Can the UK's fintech start-ups survive coronavirus?

Many 'unicorn' start-ups are scaling back their plans for 2020 because of financial uncertainties caused by the pandemic

Hands on a Monzo card
Large financial technology businesses such as Monzo and Revolut may have to scale back expansion plans Credit: The Telegraph

Last summer, the satisfying clink of metal bank cards could be heard in coffee shops and bars across the country. It was the year that banks like Revolut were gaining a cult following, and their metal cards had become the must-have accessory for everyone from bankers to tech bros.

But the era of customers willing to spend £120 on 18g-thick “status symbol” cards may be long gone.

The fallout from the pandemic has put a dampener on Britain’s once-booming financial technology sector. Many of the sector’s largest stars are seeing their valuations cut by hundreds of millions of pounds as experts warn of a dip of up to 10pc in global payments revenue this year.

Some are now curtailing rapid expansion plans and taking steps to reduce their monthly cash burn. Earlier this week, Monzo announced that it would lay off up to 80 people, blaming the current economic situation.

Can the UK’s financial technology start-ups weather the storm and survive coronavirus? McKinsey predicts that global payments revenues could drop by up to 10pc, a fall of $210bn (£167bn), compared to its pre-pandemic prediction of a growth of 6pc. It says this could have a similar impact to the 10-11pc revenue drop caused by the 2008 financial crisis.

And a Citi presentation sent to clients earlier this year warned of a “prolonged impact” on payments businesses if the pandemic leads to a long-lasting impact on the economy.

“Clearly, discretionary spending like holidays is the first to get impacted,” says Sulabh Agarwal, the managing director of global payments at Accenture. “That will have its toll on total consumer spend and the spend will eventually flow down to the overall revenues of the payment providers and fintechs.”

Payments business Wirex says it has seen a 15pc drop in online transactions in March compared to February, with Deliveroo order volume down 25pc and Amazon purchases down 17pc.

GoCardless, the online direct debit business, has also been affected. The company has seen a 15pc reduction in payment volume in March and April across sectors such as healthcare and financial services.

Any drop in payment volume or average payment size is likely to cause headaches for payments start-ups and challenger banks alike. These companies take a cut out of every payment, meaning any overall drop in transactions will hurt their revenues.

And any start-ups which rely on taking a larger cut of international payments compared to domestic card payments for a major chunk of their revenue could be left struggling.

“That is a big problem,” says Michael Kent, the co-founder of remittance business Azimo and challenger bank Tandem. Kent says Azimo is currently experiencing a surge in demand, but questions whether that will continue as economic incentives such as the furlough scheme are phased out later this year. “I think we’re all going to feel poorer come December than we did in January. How consumer spending responds is going to be a big question for all of us.”

Other businesses, such as cross border payments start-up TransferWise and online payments company Checkout.com, say they are also enjoying rises in activity during lockdown.

Privately, many start-up executives boast that they have not seen any problems, but are quick to suggest that their closest competitors will be heavily affected. But many industry insiders say the current boom in activity experienced by some start-ups could evaporate later this year as people return to work in offices – unwelcome news for the London-centric sector.

The best-case scenario is that the drop in payments will be cushioned for technology businesses as more people swap to cashless payments following the pandemic.

Sri Shivananda, the chief technology officer of PayPal, says “there is no doubt that in a crisis like this, household spending overall decreases. What is happening is the shift towards digital … it’s a shift in the approach to payments.”

PayPal says it added 7.4 million new accounts in April and May 1 had the largest number of transactions in the company's history.

Stunted growth

Even so, this uncertainty over future revenues is concerning for those companies which have planned to expand aggressively throughout 2020.

“There will be companies that hired a lot of people at the beginning of this year and spent a load of money on the assumption that growth would pay off in the second half of this year and it’s not going to happen now,” says Sarah Kocianski, the head of research at financial technology consultancy 11:FS.

Digital bank Monese held a board meeting at the start of the pandemic and agreed to reduce its growth plans for 2020 and to lower the amount of money it plans to raise.

“I definitely see this happening across the board ... everybody is revising their growth plans for 2020 and perhaps beyond,” says Norris Koppel, Monese chief executive, “we have prepared for this to go on for a while. We are more cautious than optimistic.”

This upheaval is proving serious for businesses that are reaching the end of their runway of remaining funding and are now turning to investors in search of fresh money.

“Some investors may think differently or not be as eager to invest as quickly,” Agarwal says. Monzo is reportedly finalising a new investment round between £70m and £80m which is likely to see its valuation drop from £2bn to around £1.25bn when the funding is announced later this month.

“The unicorns who have raised money at very, very significant valuations, are probably the people who are most exposed,” Kent says, “I think they’re going to be the guys who have the furthest to fall.”

Industry insiders expect to see a wave of these “down rounds” – funding rounds which inject new money into businesses but at lower valuations than previous raises.

A spokesman for Starling Bank, however, says the challenger bank’s recent £40m fundraising round from existing investors did not include a drop in its valuation.

Rishi Khosla, the chief executive of OakNorth, warned last month that financial technology businesses are now facing a “scarcity of capital,” adding that a “massive stigma” remains around down rounds.

PitchBook believes that many “unicorn” start-ups valued at $1bn or higher which are currently raising money during lockdown will see “significantly lower” valuations than they have enjoyed in previous years.

Despite this, many people inside the industry remain optimistic about the future of financial technology businesses and believe companies will be able to navigate through the hardship – albeit while making cuts and reducing their plans.

“Some companies will do down rounds, but at least they’re not going into administration,” says Alastair Lukies, chief of business payments company Pollinate.

Despite its layoffs, Monzo is planning to announce its new funding round and may finally launch its metal bank card later this month, although some industry insiders question whether premium products like this still make sense if customers are now less wealthy.

Takeuchi, GoCardless’s chief executive, is also upbeat.

“Fintechs will need to tighten their finances and cut costs to survive the drop,” he says, “clearly this is a bump in the road but it is not a fatal wound”.

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