Thought Leadership - Agustin Rubini

Where is Fintech Investment going with the pandemic?

The pandemic of 2020 has brought changes that nobody was expecting. There are certainly some winners and many losers under the new environment, and what is clear is that some trends will not reverse.

One aspect to consider is the change in the nature of the investment process - using video conferences as a new tool. It is also clear that early-stage investment has decreased considerably. Payments have thrived as ecommerce grew in the new lockdown conditions. Banking has been turning to online tools more and more to increase efficiency and improve customer service. Alternative lending has experienced a surge in demand as have payday solutions - relieving cash-flow woes for many.

Banking has been turning to online tools more and more to increase efficiency and improve customer service...

Agustin Rubini

Agustin is a multiple award-winning fintech expert that often speaks and writes about the future of banking and financial services. Agustin enjoys discussing the evolving fintech landscape and the disruptive effect of technology on the financial services industry. He has published the best-selling books Fintech in a Flash and Fintech Founders. He’s also hosting the Angel Investor School digital event from October 1st - 5th - sign up here!

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Zoom investing

Venture capitalists had to learn the intricacies of using video conferencing for meeting entrepreneurs and investing. This has indeed provided a better work-life balance, avoiding long trips and time in the office, but at the same time, it has removed some information they generally use to make decisions. Many angels and VCs whom I’ve consulted, have mentioned that body language signals and team dynamics are challenging to convey when not in-person - and looking at you through a camera. Team energy, initiative, and ambition can’t be assessed in the same way as before as people are engaging from different places and through new mediums. Moreover, it is not easy to evaluate the real knowledge of a particular person answering a question on camera; they could even be coached by somebody else also listening to the meeting!

There are suitable coping mechanisms during periods of lockdown, to keep investing which include spending more time evaluating the startups, relying on founders you have connections to, and considering investments that are geographically further away from your comfort zone.

For the long term, I see a hybrid model developing for investment and startup dynamics. On the investment side, video conferencing will be used as an early filter, and only the best firms will achieve face to face meetings. In a startup organisation, I see dispersed teams becoming increasingly natural as opposed to the prior industry norms.

Early-stage investment down

Global venture funding is down in H1 2020 by 6%, compared to 2019, according to Crunchbase. Later stage funding grew from 59% to 66%, showing that early-stage investments are being left behind. Seed/Angel deals saw the largest decline since Q2 2019. Sequoia, 500 startups, Ribbit Capital, Accel, and GFC have been the most active VCs in the first half of the year.

When investing in startups, venture capital firms and business angels need to understand that they are in it for the long run, so a change that affects the world for a year or two shouldn’t be discouraging them from investing in a company if the fundamentals are sound. However, venturing into tiny businesses has implications, and many investors are instead deciding to stockpile cash to reinvest in their existing portfolio of startups, in case these need to weather a storm - this is what the numbers are showing.

Fintech volumes recovering

When looking specifically at fintech, we can see a recovery from Q1 to Q2 on investment volume, even though the number of deals continued to fall. The trend is to see re-investment in VC backed companies, and to leave early-stage behind. What is interesting is the total funding deployed by later stage firms, which demonstrates a highly mature market.

Bigger rounds of over $100 million have reached a record, and in H1 2020 there have been 42 of these. This makes sense when considering there are currently 66 unicorns around the world, which together are valued at almost $250 billion. Stripe and Robinhood (with $600 million each) have raised the largest rounds.

Furthermore, fintech companies are increasingly showcasing an appetite for IPOs again. Companies such as Lemonade, nCino, Shift4Payments and SelectQuote have gone public with quite good subscriptions, and Chinese giant Ant Group (previously Ant Financial) has announced a mega IPO.

Payment fintechs thrive

As the physical world came to a halt, people still needed to make payments for all of their consumption. Thereby the process of making payments simpler has been an important priority, as less experienced buyers need to use online services. US ecommerce penetration has grown from 16% to 27% in 2020, and Bank of America’s data has shown an increase in online commerce of around 80%. This became an opportunity for fintechs that are specialised in payments, and funding to this sub-sector clearly shows it, as investors were optimistic about these. The growth of ecommerce has helped fintech specialists grow their revenues. Firms that can improve retail checkout have jumped into the foreground delivering services like cashier-less checkouts, NFC devices, selfcheckout, scan-to-pay, and biometric IDs. Some interesting firms to look at in this space are Tabby who specialised in PoS lending, Chargeback covering credit card fraud, both of whom recently received funding.

