COVID-19’s Impact on the Future of Fintech
The article below is from our BRIEFINGS newsletter of 03 June 2020
The pandemic is accelerating the adoption of financial technology, known as fintech, among consumers, businesses and government entities. Goldman Sachs’ Jeff Gido and Brandon Watkins of the Investment Banking Division shared their insights on the secular trends driving fintech growth and how the shift to online working and shopping is creating opportunities in the sector.
How has the economic shutdown affected the fintech sector?
Jeff Gido: The fintech sector has been hurt by the sharp decline in overall transactions and payments volumes. Anything to do with travel, tourism, restaurants and entertainment, for example, is down 70% to 90% year-over-year while cross-border transactions are down 50%. But companies are also reporting payment volume increases in everyday spending categories, such as food and grocery stores, and we’ve seen a sharp acceleration and shift to e-commence as people buy and order items from home. Over the long term, we expect these fintech trends to accelerate as more consumers turn to digital and contactless payments, as well as order-ahead apps, in an environment where more people are likely to work from home. Meanwhile, fintech companies that provide mission-critical software to banks and businesses have been doing well due to an embedded base of users who are contributing recurring revenues.
Brandon Watkins: The current environment has only accelerated the need and expectation for financial services to be delivered in a 100% digital environment as the shutdown has forced people to conduct critical financial activities and banking functions, such depositing checks or paying bills, online and over their phones. This not only creates a great opportunity for next generation digital finance platforms to drive efficient customer acquisition but also an opportunity for these digital platforms to prove their differentiated value proposition versus traditional providers.
Jeff, you’ve talked in the past about the three waves of fintech marked by a surge of startups in the first wave; efforts by the incumbents to build their own capabilities in a second wave; and a third wave marked by collaboration between the established players and startups. How has the virus changed that trajectory?
Jeff Gido: The pandemic has really accelerated fintech development beyond the third wave where we’re not only seeing more partnership dialogue but also more mergers and acquisition activity. Just last month, for example, personal finance start-up SoFi just agreed to buy Galileo, a payments processor which it had been working with since early last year. While overall M&A is down, the rationale for strategic and transformational deals will continue even if it takes a pause.
Brandon Watkins: Last year, the trend was consolidation among large incumbents where we advised on TSYS’ $25 billion merger with Global Payments and—in the largest fintech deal ever—Fidelity National Information Services’ $43 billion acquisition of Worldpay. This year, the trend has been large established companies acquiring high-growth, next-generation start-ups: We sold Plaid to Visa for $5.3 billion and Credit Karma to Intuit for $7.1 billion, and we’re likely to see this trend continue.
Even the government, in its efforts to get stimulus dollars into consumer bank accounts more quickly, has turned to digital finance platforms. Consumer digital finance payment platforms were at the forefront of enabling stimulus funds to be sent directly to consumer bank accounts through simple API integration with the US government, which was particularly impactful for those consumers who didn’t have their bank account information on file with the IRS. Additionally, many digital finance platforms, particularly ones with large small- and medium-sized business ecosystems, were directly involved in the distribution of Paycheck Protection Program loans to businesses in need.
How are fintech trends playing out globally?
Jeff Gido: We have seen tremendous amounts of activity throughout Latin America, particularly in Brazil with its highly concentrated banking sector, as well as in Mexico and Colombia, as fintech platforms make it easier for a rising middle class to access traditional banking services.
Brandon Watkins: There are similar trends in Asia which has long been at the forefront of digital financial solutions given how payment technologies have evolved in the region. Instead of going from cash to credit cards to mobile payments, consumers in Asia leapfrogged credit cards and went straight from using cash to mobile payments. As a result, there is a large, centralized ecosystem of mobile users throughout Asia which companies, such as WeChat Pay and Alipay, are now monetizing through the delivery of other financial services, such as savings accounts, loans and insurance products.