Digital Space Ventures (DSV) follows a smart money investment approach. Since inception we have invested in concepts across the value chain.
In the second of a 2-part DSV Special Analysis series, we present some discussion and analysis on the business models within the U.K. Fintech sector. The boom of the Fintech sector like any other industry will need to challenge existing business models in the post Covid world.
Disruptors will need to reinvent. Varied offerings will need to cater to new customer needs. Low interest rates, unemployed looking for jobs, return to work, change in customer shopping behaviours - no one knows what the post Covid ‘normal” will look like.
We at DSV are constantly reading, innovating and trying to understand how demand will drive innovation and how we can help young start-ups steer course. The different segments in Fintech will have to improvise in a unique way. We present a very high level analysis on the segment drivers for the future.
Challenger Banks have amassed millions of customers in the U.K. Before the crisis hit we were at the cusp of potential growth (almost like lift-off) which would have been phenomenal.
The current circumstances have hit us to reset the entire system. In many ways it presents challenges and opportunities. Shrinking wallets, unemployment and a likely economic downturn presents its challenges.
The challenger banks business model relied on interest rate spread on savings (NII- Net Interest Income), overdrafts, FX, selling insurance products and offering premium services at a flat monthly fee. With interest rates tending towards zero and economic challenges like never seen before, it will be imperative for this growing segment to find alternative sources of revenue.
Lending or overdrafts will certainly help bring about additional revenue but comes with attached issues and the lack of liabilities will create balance sheet imbalances and increase risk. Other options such as Net Interest Income yields will diminish due to low interest rate and lack of cash in bank accounts will cause personal challenges, this is one time where this segment will truly need either deep pockets to survive and / or innovation in a social context to generate goodwill and more customers.
Platforms that offer solutions cloud-based as a white label offering are (were) the new norm. Their business models heavily relied on institutions of all types buying their SaaS offerings. The regulations, compliance monitoring, risk management and running the financial institutions are all part of the target segments.
This part of Fintech is capital intense. Products have an elongated development timelines and sales have long lead times. This creates a void in revenues and in the current economic scenario; in a post Covid world priorities will change. Upgrading or changing the solutions will be reassessed which will put pressure on ‘platform-only’ business models.
We are already witnessing how these platforms (within different segments of Fintech) are offering extended trials, cheaper deployment and discounted commercial terms in the current times. Looking across the Fintech spectrum, Platforms have the most to gain (in the long run) if they are nimble and agile to ‘help’ other fintechs who may struggle to survive. The innovation lies in solutions and how they are packaged.
Investment Management (and Social Trading)
There are 2-sides of this coin; with the uncertainty in the markets this is a golden opportunity for good traders to create a following (or standalone, depending on the platform), on the other hand the liquidity crunch in the equity market has macro challenges. With rising economic challenges of the ‘users’ the idea of taking a financial risk will have its limitations.
Innovation within the investment management industry for retail and institutional is ripe. Use of AI and ML are at the fore anyways but mass adoption and drivers for yield in the post-Covid environment will require swift adaptation via online media, educational institutions and other relevant Financial Services channels.
Credit scoring is an algorithm peculiar to the creator capturing certain industry standards to determine an individual’s or an organisation’s creditworthiness.
The innovation or more likely improvisation in this segment will come from creators of algorithms and consumers (Financial Institutions, Lenders, Banks). The state where businesses and families are going to struggle economically, debt repayments will be slow.
The current scenarios of forgoinging mortgage and other debt payments make it an interesting conundrum for compliance monitoring, assessing risk appetite. The quantum of repayments and tweaks required to reassess credit scores may just redefine the scoring mechanism along with the profiling concept.
Money Transfers is one segment where innovation and number of players have both surpassed customer expectations. The recent announcement of launch of PagoFX by Santander throws a spanner in the works for U.K. based money transfers.
The price wars, speed of delivery, will have customers with choice but with Brexit and Covid the quantum of transfers are likely to slow down at least till the cash starts to circulate back to some level of normality. It will be consolidation and survival of companies with solid brands and a loyal customer base within this segment. It remains to be seen how the retail market behaves for consumer money transfer in the coming months.
Governments around the world have opened floodgates to lend to businesses. Nuances are peculiar to each state but money is being supplied to fund the businesses on the other hand P2P lenders in the U.K. are freezing payments or imposing heavier penalties on the investors trying to reclaim their cash.
As P2P lenders become accredited under CBILS (Coronavirus Business Interruption Loan Scheme) to lend (Funding Circle becomes the first such Fintech in the U.K.) business models will receive a boost for those who can maintain the flow of the business. On the other hand as some of the other segments struggle we are likely to see defaults and aggregation in the marketplace.
Use of technology, AI and ML, along with forecasting models will play a critical role in survival of the lending industry.
We are at the cusp of change. What the future holds in general is unknown. It will be a slow recovery and how we improvise to survive and innovate to grow will determine the level of success. As we continue to study this evolution we will create more content to elaborate on how the business models will stand the test of the post-Covid world.
This concludes the second of the two part series of B2C Fintech analysis.