While deals to global fintech companies are down, certain parts of the fintech ecosystem actually stand to benefit long-term from the Covid-19 pandemic.
Mirroring other sectors, fintech activity and investment has been muted through the first five months of 2020. This comes as no surprise, as Covid-19 is keeping the venture landscape broadly in something of a holding pattern.
At the same time, the story for fintech is more nuanced. While funding is down and certain sectors are hurting, others actually stand to benefit long-term from the pandemic.
Take the payments sector.
On the one hand, companies serving the restaurant industry are facing existential crises. At the same time, those payments companies serving the e-commerce space are seeing their transaction volumes sharply accelerate.
In this brief, we look at the short-term and long-term effects of Covid-19 on five parts of the fintech ecosystem:
- Banking & Lending
- Wealth & Capital Markets
- Real Estate
Short term: some Payments companies will face existential challenges
Payments companies targeting verticals hit hardest by Covid-19 such as travel, restaurants, and events and entertainment, among others, will have to find new sources of transaction volume in order to survive.
Payments companies focused on the restaurant industry are perhaps most at-risk, with merchant acquiring companies here hit particularly hard. These include Toast (which cut 50% of its staff in early April), TouchBistro (which furloughed 20% of its workforce in April), and Square (card present volume down 60% in final 2 weeks of Q1’20).
To reduce risk, these companies have placed bets in other areas, like government-backed loans: TouchBistro tapped Lendio to help it distribute loans to its restaurateurs, while Square is leveraging its Cash App to distribute loans directly to consumers. Both companies are uniquely positioned to distribute loans by leveraging their respective merchants’ historical transaction data.
Long Term: e-commerce payments companies benefit from accelerated shifts in tech and consumer behavior
Even as Covid-19 is wreaking havoc on certain industries, it has caused payments volume to accelerate in other key areas.
Most notably, Covid-19 is contributing to an explosion in e-commerce at the expense of physical retail. This shift is driving transaction volume to the payments companies behind online retailers and taking market share away from those serving physical retailers. This displacement is happening for both consumers and merchants, as merchants begin to turn to online B2B marketplaces for procurement and supplies.
As a result, the biggest long-term beneficiaries of Covid-19 will be payments companies enabling the e-commerce sector. These include players like Stripe, Adyen, PayPal, and Shopify. Indeed, Stripe saw its valuation rise to $36B in a $600M Series G extension in April; Adyen saw a 34% jump in Q1 revenue driven by online payments; and PayPal saw payment volume rise 22% in April after a bumpy March. Finally, Shopify saw gross merchandise value grow 46% in the first quarter, as the company launched a new product “Shop” to help users search across the company’s merchant base.
This theme is clear not only among established companies but earlier stage startups as well. These include players like one-click checkout provider Fast (which raised a $20M Series A in March) and payment-facilitator-as-a-service provider Finix (which raised a $10M Series B extension in March).
short term: Impact of Covid-19 depends on business line
In the near-term, the P&C market will see downward pressure on premiums for most commercial and personal lines as unemployment rises and economic activity slows down. While auto claims will likely decrease with fewer people driving, insurers could face significant losses in commercial lines stemming from workers comp and business interruption claims.
P&C startups, which have relied on high premium growth, may be vulnerable in a flat market, with fewer policy-buyers. However, their technology and agility could enable them to adapt to the new environment quicker than incumbents. For instance, home insurtech Hippo is now offering virtual maintenance home checkups for their policyholders.
The life insurance market will likely be less hurt by premiums, and may even see an increase as consumers reevaluate their financial needs in the wake of the pandemic. Claims may increase due to the virus but will likely not be detrimental to the financial stability of life insurers.
Digital life insurance startups offering easier underwriting processes for life insurance (like requiring no medical exam) are already seeing an increase in applications as customers don’t want to deal with agents or medical exams in the time of social distancing. One such company, Bestow, raised a $50M Series B in April.
long term: digital will become essential for cost-cutting & as new business models emerge
Digitizing key value chain operations (like underwriting and claims management) will be essential to improve operational efficiency as insurers look to cut costs. Successful insurers will likely have to rely on B2B insurtech startups more in order to improve their digital capabilities.
