Finch Capital: after crisis mode, fintech ‘disruptive winners’ will take all

Finch Capital published a report that discusses the challenges and opportunities the fintech sector will face both during, and after, the covid-19 crisis. Finch Capital is 6-year old firm and thematic investor in fintech, AI and IoT companies in Europe and Southeast Asia.

Startups in the earlier stages of their life cycles are particularly vulnerable if growth stagnates or even drops for a period of 3 – 6 months. The uncertainty of the current situation puts pressure on fundraising, cash management, marketing and staff management.

In the short-term, Finch sees many hurdles that startups need to grapple with in order to survive, and limited opportunities; however, post-crisis (Q4 2020 +), the firm believes the lasting impact on society creates conditions which favor increased momentum, growth, and the unleashing of a virtuous cycle for fintech companies.

The Finch Capital report covers the (i) short-term impact of the crisis (ii) structural implications post-crisis, translating into an ever-swifter adoption of digitalization and (iii) landscape in terms of growth, unit, economics, consolidation, funding dynamics and exits.

“2020 will be challenging for fintechs to navigate, but there are better times ahead. Post-crisis, disruptive winners will ‘take all’, as we expect surging demand from financial services for technology to master digital-only interaction, enabled by AI and big data analytics”, said Radboud Vlaar, managing partner at Finch Capital, in a statement.

Key findings:

  • Expect crisis mode until Q3 2020, followed by a 12- to 18-month recovery
  • Digital-only becomes the new industry norm in financial services, greatly accelerating a trend which started in the last decade
  • Shift to digital-only triggers a “Big Pocket” battle between incumbents and challengers to win the (newly) online customer
  • Financial Institutions turn to tech companies rather than in-house solutions to accelerate digital transformation
  • Fintech sector winners: consumer and SME lending platforms – best adapting mechanism to swiftly and efficiently deliver capital to key segments of the economy; mortgage and life insurance digitalization – technology that disrupts the role of intermediaries, whose role was often face-to-face
  • Fintech ‘enablers’ around AI, IoT and software solutions are in high demand: AI – bots for call-centers; account-opening procedures; loan automation; KYC – increased need for safe digital ID given volume of digital business transacted and robust solutions required for protection of client assets;
  • Areas under pressure:  challenger banks – high valuations, high burn and lower expected activity post-crisis; wealth management – client de-risking and lower AUMs impacting bottom line; payments/FX – decreased transaction activity affecting commission businesses; pull-back of corporate VC-led investments in combination with higher hurdles for companies’ access to funding put pressure on valuations in later-stage rounds; increased M&A and trade-sales in under-$250 million category of fintech companies, as fewer IPOs expected

Read the full report

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