As COVID-19 rages on across the world, the affects on the FinTech segment of the economy is already letting itself be known.
Among other things, FinTech companies are already letting their employees work from home, which means that they must adjust to the growing wave of cybercriminals using the crisis to gain access to their employees and customers’ data
The pandemic could also leave many businesses in the sector with lower valuations, more difficulties in raising funds and see their business performances drop.
However, a new report from Rosenblatt Securities, the agency brokerage, suggests that not all segments of the market will be affected equally.
It started by taking a look at challenger banks. This segment of the industry has attracted a lot of investment and customers over the last decade. In Europe, Revolut achieved a $5.5bn valuation earlier this year after raising a $500m round. In Brazil, Nubank became one of the few FinTech companies to enter the coveted decacorn club – ventures valued at over $10bn – when it raised a $400m round last summer.
Nevertheless, this segment of the FinTech industry might face some of the biggest troubles ahead according to Rosenblatt Securities.
The coronavirus outbreak is sure to force a decline in business activity, a weakening economy and squeeze the these ventures’ funding conditions. Moreover, with central banks like the US Federal Reserve making measures like e reducing the benchmark interest rate to zero, net interest margins for neobanks get more compressed than those of traditional banks as they rely heavily on transaction revenues, which will decline amidst the COVID-19 lockdown.
The challenger banks’ position could also weaken if their cost of funding fail to drop proportionately to lower rates and less than that for incumbent banks.
Moreover, customers may become more prone to using the services of incumbent banks as they are more familiar with them and because these organisations have the capitalisation to ride out the storm.
Rosenblatt Securities noted that there might be some positive outcomes of the outbreak for challenger banks. For instance, people will be more prone to do digital interactions than to deal with physical money.
This sentiment echoed that of N26, the German neobank, that told FinTech Global last week that it had already noticed an increase in transactions.
The next segment of the FinTech industry that Rosenblatt Securites looked at was online lending companies like Klarna. “Digital lenders could be entering into a perfect storm of lower net interest margins, falling loan growth, rising delinquencies and defaults,” the researchers suggested.
It believed the growth of loan balances will flatten due to the economic downturn. When that happens, many businesses that serve the subprime and SME segment of the market might find themselves with inadequate reserves when people are unable to pay back their loans. “The algorithms of Alt lenders using alternative data to underwrite risk and make loans will be severely tested for the first time,” Rosenblatt Securities continued.
It also believed that companies that reportedly planned to go public – such as LendInvest and Zopa – will see these exits delayed.
The third segment the researchers looked at was WealthTech. Here, Rosenblatt Securities repeated a notion already reported by FinTech Global: that people will be less prone to invest. For WealthTech companies such as robo-advisors, this could mean that they face a situation where millennials, their biggest customers, will not be as willing to use their services.
It could also investment platforms such as Robinhood with customers going back to incumbent wealth management services such as Charles Schwab, Fidelity Investments and Morgan Stanley.
The fact that Robinhood has suffered some severe outages due to the increased trading brought on by the coronavirus means that fewer people would potentially be less trusting of its services.
As FinTech Global reported earlier in March, Robinhood suffered two widespread systemic outages in as many weeks at the beginning of the month. The outages came as the markets began to feel the effects of the coronavirus. However, because many users were locked out of their accounts or could not make transactions, many of them blamed the FinTech unicorn for them losing a lot of money.
Taking a closer look at the payment segment of the FinTech industry, the researchers noticed both negative side effects and opportunities for the sector.
Starting with the negatives, with fewer people buying stuff, there is less need for payment services. Companies like Visa and Mastercard have warned that they will not meet their expected results this quarter due to a drop in international transactions. Similar reports can be heard elsewhere from other ventures.
Yet, there is an upside. More payment companies have increasingly been embedding payments in non-financial services. This, Rosenblatt Securities predicted, is going to keep happening and may even speed up thanks to the drop in other payments.
Next, the researchers looked at institutional capital markets firms such as institutional brokers, exchanges, clearing firms. These companies are currently benefiting from the markets elevated volatility. Yet, if this goes on, trading could be halted, which could hurt these businesses in the long run as their institutional clients fare as the market downturn continues.
“Sectors like Alternate Data may suffer as institutional investors become conservative and gravitate towards traditional investment methodology and practices,” the researchers noted.
There are opportunities for FinTechs in this segment that focus on creating better risk management and cost-cutting solutions. These ventures could become popular among brokers and asset mangers who want to keep their margins as the crisis goes on.
As a sidenote, other researchers have revealed that 80% of CFO and other financial executives fear that the coronavirus could result in a recession.
The final sector the researchers looked at was InsurTech. This segment might be the big winners from the criss as Rosenblatt Securites did not expect any big payouts as most insurance policies would not cover pandemics. Moreover, the crisis could motivate people to sign up for additional coverage, whether that be life, health, and business disruption policies.
The property and casualty (P&C) segment covered by InsurTech shouldn’t see that much difference as events like the pandemic doesn’t affect it. “In other insurance segments that address unconventional risks (cybersecurity, climate change, social disruption), investors have been keenly funding InsurTechs, so the demand for startups in these segments will continue to attract investor interest,” Rosenblatt Securities concluded.
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