Emerging markets such as Africa have shown a significant appetite for mobile money, and several early-stage firms have been looking at taking on this complicated space. The big technology firms are trying to capitalise these opportunities by offering payment services such as WhatsApp pay and Amazon Pay, and telco providers such as Vodafone also want a piece of the pie, for example through the expansion of mPesa.

The big technology firms are trying to capitalise on these opportunities by offering payment services such as WhatsApp pay and Amazon Pay, and telco providers such as Vodafone also want a piece of the pie...

Banking Dynamics

COVID19 and lockdown have highlighted the need for digital banking, evidenced by a high number of branch closures. Challenger banks tap into the socio-economic improvements made possible by modern financial technologies and the agility it affords. Venture capitalists have a keen eye for founders in this booming regional sphere.

The number of deals in banking has decreased, and this space is currently set for consolidation and acquisition, with several fintechs having a strong cash position. Monzo, N26, Nu Bank and Varo, together have received funding of more than half a billion dollars and are hungry for acquisitions that can improve their offerings and their competitive positions.

Startups have worked in developing specific offers that support banks’ automation in their front offices (onboarding, virtual assistants), middle offices (fraud, compliance) and back offices (RPA, BaaS). In emerging markets like Latin America, several firms have been developing offers to enable open banking, which can enable building modern banks. Examples of startups recently funded include BeeTech in Brazil, Minka in Colombia and Belvo in Mexico.

Borrowing needed

The pandemic has left many people unemployed and needing to borrow or freeze paying their loans. Alternative lending has grown in deals and volume, with Nubank taking the top spot in fundraising. Payday loan and payment advance firms have gained popularity, especially amongst the underbanked, as well as buy now / pay later services. The much-needed support governments have been providing for people and businesses has prevented many crashes in this financial category

In summary

As we move closer to a vaccine and a new normal, fintech plays an essential role in our lives and has rapidly adapted and expanded to the new conditions. For the near future and 2021, I expect more unicorns to go public, and most of the investment funds to go into mega-rounds that support the top firms.

Early-stage will have to wait and weather the economic storm before investments pick up, even though the best startups will always have opportunities to gain and grow interest, funding, and traction.

Unfiltered Opinion:

A place for those in the industry trenches to share their experiential knowledge on key topics prevalent in our industry today.

Open Banking Education

If you ask the experts, only a minority will call open banking a success, at the 1st birth of the open banking provisions of PSD2. Most cited reasons are, amongst others, the lack of standardisation and the fragmentation of services providers and oversight measures, or banks that haven’t done their jobs correctly. There is something else I would like to touch on as a fundamental hurdle for open banking to be successful - Trust.

YTS recently conducted a study and concluded that 25% of the respondents defined open banking as “legislation allowing any company to access an individual’s financial information, regardless of consent”. These respondents work in the industry and don’t know the essentials of open banking. These respondents, experts in banking, investments, lending, or PFM, see open banking as an opportunity to gather data, whereas it should be about protecting data, and making better use of it in a protected and consensual way.

With such a high level of confusion within the industry, what do you think the end-customer missed to adopt open banking on a massive scale?

Trust.

Looking further into the detail, it was striking that in a ‘screen-scrape-heavy’ country like the UK, the confusion over consent was twice as high as in the Netherlands, a country that is and has been an API-first for many years, with initiatives like iDeal. Consumers and businesses must be aware that these open banking provisions are there to protect their financial data. Today that is not the case.

They must know what measures are in place to guarantee this protection. Today that is not the case.

Open banking will not be successful if the industry cannot ensure a trusted ecosystem for consumers and businesses. It takes time to create comfort in a new way of banking, it takes time to ensure trust. That is why open banking education is so important and it must be taken care of, on an industry level. It should be a mission of every person involved in open banking, to make sure all their friends and family see open banking as a trusted way to manage their financial data better, and to have a financially healthier life. Making that happen requires more than just technology solutions. It requires one additional ingredient:

Trust.

Opinion by: Rik Coeckelbergs

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