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Feature | How is the Fintech Sector Coping with the Covid-19 Fallout?

David Paul

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fintech

Recent data indicates that investment in the second quarter dropped by more than a third compared to the same period in 2019 but is it as bad as it seems?

The coronavirus pandemic has caused a ripple effect throughout a host of global industries and the financial technology (fintech) sector, to some degree, is feeling the strain of a post-Covid slump.

Figures from fintech trade body Innovate Finance show that the sector has seen a 30% reduction in investment across the UK – from $760 million (£590 million) in the second quarter of this year compared to more than $1.2 billion (£940 million) in the same period in 2019.

The effect of lockdown means that the overall UK economy has witnessed its sharpest fall in 41 years – contracting by 2.2% in the first three months of this year. The virus has caused the fintech companies across the UK to pivot their businesses to try and stave off the impact. And in a lot of cases, it has paid off.

Paul Atkinson, Partner at Par Equity, said that when the lockdown was announced, companies had to adapt to survive.

“When lockdown happened, investors immediately launched into triaging their existing investments, to make sure that they had sufficient financial resources to make it through the likely Covid impact,” he said.

“At the time, most PE and VC Funds had significant firepower, but the immediate priority was to support and look after their existing portfolio.”

Atkinson added: “Most still have investment capacity, but diligence on management teams has been hampered by not being able to meet face to face, until very recently.

“This particular downturn in business is highly unusual in the sense that, immediately prior to lockdown, a lot of the big private equity funds were recently raised, so there’s lots of liquidity in these funds to be invested.

“And then, basically, the world governments just pressed the off button.”

Covid-19 has caused companies worldwide to see the value of using technology within their business. They are beginning to fundamentally change the way that they operate and how we deal with our money.

It would be easy to think that the advent of Covid-19 could make it too risky for investors. Stephen Ingledew, CEO of FinTech Scotland, believes that current uncertainty makes it difficult to gauge exactly what will happen in the future.

“In many ways, the investment opportunity in fintech’s has not come to a stop. As to how much it has changed it is still early stage,” he commented.

“Some firms have actually pivoted their position so don’t actually look into that investment; others are now, because of accelerating, looking for new investments that they weren’t doing at the start of the pandemic, so it is a very dynamic space. It is a completely new paradigm that we’re in”

Research carried out by Beauhurst revealed that 53% of UK companies are under moderate-to-critical threat from the pandemic, although the impact seems to vary between sectors. The UK Government recently announced a review to try and boost the UK’s fintech sector.

The review was initiated by the Economic Secretary to the Treasury & City Minister John Glen, who said: “The UK is one of the leading places in the world to start and grow a fintech firm, and I am determined to ensure this continues.

“The sector is worth around £7 billion to our economy and will, therefore, be vital in ensuring both that the country bounces back post-coronavirus and continues to be at the forefront of financial innovation now we have left the EU.

“This independent review will help us to uphold and enhance our global reputation, support growing firms, and promote the integration of new technologies across financial services to the benefit of businesses and their customers,” he said.

But there is evidence that the fintech sector is already growing. Technology has been a big driver in helping businesses to change the way they work to mitigate the impact of the lockdown, and fintech can be the perfect platform.

Ingledew continued: “What Covid is seeing is an acceleration in the demand for fintech innovation and that is reflected by a lot of enterprises saying they have never been busier.

“The number of firms in the fintech community in Scotland has gone up, even during this Covid period.”

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Smaller fintech enterprises that may not have the same capital as larger organisations are built to adapt their business and find investment as people change to digital models.

However, Ingledew suggested that larger companies, who have also had to make those major changes to their business models, have done an excellent job.

“Some of the big companies do find it a struggle, but they have dealt extremely well with the immediate crisis, with things like home working,” he said.

“But this next phase is quite a challenge because now they need to really digitise that business, and that means moving from legacy technology, legacy processes and a legacy culture, and that is not so easy to do as it is for a smaller business.”

Although the virus has come as a shock to the system for a lot of sectors, and some companies find it difficult to adjust, Ingledew believed that this is could be the perfect opportunity to change for a more digital future.

“I think it was a real acceleration forward and a real opportunity to fast track into more of a modern digital world,” he said.

“The problem is that it is not a straight line – It’s a bit of a bumpy journey – and for some those bumps could be quite significant depending on how they manage them, but that’s true of big and small.”

David Paul

Staff Writer, DIGIT

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