Young Companies – Corona Makes Financing Difficult for Startups

According to data from the Swiss financial services company deVere Group, the 72% increase in the use of fintech applications is part of the current adjustment to a new life, devoid of or with less human contact. The world has indeed changed in a very short time, and the measures currently being taken to curb the spread of the coronavirus are affecting the way we communicate, live, work, and manage our finances.

Fast Train of Digitalization

The deVere Group measured this 72% increase on its own fintech applications, but given that the coronavirus has ravaged the world, similar increases are being recorded by other fintech companies as well. One gold purchasing app, Glint Pay, reported an incredible traffic increase of 718% last week. Meanwhile, fintech companies in Asia and the Middle East have also announced that more and more people are using their applications.

Year by year, the need for fast, easily accessible, and secure transactions is increasing. Digital transformation is like a fast train that transforms not only the banking sector but also service industries, which is why there is a growing need for solutions offered by fintech companies and startups. The beginnings of fintech were niche-focused, but the improvement of business operations and the expansion of service scope led to an increase in investments in fintech startups. The year 2017 was record-breaking in terms of investments, but 2019 surpassed it, and the same was expected from 2020; however, unfortunately, it seems that investments in fintech startups will slow down a bit, although, had it not been for the coronavirus situation, that investment would have increased.

Best Days

This surge in the use of fintech applications comes amid a general increase in the use of digital technologies, as everyone today is discovering new ways of working, communicating, and even entertaining. However, while many applications, including those in the fintech sector, are experiencing their best days, the question remains what will happen to fintech startups and their financing, which has now come to a halt.

Nino Ćosić, co-founder of the startup Worig, believes that the true state of fintech startups will only be seen at the end of the year when the results of the third quarter become available and when some things that are currently only speculated about will be part of the reports.

– Financing for startups in this crisis has, it can be said freely, come to a halt. What remains active are actually additional investments, mostly from existing investors, to ensure operations until the end of the crisis. The most recent example is the digital bank N26, which has just closed Series D with an additional $100 million (a total of $570 million). There are certainly many more such examples, which we will, as I mentioned, only find out later – says Ćosić.

However, the situation is more favorable for fintech startups that are in the early, seed phase of development and technology validation because they can more easily access capital.

On the same track is Damir Bićanić, director of Funderbeam SEE, who says that everyone in the industry has been dimmed because a major and unexpected disruption has occurred, but he also adds that it is already visible that due to the coronavirus, digitalization and automation will accelerate, which will ultimately benefit both traditional banks and fintech companies.

This crisis shows that the time for fintech is actually just beginning. Of course, unfortunately, not all companies, nor startups, will survive this crisis, especially if it drags on, both due to a lack of financing and due to business models that could not easily adapt to the ‘new normal’.

– The other part, the one that will survive, is already experiencing its best moments, such as digital banks, payment processors, and the like. After the crisis, some will only show their strength by providing new and advanced financial services in the fintech segment, while others will help companies transform into a new and even more digital age of financial services with their services or platforms. I do not see any difference in the size of the company as a key factor because in fintech products there are those intended for individuals, small companies, and large ones, and there are also those services that have all users under the same umbrella – says Ćosić.

The Time for Fintech is Just Coming

Supporting the thesis that the time for fintech is just coming is the fact that both small and medium-sized enterprises, as well as family farms that did not prioritize digitalization, had to turn to and embrace some form of digital sales due to the inability to sell physically. This will benefit fintech companies, whose increasing acceptance of digital sales will enable faster and greater penetration into markets, from online payments and procurement systems to logistics and distribution. And by using such platforms, not only online payment and credit systems will profit, but also all accompanying services necessary for the ecosystem to be at a professional level. These include regtech, data protection, know-your-client verification, anti-money laundering, fraud detection, logistics, and delivery.

– In my opinion, market development will go in two directions. One is the coexistence of traditional financial institutions and fintech where traditional institutions will use the services of agile and efficient services for client interactions, such as white label services for various products, or efficient digital services for businesses that do not have direct contact with clients. Large financial institutions will also try to acquire fintechs that can give them an advantage over the competition. The other direction is the independent attack on traditional business models by fintechs through rapid cross-border acquisition of users and using economies of scale in product usage, as we see with Revolut, Robinhood, and others – explains Bićanić.

In any case, in all variants, the greatest benefit will go to users who will have access to more different services from even more service providers, and for products and services that have so far only been available through traditional channels (going to a store, restaurant, pub) or that have not been available in the market.

Great Potentials

In every segment of digitalization, there are great potentials, both for fintechs and for SMEs. Small and medium-sized enterprises, although short-term faced with significant challenges, could gain additional momentum and market by using digital systems, and thus fintechs focused on SMEs could be just as successful as those focused on products of traditional financial institutions. It is said that crises create opportunities, and the demand for remote services and web commerce has surged, which has, of course, created opportunities for banks and fintechs that already have or are ready to offer solutions in this area.

– Given that the crisis has affected the reduction of consumption, and that trend will certainly continue, the imperative will generally be communication with clients as individual persons. Clients will value companies that can show them that they know them, that they care about their needs, and reward them for loyalty, which is only possible through highly targeted communication. Messages must be specific, sent at the right time, and easily understandable because clarity and transparency are crucial at this moment – believes Hajdi Ćenan, one of the founders of the Croatian AI startup airt, adding that now is the opportunity to identify micro-segments of clients with unique challenges that require quick responses.

Those companies that are able to analyze the data they have in a quality manner, using new technologies such as machine and deep learning, will be able to recognize those needs in time and respond quickly. For example, the airtAI solution for banks processes historical transactions of existing bank clients and predicts how clients will manage their money in the future. For each individual client, the model predicts the likelihood of future transactions, such as the probability that they will buy fuel at a specific gas station or the likelihood that they will go shopping or on a nature trip over the weekend. Based on that foundational model, models are created that solve specific business problems, such as the likelihood that a client needs a loan or an investment opportunity.

The technology is based on the latest deep learning techniques developed for understanding language but adapted for processing banking data. This solution enables banks to communicate significantly better with clients and consequently provide a better user experience, as they can predict and meet their clients’ needs at the right time, when they need it.

Reality Check

There is already a meme circulating that COVID-19 has done more for the digitalization of business environments than CEOs or CTOs. But this is not only the case for companies that had to move their regular business online to continue functioning; the entire society has become significantly more digital and will likely remain so even after the crisis ends. Even generations that were not ‘technologically aware’ are now using various digital products and applications without major problems. The best example is the one we have already mentioned, which is family farms that have started offering their products online, which was practically unimaginable until now.

In other words, everyone, including the financial sector, has undergone a kind of reality check of their digital readiness, regardless of what exactly they do. Currently, those who are already present on digital channels and who are ready to leverage available data and analytical capabilities to build an even deeper and better relationship with their clients are benefiting the most.

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