Covid has created more fintech billionaires

Fintechs have done extremely well out of the Covid crisis. The lockdowns have forced more people to turn to online for financial products, as well as day trading as a way of creating an income at a time when jobs are disappearing.

Afterpay is one example. It is an online service that allows shoppers from the USA, the UK, Canada, Australia and New Zealand to pay for small items, such as clothing in instalments over a six-week period. It’s an online version of the catalogue shopping that was so popular in the 1970s and 80s that allowed mostly women to clothe their families by paying for the items over a period of time. Now it’s in a digital format and not connected solely to a small selection of businesses.

Afterpay is only five years old, but the pandemic has made its founders billionaires, even though at the start of the crisis its shares tanked. Now its shares have increased in value tenfold thanks to a surge in online retail sales. For example, in the second quarter of 2020 it handled transactions worth $3.8 billion, an increase of 127% over the same quarter in 2019.

Who else has benefited? Chime, a digital bank, Robinhood, the stock trading app and Swedish fintech Klarna. And then there are those platforms such as Zoom and Slack which have enjoyed a boom due to the increase in working from home.

Others have not been so fortunate. The Lending Club, which offers personal loans to high-risk customers has laid off 30% of its staff, and On Deck, a lender specialising in small business loans has been sold off in a fire sale.

Victoria Treyger, a general partner who leads fintech investing at Felicis Ventures, commented to Forbes: “Consumer fintech adoption was already strong pre-pandemic, especially among the 20s to early-40s age group,” adding, “The pandemic has become a growth rocket, fuelling the rapid acceleration of adoption across all age groups, including 40- to 60-year-olds.”

Fintech payment providers are amongst those benefiting most thanks to the rise in online spending and home delivery services. Marqueta is one of those. It is a specialised payments processor providing a service to Instacart and others. It is discussing an IPO valued at $8 billion, which is four times its valuation in March 2019.

Credit card spending is down, as large-ticket items such as holidays were effectively cancelled for 2020. Instead, debit card payments are up. This is good for fintechs, as they primarily offer debit cards. For example, Chime, based in San Francisco, used the US government stimulus package to its advantage. In advance of he $1,200 government-stimulus checks started hitting Americans’ accounts, it loaned customers that money to the tune of $1.5 billion. Its CEO said, “Following the stimulus advance, we had the largest day for new enrolments in the history of the company.” It also has a new valuation of $14.5 billion, and “venture capitalists are valuing the company at 24 times its revenue.”

While this year has proved to be a great one for fintechs and other online platforms, there is one thing to consider: will consumers keep up the habit their online shopping habits in 2021, because a lot is riding on that for the fortunate fintechs.

The digital banking surge predates the pandemic

It may be supposed by some that the global pandemic was the kick-starter of the rise in the number of digital bank accounts. However, that isn’t quite true as Ron Shevlin usefully points out in Forbes. 

In 2019, half of all community banks and credit unions opened less than 5% of their new checking account applications in digital channels. But then these banks only account for 15% of the total current account applications last year.

More significantly, it is what the Americans call ‘megabanks’ (Bank of America, JPMorgan Chase, and Wells Fargo) alongside the digital banks that “accounted for roughly 55% of all checking account applications in 2019, 63% in Q1 2020, and 69% in Q2 2020.”

However, one thing is clear; digital account openings are overtaking in-branch applications. For example, “Nearly two-thirds (64%) of the checking account applications taken during the height of the Coronavirus crisis in Q2 2020 for what consumers considered their primary account were submitted either online or on a mobile device,” Cornerstone Advisors report. That’s a 59% increase over the same period in 2019.

The turning point came earlier though; in the second half of 2019 to be precise. This is the moment when digital applications for primary accounts exceeded branch applications.

It would also appear from Cornerstone’s research that the 35% of Americans with more than one current/checking account, are more likely to turn to digital solutions when applying for a second or third account. Shevlin writes, “In Q2 2020, roughly three-quarters of the applications consumers submitted for their secondary checking was done through digital channels, up from 65% in the first quarter of the year.”

And there is more good news for digital platforms: “a larger percentage of consumers who opened an account in the past three years rated their experience on the mobile channel as “excellent” compared with those who used online or in-branch services.

Banks have for some time clung to the idea that consumers want the ‘human touch’, but Cornerstone’s research indicates that while this is somewhat true, “The rest of the experience isn’t as good as it is in a digital channel.” Furthermore, consumer ratings of the in-branch experience haven’t increased in recent years, and in some cases have fallen.

