McKinsey: sluggish funding in fintech may need improvement
The global pandemic has caused a slump in fintech funding. McKinsey looks at the current financial forecast for the industry’s future
Fintech companies have seen explosive growth over the past decade particularly, but since the global pandemic, funding has slowed, and markets are far less active. For example, after growing at a rate of more than 25% a year since 2014, investment in the sector dropped by 11% globally and 30% in Europe in the first half of 2020. This poses a threat to the Fintech industry.
According to a recent report by McKinsey, as fintechs are unable to access government bailout schemes, as much as €5.7bn will be required to sustain them across Europe. While some operations have been able to reach profitability, others will struggle with three main challenges. Those are;
- A general downward pressure on valuations
- At-scale fintechs and some sub-sectors gaining disproportionately
- Increased relevance of incumbent/corporate investors
However, sub-sectors such as digital investments, digital payments and regtech look set to get a greater proportion of funding.
Changing business models
The McKinsey report goes on to say that in order to survive the funding slump, business models will need to adapt to their new environment. Fintechs that are geared towards customer acquisition are particularly challenged. Cash-consumptive digital banks will need to focus on expanding their revenue engines, coupled with a shift in customer acquisition strategy so that they can pursue more economically viable segments.
Lending and marketplace financing
Monoline businesses are at considerable risk because they have been required to grant COVID-19 payment holidays to borrowers. They have also been forced to lower interest payouts. For example, in May 2020 it was reported that 6% of borrowers at UK-based RateSetter, requested a payment freeze, causing the company to halve its interest payouts and increase the size of its Provision Fund.
Ultimately, the resilience of this business model will depend heavily on how Fintech companies adapt their risk management practices. Likewise, addressing funding challenges is essential. Many companies will have to manage their way through conduct and compliance problems, in what will be their first encounter with negative credit cycles.
A changing sales environment
The slump in funding and the global economic downturn has resulted in financial institutions struggling with more challenging sales environments. In fact, an estimated 40% of financial institutions are now making thorough ROI studies before agreeing to purchase services and products. These companies are the business mainstays of many B2B fintechs. As a result, fintechs must fight harder for every sale they make.
However, fintechs that assist financial institutions by automating their procedures and reducing costs are more likely to gain sales. But those offering end-customer capabilities, including dashboards or visualization components, may now be considered unnecessary purchases.
The new situation is likely to generate a ‘wave of consolidation’. Less profitable fintechs may join forces with incumbent banks, enabling them to access the latest talent and technology. Acquisitions between fintechs are also forecast, as compatible companies merge and pool their services and customer base.
The long-established fintechs will have the best opportunities to grow and survive, as new competitors struggle and fold, or weaken and consolidate their businesses. Fintechs that are successful in this environment, will be able to leverage more customers by offering competitive pricing and targeted offers.
FIVE things fintechs must do to keep investors onboard
New investors flocked to the stock market during the COVID-19 pandemic. Thirty-eight percent of investors said they had never had a brokerage or similar account before opening one in 2020.
Low or no-fee trading options have helped accelerate the trend – nearly half of new investors said they accessed their account primarily through a mobile app. As FinTechs, how do we create the trust needed to keep new investors in the market and create a fruitful customer experience for them?
The financial industry does a disservice to individual investors if we merely offer tools that focus on making money quickly, an approach that usually backfires. Instead, the surge of interest presents an enormous opportunity for those who want to help more consumers use financial technology to educate them on responsible spending, saving, and investing in order to achieve financial wellness current fintech tools have welcomed individual investors in the door.
Now, it’s time to focus on education and improving their experience going forward. There are several ways those of us in fintech can step up to shape the future of retail investing so that it works better for everyone, starting with the following areas.
Equal access to financial wellness education
Financial health should be available to everyone — but today, not everyone has the educational resources to achieve it. One study shows that only 3.9% of students from low-income schools were required to take a personal finance class. What they aren’t learning in school or from family members, fintech companies can provide on their platforms.
The companies should move from solely offering financial services to a more responsible model of education, advice, and prescriptive choices to help consumers develop better habits and make wiser financial decisions. Not only can they empower consumers and bridge historical wealth divides, but they can also stimulate growth by opening up new consumer segments.
Just as we’ve come to expect that our fitness routines are tailored to our individual bodies, we’re also ready for finance tools that go beyond one-size-fits-all solutions. But only six percent of financial institutions say they’re using the kind of technology that allows them to deliver a deeply personalized experience. Fintech tools need to reflect that financial success looks different for each of us.
For one consumer, it may mean providing guidance on how to pay off student loans early; for another, it may mean prescriptive actions that enable them to stick to a budget for the first time; for a third, it could look like prioritizing environmental, social and governance (ESG) investments, so that her portfolio aligns with her political beliefs.
Now, we are seeing financial technology beginning to meet the demands of personalized finance in a substantial and meaningful way.
The rise of AI-Powered Advice
Big-picture advice and predictive guidance used to be a feature of high-end financial advisory firms — a perk only available to those who could afford it. But thanks to rapid advancements in data analytics and artificial intelligence (AI), that kind of holistic advice is now more accessible than ever. AI-driven robo-advisors can parse many different streams of financial information, delivering customized answers to key questions: Is it time to buy a home, or is it smarter to keep renting? Can I afford to take out another student loan?
Intelligent connectivity powered by AI can anticipate consumers’ needs and next steps, making proactive suggestions that guide them along the path to financial wellbeing. Fintech companies can also help consumers identify when their financial picture becomes too complex for a robo-advisor, and help them find a human financial advisor to meet their needs.
Focus on financial mental health
New investors are quickly finding that the market can be overwhelming. That’s not surprising, financial anxiety is common and studies show that financial stress can have an impact on mental health for some.
It’s not enough for fintech companies to give retail investors access; they also must provide the guidance and support that help consumers manage their financial well-being. Educational tools can ensure that consumers are well informed about their options.
Predictive analytics can anticipate consumers’ questions, serving them key information and insights before they ask. Features that emphasize a comprehensive notion of financial well-being, rather than short-term wins and losses, can also help ensure that consumers are keeping their eyes on the bigger picture.
Gamification for good
The surge of gamification apps has done an impressive job making investing as engaging as playing a video game or joining a social media platform.
Much of the current use of gamification emphasizes short-term thinking, but there’s also an opportunity to help consumers think more broadly about their overall financial picture. One example is peer benchmarking, a feature that enables help consumers to see how their financial habits compare to those of friends and fellow consumers.
Gamification can also be used to incentivize making smaller, smarter choices — for example, rewarding saving over making an impulse buy.
The future of fintech is about more than just broadening access to the markets. It’s about making sure more individuals have access to the tools that can help improve their financial well-being—in the ways that suit their own circumstances and needs. The potential to act within their own set of individual priorities, with their long-term financial wellness in mind is much more empowering to a consumer than simply relying on short-term, high-risk investments.