No-one knows what to expect in the post-COVID-19 economy but the fintech and regtech sectors of business look poised to do well thanks to a digital-first approach.
The Market Now
Before COVID-19 put the global economy in lockdown, markets had been enjoying an 11-year bull run. Since the 2007 Global Financial Crisis, fintechs had started to form and see exponential growth as the age of startups took hold.
No-one expected the pandemic to punish the economy as badly as it is, not at first. But unfortunately, a frozen economy means little cash flow and a great deal of damage to businesses, especially when many operate with minimal capacity for error or delay.
Over 40 million people have lost their jobs in the US and millions more have lost their livelihood across the globe. However, it appears as though fintechs and regtechs may, for the most part, do well during the economic recession and recovery following the pandemic.
The fintech market, in general, is holding up well despite falling markets. When COVID-19 first started to hurt the economy we saw a market crash that was steeper than the Great Depression in 1929, but thankfully not as deep.
Some fintechs are doing relatively well out of the lockdown – payments and remittance providers are especially supported by a socially distant economy as cash fades into disuse for legitimate transactions. Cash is still very much a part of the fabric of the dark economy.
Thriving in Hard Times
Fintechs are capable of providing their full suite of services at a distance, prior to the pandemic they were dependent on light-weight operational costs and having no physical locations. Something that lockdown has played into their favor, meaning that many have managed to do well as a result.
However, this has not been an equal experience for fintechs by any means. Some have seen down-round valuations and been hit by heavy job losses in difficult times, predominantly those that serve customers directly as a legacy bank replacement. Even so, they are still doing comparatively well to other types of business.
For the fintechs that are managing to do well, some are even pushing forward with developing new products, we have recently worked hard to improve some of our own, to make good use of their increased market attention as businesses and customers become more aware of what they need in trying times.
What Happens During Recovery?
Fintechs and regtechs are innovating more effectively with company resilience and business continuity planning than many of their competitor legacy providers, and are finding it much easier to operate their businesses in a dispersed manner from home. Some are asking themselves whether they need to be spending so much money on office space – although it’s likely that many will retain some sort of central office environment.
For those startups and scaleups that opt to go completely remote for work, it will prove to the market that they’re creative, but it’s a wonder as to how remote fundraising will work in practice with all the key players in those conversations in separate locations.
Fintechs are likely to see a continuing surge in business for some time yet. Regardless of the shape of the economic recovery, a V-shaped recovery is ideal and it would be great for all businesses if the economy could bounce back so quickly, a U-shaped recovery is more likely given commentary from economic and political leaders like Chancellor of Great Britain, Rishi Sunak.
The worst-case scenario would be a W-shaped recovery, where a quick return to ‘normal’ is damaged by further lockdowns due to a second wave of the pandemic. It’s untested as to whether any businesses have the resilience to handle that sort of economic shock.
Whichever way the economic recovery plays out, it will be interesting to see whether or not fintechs manage to hold onto their new customers once lockdowns have ended and physical services are available.
Any Exits in Sight?
Investors are a significant factor as to why fintechs and regtechs are managing to do well in this environment. Many startups and scaleups are designed to run at a loss, they lose profit in favor of overwhelming growth. And investors are backing their investments in these companies to the hilt.
Many Venture Capitalists see that fintech and regtech is the long term option, these businesses are facing their first crisis now but they’re also thriving for the most part and still able to service customers. They’re the long-term choice and are proving themselves to be crisis-proof to some degree.
Unfortunately, it’s not all good news. Mergers and acquisitions, IPOs and funding rounds are the traditional ways for exiting a startup investment and recoup investments. Those are unlikely to happen in the near future, M&A activity has already slowed down since April 2020 and IPOs are probably a discussion for 2021 as the 2020 window closes out. Although there will probably still be a few big IPOs for more established companies and there are some regional issues at play, Japan will likely have a few companies enter the market in the near future for example.
But that just means those companies who were looking to merge or IPO have time to improve their product. And if their investors back them then they’ll continue to supply those companies with the runway they need to make it to the next viable IPO window.
Regtechs have a strong future ahead of them. Legacy providers are facing stronger criticisms from long-serving professionals in the AML/CFT sector. The industry is becoming far more focused on speed flexibility and configurability in their screening, Transaction Monitoring and other platforms, the smaller and more innovative regtechs are at an advantage in this area.
The only thing regtechs need to avoid is being bought up by a bigger company. Something that has happened a few times in the past few years, but as discussed earlier, it’s unlikely that there’ll be many more acquisitions this year besides a few headline-grabbers.
What Will Any Recession Do?
For the actual impact of the coming recession itself – so much depends on the duration, depth and breadth of the downturn. A short, sharp shock is likely to be survivable for most of those who have a couple of years of operation under their belt, some cash in the bank, and sympathetic investors.
Investors might not pull out of the projects they have in hand, but they will think twice about getting into new ones. So it’s likely we will see some of the youngest firms lose out in the next 18 months. However, growth investing is still trending high, with $27.4 billion invested by May 2020, for context $80.6 billion was invested in 2019 and in 2017 only $33.1 billion was invested worldwide into growth companies.
With half the year left and investors anxious to improve their profits, some surprising investments are sure to occur, likely in markets like regtech where companies have a regulatory obligation to procure appropriate services.
AML, anti-fraud and digital identity are all key areas for investment, as digitalization accelerates, in part due to the global pandemic, industries will both demand and require digitally-focused products to combat financial crime. This will only be exacerbated by more transactions moving online.
The longer, deeper, broader and more volatile the recession, the more likely it will be to wash all sorts of more mature companies away. We have no way of knowing what the shape of the recession will look like yet, or if, in the UK and Europe, for instance, it will be impacted by other events, such as a ‘no trade deal’ Brexit at the end of the year. But that’s moving into the arena of long-range weather forecasting, a notoriously difficult endeavor.
However, one thing is certain despite the upheaval. Fintechs and regtechs that have proven to their clients just how vital it is to use new technologies are here to stay and will be coming out of the recession ahead of the competition.