The current crisis has also shown how static and inflexible traditional insurance products are. More flexible and transparent products — such as on-demand insurance, parametric insurance, and usage-based insurance — may be more attractive to consumers in the aftermath of Covid-19.
Distribution will continue to trend towards direct and digital. Instant underwriting and online purchasing capabilities will be more important for consumers. However, the insurance agent that embraces emerging technology and understands shifts in customer expectations has a brighter outlook, especially in commercial lines.
As the insurance sector looks to rebound from Covid-19, technology will be core in improving operational efficiencies and customer experiences.
Banking and Lending
short term: PPP represents easy money for big lenders, while online lenders & challenger banks suffer
Big retail banks are the short-term beneficiaries of the pandemic through the Paycheck Protection Program (PPP), which generates fees for banks without credit risk. Delinquent loans are unavoidable given rising unemployment, but strong balance sheets put banks in a stable position.
Challenger banks, which generate most of their revenues from debit swipe fees, will be harmed by limited spending. However, fiscal stimulus to consumers and businesses could soften the blow. The most resilient challenger banks will likely have the following attributes: (a) lots of capital (like Revolut, Chime, and N26), (b) a loyal base of primary banking customers that link direct deposits (like Chime), and (c) durable, multi-product offerings (like Stash, MoneyLion, and Betterment).
Online lenders are being hit the hardest, as rising defaults have investors running for the exits. Lending activity has collapsed, with LendingClub estimating a 90% reduction in loan volume in Q2’20. Many other lenders, including Kabbage and OnDeck, have completely shut off new loan originations. With fewer loans to give out and rising defaults, many lenders have cut staff significantly. Looking ahead, subprime lenders like Petal and Mission Lane may be hit particularly hard.
At the same time, picks-and-shovels players could find opportunity. Marketplaces like Lendio, Fundera, and Biz2Credit, which connect borrowers to lenders without taking on balance sheet credit risk, will likely fare well due to increased SMB demand for PPP and other government assistance loans.
long term: a slowdown in online consumer & business lending will likely lead to industry consolidation
In the longer term, online banks and lenders may see insolvency for some and consolidation for others. Online lenders like RateSetter and Funding Circle have cut interest rates for investors and halted withdrawals indefinitely. The credit startups that white-label their lending technology to banks, like ODX, Amount, and Powered by Upstart, are more likely to be sustainable.
Consolidation will be another avenue, likely at a discount to past paper valuations. Chime and Revolut have expressed their appetite for M&A targets; acquiring distressed lenders could be an opportunity to tack on a loan product at a discount to expand their product suites.
Ultimately, Covid-19 will be an accelerator for digital banking and lending, as well as a filtering mechanism for transactional businesses that lack a durable revenue model.
Wealth & Capital Markets
short term: wealth management and capital markets startups are shoring up cash balances and consolidating
With uncertainty ahead, capital markets players are tapping all available cash facilities. For example, Robinhood recently raised a $280M Series F led by Sequoia Capital, upping the brokerage’s valuation to $8.3B. Just a few days prior, investing app Stash raised a $112M Series F led by LendingTree, securing a partnership that could allow the startup to access future credit lines if needed.
Consolidation is also increasing as struggling firms are being scooped up at decreased valuations. In May, asset management firm Franklin Templeton acquired AdvisorEngine, which supplies wealth management technology to 1,200+ advisory groups. Personal finance platform SoFi is proving particularly acquisitive as it looks to transform into a broader fintech holding company, first acquiring payments platform Galileo Money for $1.2B in April and then acquiring Hong Kong-based brokerage 8 Securities.
long term: increased engagement with hybrid robo-advisory services & more integrated wealth tech platforms
One long-term effect of Covid-19 will be the mainstreaming of hybrid robo-advisory services. While companies like Betterment and Wealthfront have gained large consumer bases over the past decade, market volatility is proving that investors still want relationships with human advisors. Both Betterment and Vanguard saw higher-than-average engagement with human advisors in Q1’20.