The megabanks have captured much of the millennial market, largely due to a better digital and mobile experience. This leaves the smaller banks at a disadvantage, although there are opportunities for them to become second account providers. They just need to provide a digital account opening process.

PayPal targets fintech

PayPal is getting into point-of-sale financing. This is a tool that allows you to pay for an item in instalments rather than putting it on your credit card. It has been growing in popularity, and the pandemic has driven its use to rise even more steeply.

Two companies, namely Afterpay (Australia) and Affirm (USA) have been thriving in this sector. For example, Afterpay, whose entire business is staked on the scheme, has sailed from a market valuation of $1 billion in 2018 to $18 billion today, and Affirm is planning an IPO that could fetch $10 billion.

Now PayPal is squeezing itself into the space with its new ‘Pay in 4’ product. This will allow you to pay for any items that cost between $30 and $600 in four instalments over six weeks.

It promises to be slightly less expensive to use than the other two companies mentioned. It won’t charge interest to the consumer or an additional fee to the retailer, but if you’re late on a payment, you’ll pay a fee of up to $10. 

It’s OK for PayPal to do this, because it already has a highly profitable payments network it can leverage. As Jeff Kauflin says, “Eighty percent of the top 100 retailers in the U.S. let customers pay with PayPal, and nearly 70% of U.S. online buyers have PayPal accounts.” Not to mention the fact that as Covid-19 made online purchases skyrocket, it saw record revenues of $5.3 billion and profits of $1.5 billion. Its stock has rocketed in value, adding $95 billion of market value over the past six months, and Lisa Ellis, an analyst at MoffettNathanson, told Kauflin, “PayPal can grow 18-19% before it gets out of bed in the morning.” 

Why move into point of sale financing?

Data from both Afterpay and PayPal shows that consumers spend more money—sometimes 20% more—when they’re offered point of sale financing options. Therefore, when PayPal launches Pay in 4 this autumn it can expect to see transactions rise. It earns 2.9% on each transaction, so its fee revenues will receive a boost as well.

Kauflin makes a good observation: “With Pay in 4, PayPal’s renewed push into lending is an indication the company is getting more aggressive in a volatile economy where many consumers have fared better than expected so far.” Furthermore, PayPal will house these new loans on its own balance sheet. As its senior vice president Doug Bland says, “We’re incredibly comfortable in managing the credit risk of this.” That is indubitably true.

Fintech and the startup movement

According to Alex Lazarow the startup movement is growing like daisies. Indeed, there has never been a better time to launch an entrepreneurial, technology-led project anywhere. Why is that?

To start with, the cost of cloud computing has dropped significantly and this enables startup growth with fewer barriers to entry. As Lazarow comments, anyone can now rent Google’s enormous computing power by the hour, eliminating the need to purchase and maintain your own server. Telecoms costs are also heading downward and when combined with collaboration software, it is easier now for teams to enjoy frictionless remote work.

Global markets are also looking more attractive for startups thanks to the five billion mobile phone users worldwide and the two billion people with online identities on social media all ready to be the consumers that “ over 480 innovation hubs globally and over 1.3 million venture backed companies” are looking for.

Furthermore, according to the 2020 edition of Startup Genome’s Global Startup Ecosystem Report there is exciting news about the future potential for innovation ecosystems globally.

Highlights of the Startup report

  1. The incidence of ‘unicorns’ (companies valued at over a billion) has increased. They used to only be found in Silicon Valley, but there are now 400 of them spread around the world and fintech is the core component of their success.
  2. The report ranks the tech hubs around the world, and shows that the challengers to Silicon Valley are muscling up at pace, with New York, London and Tel Aviv amongst the big contenders, including the Asia Pacific region. Indeed, Asia Pacific accounts for 30% of the leading ecosystems.
  3. Covid-19 has presented a challenge, especially in the tougher, less resource-rich ecosystems around the world. Venture Capital investment has dropped by 20% globally, plus over 72% of startups saw their revenues drop. The knock-on effect of this is the loss of employees in 60% of startups.

The way forward for fintech startups

Future success will require resilience, and Lazarow suggests it also requires a new playbook, something he explores in his recently published book : Out-Innovate: How Global Entrepreneurs – from Delhi to Detroit – Are Rewriting the Rules of Silicon Valley (HBR Press).

As he points out, it is vital that startups get it right this time round, especially as entrepreneurship is “the largest force of job growth globally.” In a positive way, this is a good time to rethink how to be an entrepreneur, rather than follow the old routes, because it’s a good time to act for success and join the startup movement.