The first few months of the 2020s have been nothing if not eventful. The start of a new decade is always a time for optimism so, just as many of us look forward to a new year as an opportunity to change something in our lives, you can reasonably magnify that feeling 10-fold when applying it to beginning a new decade. In this article, I take a look at some of the highlights of FinTech’’s first quarter of 2020. Of course, the COVID-19 pandemic has dominated everyone’s minds and, while I do examine what it means in relation to the FinTech ecosystem, outside of this there has been plenty else of note occurring so far this year too and that is where we’ll start.
What Happened in Q1 for FinTech
Vodafone leaves Facebook’s Libra to focus on M-Pesa
Libra, Facebook’s proposed blockchain digital currency, provided one of the biggest stories of 2019, even though it did seem at one point that the concerns held by governments and central banks could permanently derail the project. Vodafone, the major UK telecommunications provider, joined a growing list of big name companies dropping out of the Libra project which was more unwelcome news for Facebook.
Vodafone stated that, as part of their commitment to financial inclusion, they would focus the resources they had planned for Libra on M-Pesa, the digital payment service, a company which we have previously worked with on development projects. The plan was to expand the successful mobile solution to further markets in Africa where it has already enjoyed great success since its launch in 2007. Vodafone did appear to leave the door open to some future involvement with the Libra Association and maybe the revised roll-out plan by Facebook will prove more attractive to partners with its decreased emphasis on the cryptocurrency element of the project.
Brexit’s First Big Name Victim?
N26 pulled out of the UK citing Brexit as the reason. The German challenger with five million global customers became the first fintech of note to publicly claim that Brexit had directly led to a decision to cease operations within the UK. Financial services ‘passporting’ in its current guise will cease to be possible from the end of this year and N26 opted not to apply for a UK banking licence which would have allowed them to continue operating. However, critics were quick to point out that Brexit may have been a convenient scapegoat to distract from some lacklustre numbers. Since a high profile launch in the UK in October 2018 (the referendum where Leave won was, of course, back in 2016) N26’s performance has been notably poor in comparison to that of established challengers such as Monzo and Starling.
Despite Brexit, the UK remains an attractive place for any fintech to operate due to its digitally aware consumers and startup friendly ecosystems. N26 CEO and co-founder Valentin Stalf said at their time of launching: “The UK is one of the most digitally advanced countries in the world.” We have already had the 2020 UK Budget which was generally deemed to be fintech-friendly, encouraging as we approach the end of the transition period. Chancellor Rishi Sunak announced the Government will carry out a review of the FinTech industry to “support growth and competitiveness in the sector” as part of its goal to champion the UK’s lead in encouraging tech talent. The review will be led by Ron Kalifa, vice-chair of Worldpay and non-executive director at the BoE.
Revolut Kept Making the News
The UK based money app joined the list of Euro challengers including Monzo and N26 looking to make waves in the US market where their main competition will be from Chime. They plan to launch some of their basic account features before rolling out the various additions which are already available to their ten million plus European customers. They have partnered with New York based Metropolitan Commercial Bank (MCB). Also, this year we have seen Chief Financial Officer David MacLean quit his role at Revolut after just five months and a new $500 million funding round for what is now the most valued fintech in Europe at $5.5bn. Some have been quick to claim this is another example of FinTech’s price bubble.
Of course, the elephant in the room when admiring the sheer scale of some of Revolut’s numbers is that profit, that seemingly, at times, neglected measuring-stick of sustainable business models, is still somewhat far from being achieved. Although a recognised growth strategy, this approach does contrast jarringly with the achievements of other UK profit making fintechs Transfer Wise and Oak North Bank.
Q1’s Headline Grabbing FinTech M&A Megadeal
Due to the current macroeconomic environment, reduced funding for fintechs will force firms to seek collaboration, investment or acquisition in order to grow and succeed. 2020 has already seen Visa acquire the fintech Plaid for $5.3 billion. Plaid calls itself the “plumbing” behind fintech and provides APIs which connect users’ bank accounts with third party providers such as Wealthfront and Robinhood. The frenetic pace of FinTech M&As over recent months has seen not just incumbents buying fintechs (Visa/Plaid, Intuit/Credit Karma) but fintechs buying banks (Lending Club/Radius Bank) should accelerate during any economic slowing over the next 12 to 18 months.
