Fintechs weathering pandemic

Fintechs remain resilient but still faces challenges to long term viability

by | May 27, 2021

With the pandemic accelerating digital trends, fintechs in sectors like digital payments and regtech have seen double digit growth in transaction volumes over the past year, according to Capgemini’s latest World Fintech Report.

“I was extremely surprised with the resilience that fintechs have shown in terms of staying in the game,” says Sankar Krishnan, vice president of banking and capital markets at Capgemini.

“The funding for them hasn’t stopped, they continue unabated. We see new IPOs being announced with a variety of fintechs and new SPACs.”

However, the sector also faced its share of headwinds. More than half of fintechs indicated the pandemic had a negative effect on their capital reserves and more than a third said it affected their future fundraising outlook.

Profitability is becoming the “next frontier” for fintechs as the market matures.

“As [fintechs] approach the IPO stage, there’s going to be more eyes in terms of how well they are doing. Otherwise, they’re going to get dinged,” says Krishnan.

He believes that fintechs will be measured more on metrics common in the tech industry as opposed to banking.

“People are going to look at [metrics] that you look for in Netflix or Amazon; daily users, active users, the customer lifetime value and the total addressable market.”

Consolidation and regulation for fintechs

As the sector matures, Krishnan expects more consolidation to take place within the market.

“Like, what happened with banks, there’s going to be eventual M&As.”

A review of the fintech sector commissioned by the UK government (Kalifa Review of UK Fintech) found that some consolidation of the market will be critical for growth while current regulation is preventing M&A. The report recommended the Competition and Markets Authority (CMA) take on a more flexible approach to fintech M&As.

“There are many fintechs that have actually been blocked from growing as a consequence of increasing scale, said Ron Kalifa, lead author of the fintech review while speaking in a live interview with bobsguide.

“The CMA is actually quite forward looking and understands the challenges. But the problem is that they are shackled by the rules and the regulations they are operating to.”

Government support will be vital to further develop growth and confidence in the fintech market, especially on topics that could pose risks to financial stability.

“We need some governmental help in terms of seeing how we should regulate fintechs, especially as they embrace new things like crypto-assets, Krishnan says.

He adds having a national plan for issues like AI, setting up governance and compliance models, along with some capital considerations would be key going forward.

Governments will need to strike the right balance between market growth and ensuring financial stability.

“It isn’t about relaxing regulation, it’s about making sure regulations are appropriate,” said Kalifa. “We cannot relax the rules to the point where consumers or SMEs will get damaged.”

“Regulation is a positive thing for companies. It’s a positive thing for society. There’s no question of it in my mind, in making sure that it’s robust.”

As incumbents either compete with or partner with fintechs, Kalifa said the line between the two is quickly blurring.

“The future of fintech isn’t about [a firm] being a fintech. It’s about essentially being in financial services.”

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