The COVID-19 global pandemic has become a make-it-or-break-it moment for many businesses, particularly startups and industry disruptors. With market forces and rules being reshaped daily at lightning speed, large swaths of the world have been forced to adopt technology and embrace the digital age in order to keep the lights on.
The new socioeconomic order and redefined market priorities will be a fire test for businesses of all sizes to prove the sustainability of their model and the uniqueness of their value proposition. Shaky shops will unfortunately collapse, particularly in the small and midsized markets, while compelling innovation, much-needed disruption and quick adaptability will soar.
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Now, this doesn’t mean that all businesses that make it through the COVID-19 crisis are destined to succeed in the long run. Nor does it mean that all business concepts that fold during the pandemic were destined to fail. The unpredictability and suddenness of this global emergency are such that a stroke of either cash-flow luck or an unfortunately-timed investment makes a difference between the liquidity needed to stay afloat or the next payday simply being one bridge too far on the cash runway.
The Fintech Landscape
In developed free market economies, 2018 and 2019 were good years for the fintech software as a service (SaaS) space. For both acquisition and capital raise transactions, startups that have proven their model’s worth in the marketplace were valued at six to nine times their annual revenue. Depending on maturity, cash flow and revenue growth metrics some outstanding companies even secured valuations over 10 times their annual revenue. Similarly, in emerging markets, the use of proliferation of financial technology has allowed entire populations to discover the use of cashless payments, leverage crowdfunding platforms, microloans and parametric insurance.
For at least half of the fintech market, a correction was overdue, and valuations will certainly constrict in the midst of the socioeconomic crisis. However, once the COVID-19 crisis has passed, small and midsized businesses that manage to weather this tempest and survive the market shock will procure premium valuations for several reasons.
Firstly, businesses still standing after months of tight liquidity, stretched sales cycles, tested employee morale and teleworking challenges will warrant a force majeure survival premium on their enterprise value. Moreover, most of these companies will face a leaner, more favorable competitive landscape once the storm has passed and former peers have left the market.
Likewise, pandemic-induced physical distancing has served, in some regards, as a marketing equalizer. Forcing would-be customers into the digital space and increasing the amount of time individuals spend online, global quarantine measures have turned the already robust social media presence — which tends to favor small and dynamic market players — into an even more valuable corporate asset.
On the supply side of capital and acquirers, however, the future is more uncertain. In the United States, aggregate demand will increase slowly as everyday consumers prioritize savings and purchasing power remains low due to increased unemployment. Likewise, an increased global demand for US dollars will decrease national exports and hurt manufacturing.
Therefore, investors not fixated solely on asset liquidity and capable of taking long positions will focus on positive cash flows and significant margins over revenue growth, particularly with the prospect of a second wave of COVID-19 and a slow macroeconomic recovery. In this regard, startups in emerging markets seeking foreign capital injections will find themselves competing for fewer resources as investors turn toward established and developed economic environments.
To comply with distancing guidelines and health regulations, banks and commercial stakeholders around the world will continue to promote and implement fintech applications facilitating cashless and virtual transactions. In this sense, fintech will also play a decisive role in reaching individuals currently outside the formal financial sector, such as rural communities without banking infrastructure in emerging markets. Likewise, it will allow socially and economically vulnerable populations greater access to game-changing resources and financial literacy tools.
For instance, the mass propagation of new digital payment methods such as PayPal, Square, Apple Pay, Google Pay, Alipay and Samsung Pay is a unique opportunity for fintech developers and entrepreneurs to reach customers in new and uncharted jurisdictions. Simultaneously, established industry players such as Mastercard, Visa and American Express are now finding themselves with new competitors hungry to gain market share. On the lending front, small banks and non-traditional players, like the payroll software provider Quickbooks, have become key actors in implementing federal incentives and loan programs in the US.
These transformations also open a new regulatory landscape. Governments and corporations will have to address new sets of challenges, such as preventing money laundering, tax evasion and terrorist financing. Due in part to current lockdown measures, criminal activity in Latin America — drug dealing, human trafficking, contraband, and cybercrime — has also found a way to adapt, leveraging fintech platforms as channels to receive and make payments while avoiding conventional regulatory controls and oversight. Consequently, criminals are gaining liquidity and finding ways to launder illegal funds onto platforms and even into the financial ecosystem.
For instance, the use of fintech platforms and other third-party intermediaries renders the job of regulators more difficult as they seek to determine how the funds were generated or where they are derived from. Likewise, the use of non-bank financial institutions such as Western Union, as well as cryptocurrencies, helps illicit organizations avoid legal controls.
Nonetheless, the introduction of dynamic and bespoke regulation into the fintech space can both enhance the user experience and help oversight authorities with due diligence and compliance as required by law. Responsible governance and transparency in this sector are essential to ensure that governments and individuals are protected amid growing concerns around user data privacy, particularly as cyberattacks become more common, thus elevating digital risk.
Consolidation and Competition
Sectors of the global market that were deemed essential a few weeks ago and had experienced steady growth trajectories for decades are now facing a challenging change in the paradigm. From higher education and international travel to lodging and hospitality, many aspects of modern life will be forever transformed by the realization that, in a tele-business world, classrooms and boardrooms can be accessed from a home office for a fraction of the cost. Thus, commercial real estate can expect to feel the sting of an increasingly digitized economy and adapting businesses seeking to reduce fixed costs.
With established and emergent players struggling in a variety of markets, and with the capital needed to fuel competition shrinking, another trend in impacted industries, like retail and air travel, will be consolidation. Some sectors are becoming more competitive as a new economy takes shape, but startups and entrepreneurs might struggle with operations and funding as recapitalization investments are put on hold or down-rounds become the only option. Beyond the obvious enablers of the digital 2.0 economy (such as teleconferencing and web-streaming platforms), food and grocery delivery services, as well as healthy-living enablers, are seeing their markets grow.
In the fintech space, large strategic acquirers will be careful about their investments as they see the crisis reflected in their income statements and thus focus on targets that generate proven efficiencies through reduced costs. Meanwhile, financial funds will be looking to capitalize on fire-sale exits in the fintech space before the dust settles and the coronavirus premium ups enterprise value.
In short, the stress of COVID-19 on the global economy will expand the market for fintech and accelerate the pace at which it is adopted. It is up to established market players and government regulators to keep lockstep with technological innovation and increased user demand for efficiency.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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