The rest of this year will be challenging for FinTechs to navigate, but prosperous times remain ahead post crisis for certain types of ‘disruptive winners’, according to a new report from Finch Capital.

The thematic venture capital investor has since 2014 backed FinTechs like Digital Insurance Group, Goodlord, Grab, Hiber and Trussle.

Its research was based on surveys with the founders of Disurptibe FinTech, as well as artificial intelligence (AI) and Internet of Things (IoT) companies selling software to financial services firms, interviews with financial institutions in its network and proprietary Finch Capital research.

Finch suggested that demand for AI and IoT companies that help financial firms transform to a digital and data-driven interaction environment will surge, once Coronavirus “crisis mode” lessens in the third quarter – followed by a 12 to 18 month recovery.

During this time, digital-only will become the new industry norm in financial services, accelerating the current trend.

The report predicted that this shift will trigger a “big pocket” online battle between incumbents and challengers, as financial Institutions turn to tech companies rather than in-house capabilities to accelerate digital transformation.

It argued that potential FinTech sector winners include consumer and small business lending platforms - as a “best-adapting mechanism to swiftly and efficiently deliver capital to key segments of the economy” - along with mortgage and life insurance digitalisation firms - “leaping forward with technology to disrupt the role of intermediaries”.

As for AI, Finch put its money on success for call centre chatbots, account-opening procedures, loan automation technology and the automation of Know Your Customer onboarding processes.

However, areas under pressure in the near future included challenger banks - suffering from “high valuations and lower expected activity post-crisis” - wealth management - hit by “client de-risking and lower assets under management impacting bottom line” - and payments or foreign exchange firms - with “decreased transaction activity affecting commission businesses”.

There is likely to be a pull-back of corporate venture capital-led investment, with higher hurdles for companies’ access to funding, in turn putting pressure on valuations in later-stage rounds.

Increased mergers and acquisitions and trade-sales below the $250 million category of FinTechs are also likely, according to the report, as fewer Initial Public Offerings are expected and bank funding will be constrained due to higher capital preservation requirements.

Finch proposed seven steps FinTechs can take to reposition for the post-Coronavirus normal. These were: cutting staff costs, renegotiating contracts and using force majeure clauses; focus on protecting the existing portfolio rather than seeking new funding; incentivise staff through equity offers; communicate openly with employees while making tough decisions; put as much effort as possible into product development; focus marketing spend only on high return-on-investment channels; and make use of government rescue packages.

Share Story: