revolut, are also likely to see a dip in subscription openings, especially amid a crackdown in travel.

N26 cofounder Maximilian Tayenthal confirmed that the Berlin-based bank has already seen this. “Our customers’ card sales in March have so far declined. In certain markets we’re seeing a 10% drop in account openings,” he told Bloomberg.

Moreover, if the crisis spills into a recession, investors expect business-to-consumer (B2C) challenger banks to be an obvious target for opportunistic M&A, assuming valuations dip to a more affordable level.

“[A recession] will especially hurt challenger banks,” concluded Rosenblatt Securities, a US brokerage company, in an analyst note, highlighting these companies’ high burn rate, reliance on marketing and incumbent players’ advantages in a crisis.

Nonetheless, Angelique Schouten, chief commercial officer of cloud-banking platform Ohpen, argued that incumbent banks will face greater pressure during the lockdown because of “the number of processes that are still human and/or paper-driven and initiated“. Indeed, digital banks at least have the benefit of digital onboarding and an existing infrastructure for mobile-only banking.

To this point, Speedinvest partner Stefan Klestil told German media Finance Forward that the lockdown will highlight the benefits of digital banking and could trigger a “growth-spurt” in future. He also argued that “existing investors will continue to support their good companies [like N26]”, countering theories that digital banks will see down-rounds if the turmoil exists.

This may well help N26 and Revolut’s early efforts in the US; however, bank branches have already seen a gradual decline in footfall in Europe, so a better digital interface alone is unlikely to sway local users.


Such as: (UK), SumUp (Germany), Modulr (UK)

In the payments sector, we are unlikely to see startups crash and burn because of coronavirus. Payments has proven itself it be a fairly resilient industry during past crises, leading the Mercator research group to predict “lower growth…rather than negative growth.” Yet how hard individual firms get hit depends on a couple of key differentiators.

Those will a big online exposure should be ok. There has been a surge in e-commerce payments in the lockdown as people order online, which should help mitigate for the general downturn in consumption, transactions and cross-border payments.

See:  How payments can adjust to the coronavirus pandemic—and help the world adapt

Business-to-business (B2B) payment companies which automate invoices, for instance, are also better insulated because they enjoy long term contracts.

However, Visa and MasterCard have warned that sales will fall short this quarter by 2-4%, which will also trickle down to merchant acquirers (like Worldpay, which process your card details).

Purely offline payment services, like German startup SumUp, will be worst hit during the lockdown.


Such as: Bux (Amsterdam), Freetrade (UK), Trade Republic (Germany)

Uncertainty breeds volatility and volatility is gold dust for trading companies, as each trade executed provides a small revenue cut.

Digital trading startups like FreeTrade and Bux have reported a boom in volumes in recent weeks as traders attempt to “buy-the-dip”, so for now, it’s good news for the sector, which has taken on incumbent players with cheaper fees. Indeed, Germany’s Trade Republic has extended its Series A this week to attract new investors hoping to profit from the uptick.

Having said that, the likes of US-based Robinhood may have seen too much trading, given their system has collapsed several times in recent weeks due to technical overload.

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And the biggest gains will come if Europe’s “zero-commission” startups can retain new users and sell them more lucrative products than basic single-stock UK trading. It remains to be seen if they will be able to convert customers in this way.

The other short-term winners will be fintechs providing trading infrastructure.

Wealth managers/ Robo advisors

Such as: tickr (UK), Liqid (Germany), Wealthify (UK)

A wave of digital wealth managers have emerged in recent years to attract Europe’s millennial traders (notoriously reticent retail investors). Wealth managers differ from trading apps in that they do not encourage “buy-and-sell” behaviour, but rather long-term investing. With their friendly interfaces, pre-packaged stocks and low fees, they’ve managed to gently lure in a new audience.

However, a financial downturn could be damaging for wealth managers, as investors get scared and withdraw their deposits.

“Severe volatility and the lack of recovery in public stocks may scare away investors, especially millennials… Investors using robo advisors… may gravitate away towards established wealth management shops (Charles Schwab, Fidelity Investments, Morgan Stanley) who have matched the ‘zero commission’ model of e-brokers and also offer the comfort of human advice,” the Rosenblatt report highlighted.

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This is bad news as robo-advisors largely make money from fees on their assets under management. That means the smaller the uptick in assets, the less money they make. Nonetheless, the economic effects of coronavirus are still under debate, so many users are reportedly holding their nerve.

‘We are still growing positively despite the worst financial market in over 30 years. User behaviour has held up despite the environment,” the cofounder of ethical trading platform tickr, Tom McGillycuddy, told Sifted.

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