Consolidation of the fintech space is one of a number of emerging themes that investors in disruptive firms in financial services, writes Dr. Ruth Wandhöfer, partner at Gauss Ventures.
Fintech is not immune to the impact of coronavirus. The pandemic has swept across the world, threatening not only to cause havoc across populations but also industries. It is reported that at least 22 per cent of jobs within fintech will be lost whilst the last quarter saw the worst for deals, since 2016. But, unlike the travel or fashion industries, the impact is likely to be felt to a much lesser extent.
Fintech was effectively borne out of the financial crisis. The global economic collapse challenged us to think of new ways to run our financial systems, at both a macro and micro level.
Over the years the sector has shown its agility and ability to identify areas that need new solutions and technologies, as well as develop a totally new way of managing the interests of consumers. Fintech has been successful in evolving to create a better future of finance - and we remain confident that our industry will use this challenging time as an opportunity to form the next successful wave in banking.
Here are five major trends we expect to see once the world emerges from crisis-mode - and with them some areas of investment that are worth taking a closer look.
De-risking the future - the importance of simulation
The current pandemic has highlighted the need for more risk simulation to optimise our responses to crises. Ranging from individual business resilience to contingency planning, there are several domains that require immediate attention.
Simulation can future-proof a number of crucial areas such as supply-chain, fraud, money laundering or compliant trading. The ability to model risk (and therefore manage it) will allow for optimal decision making in order to de-risk our future.
Investment focus: Agent-based risk modelling / Risk simulations
Emphasis on cybersecurity/ data privacy will significantly increase
With lockdown, more of the world exists and operates online than ever before. Board meetings are conducted over zoom, everyone now banks online and pensioners are twice as likely to shop online than they were a year ago.
With this great convenience comes some serious risk exposure. Prior to Covid-19 cybersecurity was already a serious threat but as businesses fight to stay afloat, hackers are looking to take advantage of the situation. If lockdown has made CEOs appreciate anyone, it’s their CIOs and the uphill battle they fight to keep systems secure.
It is vital that, given fintechs’ main asset is data, investors carry out serious due diligence when it comes to checking the company’s cyber resilience processes, software, protocols as well as staff training. Data privacy and data protection are of utmost importance and cybersecurity has to be taken seriously.
Investment focus: Fintechs with embedded cyber resilience
The rise of the digital asset capital markets
Blockchain technology has promised us many things, but a global capital market powered by digital assets is one of the most exciting.
The arrival of tokenisation did show major potential for the expansion of businesses from cryptocurrencies into the broader digital asset space, drawing the attention of the world of institutional financial services.
Some of the traditional exchanges are taking an increased interest in the token-based capital markets space, often spurred by increased buy-side client demand.
Ranging from the emergence of regulated token exchanges and CSDs to digital custody players as well as the crucial area of compliance with AML risk monitoring solutions across the digital asset space, the ecosystem is growing every day.
Investment focus: Digital network and crypto/token risk and compliance solutions for the evolving digital asset ecosystem
Digital financial support for SMEs
SMEs are facing an ongoing battle thanks to Covid-19. As the backbone of fintech, gaining access to capital is of life-saving importance, whether that is credit or government support (CBILS). They need streamlined, multi-expert platforms to help them to find the best financial support and know-how available to them.
But, SMEs have very little resources so platforms offering support will do well as they solve this issue, at a crucial time. In particular, those that can bring businesses, lenders and accountants together to help SMEs gain know-how and to overcome the delays and confusion when it comes to finding financial support.
Investment focus: Digital SME financing comparison and advisory platform
Digitisation of the trade finance value chain
Trade finance has existed for hundreds of years (even longer than lockdown!), but it is behind the times when it comes to streamlining administration and practical execution.
The virus has massively exposed the fragility of the current system. Prior to Covid-19 digitising trade finance was seen as a nice to have in terms of realising cost savings, increasing efficiencies and reducing fraud. It is now more relevant than ever as we try to operate globalised trading systems without physical documents whilst navigating cumbersome regulations and agreements.
Investment focus: Trade Finance digitisation and automation
Finally, look out for consolidation of the fintech space
The fintech industry is now approaching its second decade. This means a maturing of the space. Naturally, the established, well-funded companies now involved in the sector will have a desire to merge and acquire businesses.
2019 gave us a good indicator of what is to come; Fidelity purchased Worldpay for $44 billion; First Data became Fiserv’s for $22bn and GlobalPayments bought ‘start-up’ TSYS for $21.5bn.
As companies look to own smaller ‘start-up’ competitors, expand into side-streams or secure their supply chains they will no doubt see further consolidation of the space as 2020 moves into 2021.
Ruth Wandhöfer is a partner at Gauss Ventures. The views and opinions expressed are not necessarily those of AltFi.