Impact of Covid-19 on fintech funding and what it means for UK firms
As we enter a time when VCs and lenders are more careful about who they fund, how will fintechs continue to innovate and survive? Alex Reddish, CCO at Tribe, shares his insights…
Covid-19 has already had a massive impact on UK fintechs. Despite there being an abundance of innovation from UK challengers in payments leading up to the crisis, many of these firms have not yet begun to turn a profit. As a result, this health crisis and economic downturn could mean make or break for many companies that rely on funding to keep the lights on.
Right now it’s clear VCs and investors are becoming more careful about who they fund. A recent survey by Qadres found 68% of UK fintechs had recently lost out on funding due to the virus. However, although the amount being invested may potentially decrease as fintech valuations go down, as we unlock lockdown it’s predicted that the number of investments will slowly begin to rise again. Either way, it’s not great news for this fast-paced industry.
The lack of funding happening now will have a substantial impact on how fintechs grow and do business.
Here are 3 changes that we’re already noticing and will impact the industry in the long-term:
Customer acquisition won’t be the main metric of success
Investors could shift their attention from fintechs with rapid growth to a focus primarily on revenue and profit. Customer acquisition may no longer be enough, so fintechs will have to demonstrate value in other ways – in figures that mean money.
However, this doesn’t mean the race for sign ups will end. Some of the original challengers like Monzo, Starling and Revolut excelled by building loyalty with initial users when they began, which meant that they built a tribe of people who believed in the digital banking movement and were excited to be part of the journey. These are the customers most likely to adopt paid-for services such as business accounts and enhanced benefits, that will turn a profit. It’s vital other fintechs follow this lead and tap into, or begin building, brand advocates that they can convert into paying customers to weather this storm.
Ad hoc innovation could decrease
Challengers that have been celebrated for their agile approach to innovation, might now be constrained by capital, this means the ‘you asked and we listened’ style may be at an end. As comapanies will need to demonstrate the value of each update to expectant investors, products will no doubt be more carefully released and will be based on economic principles rather than just customer demand.
Small firms will be acquired by their larger counterparts
For the stronger challengers, they may become acquirers as they seek to buy or merge with another fintech provider to diversify their offering, at a cut cost. For example, Revolut has already announced plans to use some of it’s February $500 million fundraising round to acquire competing technology firms that were suffering from the impact of Covid-19.
All of this means it’s more important than ever for fintechs to make difficult decisions on their long-term future now. A number of them may realise that there is no realistic route to profitability any time soon, so we may begin to see stunted growth, mergers and acquisitions, and even sadly potentially some closures soon. But, with lockdown being considered the perfect time for businesses to refocus their long term strategy and take a step back from the day-to-day, fintechs have an opportunity to consider their position in the market, as well as the value they provide to not only their customers, but also potential investors who are looking for a good deal post COVID-19.