Big companies are, by their very nature, usually better suited to survive

economic crises. When economies go into recession, capital markets tend to freeze up as

banks and other financial institutions become skeptical (and scared) of lending money to


When they do, companies with the most resources are most likely to qualify for loans —

unless banks have a sense that the government will not let a borrower, or the industry of

which it is part, die. And even then, firms may be left to their own devices to survive

downturns. As a result, companies with the largest balance sheet, and deepest reservoirs

of savings and untapped credit lines, are most likely to survive.

For the reasons sketched out above, startups often find it virtually impossible to

raise capital in times of economic distress, resulting in fewer new challengers to

legacy financial institutions. With no operating history, and few resources, those

companies find that banks are loath to put at risk their balance sheets. Consequently,

entrepreneurs usually depend on angel investors and family members to get new

ventures up and running, investors who have likely seen their own wealth deteriorate


Varying global policy responses

Recessions usually result, consequently, in consolidation. And the fintech sector may be

no different. Indeed, even prior to the coronavirus, over $195 billion in mergers and

acquisition deals were reported by The Wall Street Journal in 2019, more than three

times the value of the prior year. Now, with valuations of firms plateauing, and in many

cases falling, fintechs will be increasingly attractive targets for acquisition. Don’t

be surprised to see an array of firms picked off, not just by banks looking for

technology, but also by other larger fintechs, and bigtechs — a trend reflected in

February with Visa’s $5.3 billion acquisition of Plaid.

Government policy can, however, have an impact on how many small businesses —

fintech or otherwise — disappear. Some countries, interestingly, have proposed direct

government subsidies to the industry to keep it afloat. Singapore, for example,

announced a $125 million support package for the financial and fintech sectors to deal

with the immediate challenges from COVID-19 and position itself strongly for the

recovery and future growth. Similarly, the UK recently announced a £1.25 billion

coronavirus package to protect firms driving innovation, including a £500 million

investment fund for high-growth companies impacted by the crisis, made up of funding

from government and the private sector.

The U.S. response, by contrast, has involved policy choices that have if anything

tended to favor and promote big companies. As in the 2008 financial crisis, well

connected financial institutions — as well as sectors like the airline industry — were given

front-seat access to government sponsored bailouts. Meanwhile, smaller businesses

found themselves at the back of the line, and in some instances off the line, in their

attempts to access financing.

The realities of the schism has been most obvious in programs specifically designed to

assist small businesses. Banks eligible to disburse federal assistance like Paycheck

Protection Program loans were at least initially among the largest in the country, and as

such tended to concern themselves most with their largest customers, and, among those,

the firms with whom they had existing lending relationships. Making things worse, big

banks had not fully invested in onboarding new customers or automating compliance

programs for anti-money laundering and sanctions regulations. As a result, small

businesses, including many startups, have had difficulties accessing federal assistance.

Not all has been lost. There have been attempts to shift course and funnel federal support

to small companies in need of assistance. The Small Business Administration, for

example, recently reserved a full eight hours on its website to companies seeking

funding; similarly, the Federal Reserve has created a Main Street credit facility intended

to support small businesses that were in sound financial condition before the onset of the

COVID-19 pandemic. But both measures come later than similar forms of aid have been

made available in other countries, and in the wake of intense, and continuing, bipartisan

criticism. Indeed, many firms — including fintech services providers — that at the start of

the year were turning down outside investors are now scrambling for capital, and

introducing layoffs and spending freezes to preserve cash.

A less competitive US fintech sector?

All of this could leave the fintech sector less competitive — and innovative — once

the dust settles, with fewer small companies and an ever more powerful

collection of banks and big tech firms.

Not every corner of the ecosystem will fare the same, of course. Payments firm PCM has

suggested that fintech enablers around artificial intelligence, internet of things, and

software solutions will be in high demand. In this regard, bots for call-centers, account

onboarding technologies and loan automation will be subject to considerable interest.

There will also be an increased need for safe digital IDs given the volume of digital

business transacted and robust solutions required for the protection of client assets.

According to Finch Capital, challenger banks, by contrast, may face tough questions

from investors calling into question earlier valuations as a result of high burn and lower

than expected activity due to the coronavirus. Robo-advisers could see similar turns in

fortune. For those on the losing end, the consequences might be dire. It’s more likely

than not that angel investors and venture capitalists willing to invest will expect much

more from firms seeking funding, if they invest at all. And for fintech firms that fail, there

will not necessarily be a long line of companies, startups or otherwise, ready to replace

them with new models and resources sufficient to pose even distant challenges to bigger

than-ever rivals that hunker down and draw on existing resources.

How precisely this will. ultimately impact consumers will be anyone’s guess. But it’s hard

to see it being good.

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