Early Stage Fintech Hit Hardest From Pandemic

The coronavirus epidemic that began in March has had lasting economic consequences whose full ramifications are still far from clear. While the markets were down by 35% early in the crisis have bounced back, the financial services space has seen mixed results.

The large banks have benefited by collecting significant assets. JPMorgan Chase JPM , the nation’s largest bank, grew 20% in the first quarter, becoming the first bank in the U.S. with over $3 trillion in assets. While many customers have flocked to large banks for a safe place to store their funds and borrow money, all banks must prepare for a coming wave of delinquent loans, unpaid mortgages, and bankruptcies. Banks of all sizes must also look closely at enhancing, or in some cases creating, their digital capabilities to meet their customers’ demand in this virtual world.

Fintech startups have seen similar ups and downs. On the one hand, as mentioned in my previous article, fintech acquisitions post Covid-19 have stayed consistent including American Express AXP ’ acquisition of Kabbage this week, but funding has suffered from a flight of capital, and many existing startups have encountered difficulties, especially early stage startups. The $6.1 billion invested, according to data from CB Insights, was the lowest amount given to fintech startups since the first quarter of 2017, and the lowest number of deals (404) since 2016, which saw 395. The share of seed funding—28%—was also the lowest seen in five quarters, indicating investors sought quality and safer startups. As American Banker noted, “For fintechs, the pandemic marks the first major economic slump they’ve dealt with, testing their businesses as customers retreat to the safety of traditional banks.”

Promising signs have started to emerge however with startups in the mortgage and payments space gaining traction as well as greater interest from consumers in investing and robo-advice. As the third quarter progresses, there are signs of life in fintech. The insurance startup Lemonade, backed by SoftBank, filed to go public on the New York Stock Exchange. Lemonade currently holds an estimated value of $2 billion. Mobile banking startup Varo Money, after announcing a $241M Series D raise, officially acquired a banking charter and was the first fintech to do so. Varo has seen a 350% rise in deposits and 140% increase in spending. Mobile banking more broadly has seen a 50% increase in usage during the pandemic.

In terms of investment, areas that have seen greater interest, per the CB Insights report, are automation and workflow startups that help with backend processes. This is not surprising as more efficient processes are essential for banks and the businesses they serve, as the economy prepares for a recession. With the lack of capital, there is a fear that fintechs will lose a great deal of their innovative spirit and insight into the lives of overlooked Americans if capital continues its retreat to safe havens. Investors watching the space closely point to hopeful signs. Jay Reinemann, General Partner at Propel Ventures, sees strong upside to the current state of affairs. “Covid-19 is accelerating customers’ migration to 100% digital solutions, favoring the fintechs and institutions with strong digital solutions,” Reinemann said. “Incumbent financial institutions that were previously not heavily invested in digital transformation are now looking for fintech vendors and partners. The first half of 2020 produced record fintech IPOs, M&A and SPAC filings. These are sending strong signals the market wants more fintech!”

Times may be difficult for fintech founders, but those that can emerge on the other side of this crisis will find themselves in a new market that is tilted in their favor.