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Covid-19 pushing fintech unicorns towards extinction: Future finance in doubt

After grabbing the headlines in much of 2019 for disrupting Banking, fintech is today making news as the technology facing the most headwinds and facing a dire future.

Fintech unicorns could see $76bn wiped off their valuations Fintechs with lower fixed costs will outperform and gain favor with investors Fintechs emerging in Saudi Arabia’s financial services landscape is changing the face of the banking industry

Is Fintech dead? No. it appears that smaller, more agile fintech companies will survive the Coronavirus and associated financial pandemic wiping billions of Dollars from markets and sapping investments in future banking.

Not Unicorns. Reports say the mightiest fintech companies will fare the worst. 

But that’s today. Situation could get worse for all financial technology firms should Corona stick around for longer periods of time.

Read: UAE pioneers MENA’s $2.5 billion fintech market innovation

Fintech Unicorns in trouble 

Fintech unicorns could see $76bn wiped off their valuations.

A report, reflecting a survey of fintech investors, by Rosenblatt Securities, a US brokerage company, predicts that financial tech startups valued at $1bn could be the worst hit by a shock to the global economy.

The report estimates the world’s 58 fintech unicorns could each contract by 15% on average in the event of an extended recession. 

Smaller startups, who are short of cash, are being forced to halve valuations to raise the money needed to meet payroll in the coming months.  Bottom of Form

But billion-dollar valuations are based on a series of (often optimistic) assumptions about future growth, profits and exit prospects, which are now in question. 

These major fintechs, with weaker exit prospects, will need to adjust their expectations for raising fresh funds and for expansion.

Those currently rumoured to be raising include European unicorns like Monzo and Monese, while Revolut and Starling locked in their deals ahead of the market crash.

The main threats to fintech unicorns now are cheap mergers or acquisitions, driven by opportunistic buyers looking to capitalise on the fintechs’ shortage of liquidity. 

A large proportion of private fintech firms are less than ten years old and facing their first market downturn. 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 favor with investors over those with big, rigid fixed costs,” states the report. “The flexibility in business models and the ability to dial-up/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. “

 The report adds that traditional financial institutions, banks, 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.  

Read: Kiddo fintech App set to change the face of education

Fintech views: Optimistic

From fintechmagazine comes a survey of fintech companies asking how and why they should be optimistic during these difficult times.

“I’m massively optimistic. Ultimately, sector’s like fintech are set up for this, with remote working capability and systems to innovate and respond. We’re well placed to support our customers through this, navigating a time none of us has lived through before.” – Vivi Friedgut, founder, Blackbullion.

“B2B SaaS will remain resilient as the global economy shifts because it relies on a recurring revenue model – in other words, B2B SaaS companies don’t rely on one-off sales. Growth may slow down, but for mission-critical platforms—which is what we look for and invest in—churn is unlikely to be destabilizing” – Josh Bell, General Partner at Dawn Capital

“There’s potential to thrive for online services, VR technologies, remote working platforms, sustainability-related businesses and also fintech companies which help customers embrace new, future-proofed ways of money-saving and management.” Frank Zhou, CEO & Founder of Zeux.

“For investors, some Fintech products offer alternative investment vehicles that aren’t as subject to volatility as traditional market-based ones. Token-based products, for example, open up comparatively stable property investments, while still providing easier liquidity than that space would otherwise provide.” Sébastien Flak, Director, Fintech Solutions, at Geneva Management Group (GMG)

“Cryptocurrencies and blockchain methods are likely to become more widely accepted and trusted. FinTech will definitely play a large role in both kick-starting our world and economy again, and making it more resilient for the future.” – Gavin Powell, General Secretary of FinTech Wales.

ReadFinancial threats in 2020: fintech, mobile banking and e-commerce are in the crosshairs

Why Fintech is important- The Saudi case

The number of fintechs emerging in Saudi Arabia’s financial services landscape is changing the face of the banking industry. According to Rajesh Prasad, a partner at KPMG, banks now need to respond to the threat while at the same leverage the power of fintechs to turn the situation into an opportunity.

The swift evolution of fintech has forced traditional banks to face a new reality wherein products, services and business models that have worked in the past are no longer relevant or considered as a viable option in the digital world. Legacy IT infrastructure has to be replaced or augmented by newer, more efficient technologies.  

Technology companies, telecoms, postal services, retailers, global and niche companies which are all looking for ways to provide what customers are demanding from their financial services providers which may no longer be a bank.

But banks are orienting themselves to define how they should approach and adopt fintechs in their businesses. 

In Saudi Arabia, many banks are in the early to middle stages of evaluating how fintechs can help them with their issues related to front-end omnichannel-based customer servicing for increasing process efficiencies and regulatory compliance.

One thing clearly emerging is that local Saudi banks are now open to the idea of evaluating how fintech solutions can help them rather than seeing them as a threat and investing in-house technologies as in the past. Banks are now rapidly looking at embedding the adoption of fintechs in their overall business and digital strategies.

SAMA launched ‘Fintech Saudi’ with the objective to make the Kingdom a pioneer in the fintech sector, in line with Vision 2030. Key regulations on digital signatures and customer versification will further facilitate in the buildup of the digital banking ecosystem.