The COVID-19 pandemic has profoundly impacted the economy, but it has also had the unintended consequence of accelerating a range of hugely disruptive macro trends already in place. One of these trends is the digitization of financial services, neatly if not wholly encapsulated in the sector known as FinTech. Previously described as a steady transformation of everything related to monetary or marketplace interactions – payments, trading, capital formation, digital currency, credit insurance, real estate, etc. – the pandemic has unlocked a wave of adoption for FinTech startups across one of the fastest-growing and best-funded areas of technology.
The data is startling, if not surprising: U.S. consumers spent $9 billion online this past Black Friday alone, 21% more than last year, according to Adobe Analytics, as virus concerns kept shoppers away from physical stores and long lines, while traffic in brick-and-mortar retailers fell 52% for the same reasons. Every single one of those online shoppers used fintech applications, from their shopping carts to the settlement of their credit card transactions.
Every single one of those online shoppers used fintech applications, from their shopping carts to the settlement of their credit card transactions.
The accelerating effect of the COVID pandemic on the FinTech sector has been described by no less than VC giant Andreesen Horowitz. It meets the U.S. economy at a time when other enabling factors, like greater mobile access, increasing bandwidth, and falling costs for cloud computing, have converged to allow a vast array of FinTech use-cases to flourish. Social distancing rules and fears of crowded spaces mean applications for online banking have soared. Demand for cashless/contactless payment apps has skyrocketed. Distributed ledger technologies enable a new generation of traders, lenders, and borrowers to transact without fee-inducing gatekeeping middlemen like banks and Wall Street firms.
Consider these FinTech Startups:
- Plaid, which allows users to securely connect their bank accounts with apps like Venmo, Chime, Prosper, and Carvana, saw its customer base jump 44% year-over-year in the period March-May 2020 (1).
- Popular shopping cart app Shopify said new stores created on the Shopify platform grew 71% percent in Q2/2020 compared with Q2/2019 (2).
- Square estimates cash usage fell by 8% year-over-year in Q3/2020, a decline it estimates would have taken three years to occur without the pandemic (3).
The Current State of FinTech VC Funding
FinTech was booming in terms of VC deal count and dollar volume long before the pandemic hit. From only $1.2B across 266 deals in 2010, the U.S. & European FinTech sector raised $26.1B in 2,085 deals in 2019, according to Pitchbook. As broad as it is complex, the sector includes companies that provide financial services as well as enable them, and as such, are often included in multiple segment definitions. For instance, a startup looking to use a blockchain solution to settle bond trades would fall into both digital assets and capital markets. Going a step further, FinTech as a vertical is almost uniquely applicable across most economic sectors in one way or another. Startup innovation in payments, transfer, insurance, compliance, capital markets, lending, real estate, etc., is naturally applicable in companies operating across a wide swath of industries.
From only $1.2B across 266 deals in 2010, the U.S. & European FinTech sector raised $26.1B in 2,085 deals in 2019, according to Pitchbook.
The funding pace has understandably slowed in 2020: Year-to-date through September 30, 2020, FinTech startups have raised $23.9B across 1,344 deals, with early-stage, angel, and seed-stage a lower proportion of activity compared to late-stage. While the full year’s value total may come close to last year’s record, the lower transaction count illustrates a preference for VC capital to focus on larger deals for later-stage FinTech businesses during the pandemic. Indeed, looking at Q3 2020 alone, FinTech VC deal value in North America and Europe of $8.9B was the highest quarterly FinTech deal value on record and up strongly from Q2’s $7.6B, but it was across only 414 deals – the lowest count since Q3/17. The takeaway? Mainly while the pandemic is still very much front-and-center, more mature firms with booming usage and soaring adoption rates are viewed as less risky VC funding propositions than untested startups.
However, although funding for early-stage startups has dipped in 2020, the seeds of the next FinTech surge are already planted. The crisis has accelerated the development of payment, banking, brokerage, lending, compliance, and blockchain applications, often designed explicitly for mobile and aimed at lowering cost, improving access, and sharing financial data smartly and securely. In particular, FinTech startups with partnerships or alliances with modernizing incumbents will be well-positioned going forward despite investment headwinds from the pandemic, not least of which because of the regulatory hurdles they can avoid by inking such partnerships. Such alliances will widen the playing field and ultimately increase strategic exit opportunities in an era where startups stay private longer, and industry giants innovate via acquisition.
Almost exactly one year ago, in a world still free of the pandemic, a16z general partner Angela Strange confidently declared, “every company will be a FinTech company.” Her point? In a future brought closer by the accelerating impacts of the COVID-19 crisis and advances in technology access and affordability, every company, at some level, eventually, will be either using, developing, or providing financial technology. Startups like those we work closely with at Burkland will feature prominently in this transformation. Our team of fractional CFOs, controllers, bookkeepers, and tax professionals have already built substantial FinTech experience and are looking forward to continuing being part of the FinTech journey.
(3) Pitchbook Q3 Emerging Technology Research Report