In its latest report, “Fintech Funding Roundup, Q2 2020,” Forrester provides an overview of fintech funding by venture capital firms, investors, and financial institutions. The COVID-19 pandemic and its economic impact have not spared the fintech sector.
Worst quarter since 2018 with 6.34 billion in financing
Harmed by the economic climate, Fintech funding experienced significant growth over the last decade, rising from $1 billion in 2010 to $39 billion in 2019. The year 2020 promises to be different, with a sharp decline in investments. Already observed in the first quarter of 2020, the drop accelerated in the second.
In these challenging months, it’s worth noting that the American payment provider Stripe still managed to raise $600 million in April, while the Brazilian online bank Nubank raised $300 million. Forrester also points out that “the impact of the crisis continues to vary across geographic regions: China recorded no transactions for the second consecutive quarter.”
Another effect of the crisis is that the fintechs attracting investment are those in advanced stages and focused on large funding rounds, considered safer. Thus, 52% of funds went to late-stage startups , while the 21 companies that secured $100 million or more in funding accounted for nearly 65% of the total funding for the entire quarter.
A concentration of funds towards digital banks, lenders and payment service providers
The investment trend in fintech is confirmed: money is flowing to mature, established, and well-used technology sectors. Investors are therefore favoring fintech companies that improve existing processes.
Stripe is a good example. With its $600 million Series G funding round (totaling $1.6 billion for a valuation of $36 billion), the company fits perfectly into the trend of improving online payment processes, a trend that itself reflects the ongoing migration from cash to digital payments. In another study , Forrester highlighted the shift in payment practices accelerated by the COVID-19 crisis, as cash is perceived as unhygienic, leading consumers to turn to e-commerce. Forrester also points out that Stripe’s example is not unique; Checkout.com raised $150 million in its latest funding round, bringing its valuation to $5.5 billion.
Fintech companies that capitalize on crisis dynamics by providing solutions to consumer needs are also attracting investors. At the intersection of investor concerns and responses to public needs, neobanks are thriving. Nubank, mentioned earlier, which now boasts 20 million account holders, reacted swiftly during the COVID-19 pandemic by distributing government relief payments and providing loans to vulnerable individuals impacted by the crisis. Further north, the American online bank Varo Money raised $241 million in Series D funding while supporting its customers by providing rapid access to government assistance measures.
The same logic applies to fintech companies that support very small and small businesses. Public funding amplifies investment in companies that provide solutions to the COVID-19 crisis that has hit small businesses hard. Forrester cites the example of Judo Bank, specializing in business loans and banking services, which secured the largest fintech funding in the second quarter with $649 billion, including funds from several branches of the Australian government.
Another trend is that established fintech players are acquiring others to expand, for example, the American online personal finance company SoFi was bought for 1.2 billion by Galileo, a payment software company.
A tough future and consolidation for fintech
The impact of the COVID-19 pandemic has been severe for fintech companies and is far from over. The landscape is shifting, with a more secure outlook for fintechs that have secured significant funding and/or possess sufficient capital. The Forrester report offers some predictions for the fintech sector.
In times of crisis, some fintech companies that have directly challenged traditional banks will be at risk. As funding dries up and the outlook shows no sign of improvement, defaults will increase, according to the report, and only a few leaders are expected to emerge. With this difficulty facing fintech companies, banks will see opportunities arise for “cheap acquisitions.”
Tech giants and other large non-bank companies will continue to show increasing interest in fintech. The GAFA companies have already begun acquiring or financing fintech firms, and banks are increasingly wary of players like Amazon and Apple, which could become leading players in financial services. Forrester points out that, without capturing huge market share, these companies’ investments in fintech will drive up costs, making it more difficult for traditional banks to acquire innovative digital services at low prices.
Finally, back-office automation will accelerate. This area, which is reaching a certain level of maturity, should increasingly replace manual tasks performed by bank employees, allowing banks to reduce costs. Those banks that invest or make relevant acquisitions will thus be able to remain competitive with the GAFA companies and the leading fintech firms.
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