A new report indicates that COVID-19 has hit UK Fintechs hard as this sector of finance may need to raise £825 million for these firms to make it beyond the global pandemic. According to KPMG‘s Fintech Focus report, annual losses for Fintech startups are hovering around £1.5 billion. The Fintech sector is estimated to be worth $48.5 billion and continues to generate encouraging returns on paper yet.
There have been many reports outlining the concern that COVID will harm the entire entrepreneurial sector of the economy and a generation of innovative firms may be impacted. In the UK, emerging Fintechs are an important sector of innovation and strategically important to the UK’s economy – long a top global financial center.
As well, there is a concern regarding valuations and the potential for down rounds in the Fintech sector. While more established Fintechs may find support from existing investors younger firms that represent greater risk may struggle to find the growth capital they need.
Janine Hirt, Chief Operating Officer at Innovate Finance is quoted in the report explaining:
“Like most sectors of the economy, UK Fintech will face some key challenges as a direct result of COVID-19, including a significant funding gap. We need to collaborate as an ecosystem to address these challenges and protect the increased access, transparency, and inclusion that Fintech has brought to our financial services sector over the past decade.
The UK is known around the world for its leadership in financial innovation, and Fintech has a vital role to play in society as our economy recovers and the digitisation of our lives accelerates. This report highlights how important it is for investors and entrepreneurs to work together to ensure the continued democratisation and transformation of financial services.”
KPMG’s report states that the estimated median internal rate of return (IRR) on paper for first-round investors in Fintechs, is around 71%. The report points to Paytech as an example that claims a median IRR of 98%, exemplifying the rising demand for Fintechs offering payments processing and open banking solutions.
The document adds that just 6% of Fintechs are breaking even with 84%, the vast majority, losing money at an increasing rate due in part to the Coronavirus. KPMG estimates that about half of early-stage Fintechs had less than 18 months of runway going into the health crisis. The report also highlights that female founders are also, for the second year running, outperforming the industry average, with only 22% of female-led Fintechs entering COVID-19 with less than 18 months of runway, around half of the representative percentage for the sector as a whole.
Anton Ruddenklau, Global Co-Head, KPMG Fintech says that COVID-19 is “sharpening the minds of the entire Fintech ecosystem:”
“For the Fintech firms that are truly transformative with their business models, the path to profitability at scale is still likely to be 10 years plus, and for these firms to remain competitive they will need to be systemically important. Nonetheless, patient capital must be found, and now more than ever institutional investors need investment data to support their participation.”
Anton added that it is encouraging to see that the picture is still positive for female founders. Last year KPMG found that UK Fintechs with a female founder or co-founder typically achieved 113% higher returns on paper for investors. This year, female founders make up 4 of the top 20 Fintechs with the highest IRRs as of their latest funding round.
Liam Gray, Head of Fintech programme, TechNation said raising funding is always a difficult process, even for some of the most promising Fintechs, and the crisis has exacerbated the problem.
“Not only has capital become more challenging to raise, many that do raise have been forced to accept lower valuations. That being said, raising capital – even at a lower valuation – is still a great achievement in this climate.”