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Fintech Funding Hurt by COVID: Community F.I.s Will Feel the Effects

Data black hole

Fintech start-ups, which push the envelope to develop competitive community bank technology, come under pressure due to COVID-led reduction in funding.

In the News

A recent Finextra article, “£1.4 billion of UK fintech funding swallowed up by Covid black hole”, discussed a new survey of fintech founders. The survey identified a potentially far-reaching effect of the COVID pandemic: funding is being cut off amongst UK financial technology companies. Primarily, there seems to be a concern among fintech start-ups focused on developing new solutions for the financial sector.

In their article, the Finextra team infers that since the drop in the stock market, many of these firms have lost investors. Instead, they are now spending time searching for new funding sources such as private equity firms to keep their start-up companies in business.

In their article, the Finextra team infers that since the drop in the stock market, many of these firms have lost investors. Instead, they are now spending time searching for new funding sources such as private equity firms to keep their start-up companies in business.

To the team here at Remedy, the amount of start-up funding described as “lost” seems a bit exaggerated. However, everything we have read concludes that investors are increasingly pulling back from risky investments as stock values around the world decrease and the value of personal (and venture capital) portfolios decline. 

This all makes sense.  When things are going well, we are all a bit more liberal with our money.  We tighten our belts as needed when we see more risks in the future. So, what does this mean to an executive level reader at a bank or a credit union?  We came up with a few takeaways. 

Key Takeaways

1. Not Everyone Will Survive

First, COVID-19 will slow some things down in the fintech sector.  This is true of all industries right now. Start-ups with riskier ideas or questionable business plans may be forced out of business.  Based on some of the ideas that we have seen obtain funding over the past few years, some of them should fail.   That is just capitalism at work.

2. The Survivors Will Tighten Their Belts

Second, there will be an immediate effect on the start-ups that survive. The executives of these companies who are responsible for the dog-and-pony show used to solicit venture capital will either need to work more hours or dedicate more time to fund raising and less to development work.  Again, tough to judge why this is a problem for anyone but the management team of the fintech.  Perhaps it will slow innovation, but hard to tell.

3. Fintech Start-ups Are Essential for Community F.I.’s Survival

The third reason is less quantifiable and is perhaps most relevant to bank and credit union executives.  The Remedy team regularly speaks to community bank and credit union executives across the U.S.  Many feel that their technology providers are not spending as much on innovation as the large banks who create their own tools internally.  Technology from these same providers is becoming more expensive as a percentage of non-interest expense. If more fintechs fail, who will compete with the Big 3 core providers to provide new products?

This survey and article were concerned with fintech start-ups in the U.K.; however, the same set of circumstances holds true for U.S. companies. Community financial institutions need small fintechs to push the envelope and challenge the few large providers that provide technology to community banks and credit unions.

In a perfect world, some good will come from the COVID-19 stock market fears.   Those tech providers less able to adapt will go by the wayside.  It is probably not healthy to fund every idea. And based on the reports we have been reading, some of these ideas should never have been funded by outside investors in the first place. 

But in the long run, we need more competition for community bank technology with less expense.  If that competition does not come from competitive start-ups pushing the envelope, it will be tough for small financial institutions to remain competitive.

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