The FinTech industry has gone from record highs a month ago, to Coronavirus-hit lows in recent days, with market values set for turbulent times ahead.

A new report from Rosenblatt Securities explained that on 19 February, the FinTech index comprising 26 public firms was up 49 per cent, compared to the Nasdaq and S&P 500, which were up 28 per cent and 20 per cent respectively. Since then, the FinTech index has under-performed both the S&P 500 and Nasdaq by seven per cent.

The US brokerage firm stated that are three aspects to how COVID-19 and the current disruption in public markets will impact private FinTech companies: business conditions (both demand and supply) may deteriorate impacting a FinTech’s operating performance; funding conditions may weaken, jeopardising growth plans; and exit options may change significantly.

“These forces may feed off each other, creating a vicious cycle where deteriorating business performance makes funding more difficult and vice versa, should the market downturn last long,” read the document.

‍A large proportion of FinTechs are less than 10 years old and therefore facing their first market downturn, so Rosenblatt analysts suggested that many management teams may be inexperienced in responding to difficult business conditions – weak customer demand, working capital squeeze and a tougher environment to retain employees.

FinTechs with lower fixed costs will outperform and gain favour with investors over those with big, rigid fixed costs. The flexibility in business models and the ability to dial-up and down costs will become critical for FinTechs and will determine which firms survive. Firms that rely heavily on large marketing expenditures to generate growth will come under investor scrutiny as they can no longer justify large customer acquisition costs due to weak transaction volumes.

With investors less willing to continue funding weaker FinTechs, and founders unwilling to accept the new market reality, the next few quarters may see subdued overall investment activity, the report noted.

“Traditional financial institutions will gain a competitive advantage over FinTechs in this highly uncertain market environment as they are better capitalised, have bigger brands, and benefit from customers becoming more risk-averse.”

According to Pitchbook, private equity and venture capital firms had a record $1.2 trillion of cash in November 2019, so FinTechs with solid value propositions and credible management teams may not experience an immediate constraint on funding.

A Rosenblatt survey of FinTech investors in October asked them how they would react to a market downturn and how it would impact valuations, with 55 per cent stating they would be opportunistic and stand ready to fund or acquire FinTechs if valuations dropped, especially in sectors like consumer banking that had become unaffordable during the recent FinTech bull market.

The respondents also said they expected the 58 FinTech unicorns globally (as of October) to be most impacted, with average valuation contracting by about 15 per cent. With the market capitalisation of those unicorns being $510 billion at that time, that implies that a protracted downturn could wipe off $76 billion of unicorn market value.

“When VCs made FinTech investments in past years, they depended on a vibrant IPO market as one of the avenues for liquidity, but with IPOs markets tightly shut at least for the next few months, exits via strategic M&A might be the only option available for liquidity,” the report read.

There will be major differences and nuances in how FinTech sub-sectors respond to a distressed market. Rosenblatt analysis indicated that lending FinTechs would suffer the biggest drop (lower valuations, slower funding), followed by capital markets, with insurance and payments less impacted.

Business to consumer models like challenger banks are also likely to see valuations contract faster than business to business models like corporate banking and treasury.

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