May 11, 2020 · 4 min read
Fintech during COVID-19 : challenger banks & SMB lending
Three months into 2020, the year of COVID-19, there have been more than 4.2M cases reported worldwide and 10 year’s work of job creation in the US has been eliminated in a month. The global economy is in a vulnerable state and Fintech startups are no exception; Fintech funding deals and volume are declining amid broad market uncertainty even challenger banks’ massive customer acquisition rate has come to a temporary halt which can be seen in a drop of app downloads of more than 20% in March vs February.
However, it’s been a signal moment, driving firms to invest in digital innovation at an unprecedented rate.
Big ones get bigger
Commission-free stock brokerage Robinhood has closed a $280M Series F funding last week.
Some companies’ global expansion ambition showed no signs of abating. Leading UK challenger bank Monzo filed an application for a US banking license although confusingly, two weeks earlier they voluntarily furloughed UK staff and closed its UK nighttime customer support office in Las Vegas. Monzo acted ahead of its rival Revolut which is also preparing for a US banking license. Revolut has however recently lost or removed eight senior executives. During uncertain times, being able to offer insured customer deposits and lending are the important services customers will need.
Challenger banks with a tight pocketbook reduce the spectrum of their offerings and are often gobbled up by well-capitalized ones. As an example, New York-based neobank Moven shut down its direct-to-consumer banking division as the COVID-19 crisis made its retail banking services hard to continue. Varo has taken on Moven’s retail customer accounts. Varo sees a surge in new accounts and the latest fundraise was in July 2019 a $100M Series C round.
Copenhagen-based neobank Lunar has also added €20M in a Series B funding round during the pandemic in April 2020.
We’ve mapped out major challenger banks’ valuation, funding and number of customers. The sizes of the circles show the number of customers.
Regardless of governments’ efforts rolling out stimulus packages and various schemes based on the business sizes, perfectly undoing the COVID-19 impact doesn’t seem anywhere near. Here are some startups’ moves to rehabilitate SMEs and offer lending where traditional lenders will not participate.
Kabbage, a small business loans company, paused lending in late March and focuses on enabling SBA(Small Business Administration) lending to provide PPP(Paycheck Protection Program) loans to SMEs for the time being.
Funding Circle paused servicing retail investors and will help distribute loans to SMEs through CBILS(Coronavirus Business Interruption Loan Scheme) loans.
Australian SME lending company Judo Bank received a $500M investment from the Australian Office of Financial Management. On top of the investment, the bank secured $147M of fresh funding gaining unicorn status at a post-money valuation of $1B.
Fintech startups in the SME lending market using alternative metrics to assess risk profile will need to rethink their existing credit risk models and lending capacity. Balance sheet lenders including challenger banks offering loans are especially exposed to risk. The figure below illustrates some of the SME lenders. The sizes of the circles show the amount of loan extended.
Although both purchasing power and retail appetite has evaporated worldwide, COVID-19 will have a lasting impact on how people shop and pay. Payments startups are however still winning investments.
Payments firm Stripe announced its fresh $600M fundraise on 16th of April
Cross border payments infrastructure company Airwallex raised $160M in Series D funding
One-click checkout company Fast closed a $20M Series A round in March
Although there has been a sharp decline in the volume of remittances due to COVID-19, global payments startups have proven advantages over brick and mortar branches. Remitlyhas seen a customer growth up 100% from February to March, and a 40% growth in transaction volume. Transferwise and Azimo further expand to Asian markets making partnerships with Alipay and Thailand’s SCB respectively.