Over time, this could lead clients to move toward established players like Fidelity and Charles Schwab, which incorporate more established hybrid advisory services alongside zero-commission models. More recent entrants like Personal Capital and Betterment also provide hybrid robo-advisory solutions and will have to compete with incumbents on pricing to maintain their respective customer bases.
Looking further out, Covid-19 increases the need for centrally managed “autopilot” personal finance solutions. Consumers are now saving more — to address this shift in consumer behavior, wealth tech firms are creating millennial-friendly platforms that provide a more holistic suite of services and analytics tools. For example, Wealthfront is currently working on connecting clients with mortgage providers, while Betterment recently announced an addition of checking and savings products through partnerships with banks.
short term: restricted movement, uncertainty, and tighter lending standards are freezing the real estate market
With Covid-19 crushing consumer demand, real estate agents have been hit hard. Major firms like the Corcoran Group, Douglas Elliman, Brown Harris Stevens, and Halstead have all laid off or furloughed staff. Redfin reportedly put 41% of its salaried agents on furlough, and cut 7% of its staff in early April.
Online real estate portals have also seen demand drop, with players like Zillow and Realtor.com seeing a roughly 40% reduction in website traffic resulting in fewer leads (and therefore reduced “subscription fees”) for agents. In addition to fewer leads, the supply of new listings has tanked as owners hold out for more favorable conditions. In hard-hit markets like NYC, new listings fell as much as 75% compared to the same time last year.
Even deep-pocketed iBuyers — tech-enabled companies known for making “instant offers” on homes — have largely suspended buying activity in an attempt to preserve capital, although Opendoor recently resumed purchases in select markets.
Moreover, despite mortgages rates reaching historic lows, many prospective borrowers are having difficulty securing financing as many traditional bank lenders have tightened credit requirements. Mortgage forbearance — where lenders delay a foreclosure — reaching almost 8% in the US, according to the Mortgage Bankers Association.
Digital lenders like Better.com stand to benefit from the pandemic as their lean cost structures are well equipped to take advantage of refinancing activity. Better.com reported a 200% increase in loan applications in March, and the company reports having funded $1B in loans for the month — 80% of which were refinancings.
long term: the acceleration of digital processes and capabilities will become a crucial priority
In a post-Covid world, the focus around virtual, online experiences will become table stakes. During the crisis, to help enable its agents, Compass rolled out its virtual agent services toolkit which includes 3D staging, location-based mobile listing ads, digital listing brochures, and virtual neighborhood walks. Virtual home tours in particular may see major adoption: Zillow experienced a nearly 200% increase in 3D home tours and Redfin saw about a 4x increase in video tour requests.
Even prior to Covid, aspects of the closing process were seen as antiquated and highly cumbersome, requiring in-person signings in accordance with state laws. In response to Covid, some states have proposed the SECURE Notarization Act that would legalize remote online notarization nationally — a major tailwind for accelerated digital adoption if passed. Companies like Qualia, States Title, and Snapdocs stand to benefit as part of this trend.
Venture investors are already showing optimism for companies focused on streamlining and connecting disparate processes. Appraisal is a key component in acquiring a mortgage, and typically requires a number of touch points. Reggora is a platform that helps lenders, appraisers, and other stakeholders collaborate through the process, while Brace.ai provides mortgage servicing solutions. Both companies recently raised a $10M Series A as streamlining disparate mortgage processes becomes increasingly pressing amid rising mortgage forbearance.
This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like:
- Earnings Transcripts Search Engine & Analytics to get an information edge on competitors’ and incumbents’ strategies
- Patent Analytics to see where innovation is happening next
- Company Mosaic Scores to evaluate startup health, based on our National Science Foundation-backed algorithm
- Business Relationships to quickly see a company’s competitors, partners, and more
- Market Sizing Tools to visualize market growth and spot the next big opportunity