Repercussions of COVID-19 for FinTech – Concerns and Opportunities
The biggest event when talking about any industry or pretty much anything thus far in 2020 is the coronavirus or COVID-19 outbreak. What I consider here is its the meaning for the FinTech industry. Clearly not the most important question of the moment but there are other more suitable channels to discover and discuss other topics relating to the broader situation. That having been said, in financial services business as usual will not be as usual anymore. The pandemic has created an immediate operational crisis for FS firms, especially those that have previously elected to ignore the need to digitise. The good news for fintechs is that they are well versed in the art of disruption of traditional fields and should be best placed to adapt to any new normal.
Traditional firms will be accelerated towards replacing legacy monolith infrastructure with microservices-based tech stacks with maintaining operational resilience a clear priority in the short-term. Right now, banks and investment firms are being overwhelmed with customer requests, Barclays are paying frontline staff triple overtime to ensure call centres are fully staffed to meet demand. Lending and wealth management fintechs are being inundated with customer requests and are scrambling to increase capacity and resources to stand up to system stress. Warning signs became apparent in this regard early in March thanks to the travails of the US stock trading app Robinhood which experienced its third outage in a week as stock market volatility peaked. The problems led to this statement being published by Baiju Bhatt and Vlad Tenev, Co-Founders and Co-CEOs “Multiple factors contributed to the unprecedented load that ultimately led to the outages. The factors included, among others, highly volatile and historic market conditions; record volume; and record account sign-ups. Our team is continuing to work to improve the resilience of our infrastructure to meet the heightened load we have been experiencing.” This is the kind of situation which must keep any fintech’s top people awake at night. With unquestioning customer loyalty becoming a thing of the past and a plethora of convenient app alternatives available, failure of the technology on which everything relies can prove too much to recover from.
Yet there are opportunities and segments within FS that will be less hard hit than others and will play a key part in our economic recovery. With digital-only as the financial industry default legacy, institutions will turn to tech companies for their expertise and know-how. Digital businesses have generally responded faster than traditional firms, helping to deliver government backed credit and by offering COVID-19 specific products. In the UK, Trade Ledger, Wiserfunding, Nimbla, and NorthRow make up a business lending taskforce and provide a platform for lenders to virtually deploy funds to businesses during the crisis. Covid Credit is a POC used to demonstrate loss of income to the UK’s HMRC and is a notable FinTech contribution to address some of the disruption caused by coronavirus. The collaboration between Fronted, 11:FS and Credit Kudos in creating the platform demonstrates the nimbleness of fintechs at this time.
Digital currencies and contactless payments will be areas of increased focus with bricks and mortar businesses having been forced to close during lockdowns. The World Health Organisation (WHO) encouraged people to use contactless forms of payments whenever possible in response to COVID-19 in recognition that the hand to hand transfer of physical cash may lead to the virus spreading. Mastercard was one of the leading payment organisations calling for higher contactless limits to be put in place in order to be socially responsible and to help small businesses who may be suffering disproportionately during this crisis. Gregor Dobbie, CEO at Vocalink (Mastercard), recently wrote in depth on how we must retain a human touch to ensure inclusion for groups such as the elderly during the growth in digital options for day to day living. With app downloads for banks like Barclays and Monzo having soared across March it’s difficult to imagine that the majority of these new users will revert to traditional methods of banking and managing their money when and if that becomes possible.
Other Business of Q1 2020
Our parent company, Trifork, has worked in the banking business for many years developing some of the very first mobile banking solutions, such as the innovative MobilePay for Danske Bank. Trifork are currently extending their tech solutions into the UK utilising our expertise in building scalable, fault-tolerant systems for fintechs and I have recently written about some of our latest FinTech projects. We have enjoyed a close relationship with the DiT backed Fintech Alliance in the UK and have discussed some exciting joint ventures for the FinTech community as we emerge from lockdown so it was an exciting development for the group when Trifork recently confirmed a similar strategic partnership with Copenhagen Fintech in Denmark. There are a number of interesting FinTech startups and high profile sponsors involved with Copenhagen Fintech and Trifork’s experience in cloud-based development and FinTech innovation, along with a passionate commitment to the tech and startup experience will mean some exciting opportunities and projects soon to come.