No. 61: Covid-19: Impact and Response for the Fintech Industry in the United States, the United Kingdom and Europe


Publish Date:
September 1, 2020
Publication Title:
TTLF Working Papers
Stanford Law School
Working Paper
  • Diana Milanesi, Covid-19: Impact and Response for the Fintech Industry in the United States, the United Kingdom and Europe, TTLF Working Papers No. 61, Stanford-Vienna Transatlantic Technology Law Forum (2020).
Related Organization(s):


Faced by an unprecedented crisis induced by the outbreak of the coronavirus (“Covid- 19”), many financial technology (“fintech”) companies have come under pressure on a number of fronts over the past 6 months. From lending and insurance to banking, payments and wealth management, fintech companies across every vertical have worked around the clock to improve efficiency, build up capital and liquidity and extend their cash runway. They have displayed resolve and resilience, moving rapidly to protect the health of their employees and customers and ensure the continuity of their services. They have examined their burn rates, implemented significant costs cutting measures and curtailed any spending that wasn’t core to their business. At the same time, they have increasingly concentrated on key business metrics, monitored leading business indicators more closely and focused more on profitability and positive cash-flow than growth at all costs. Flexibility and validation in business models, strong management teams and the ability to dial-up/down costs have become critical. A number of fintech companies have also re-considered their strategy and re-focused on their core product roadmap, customer services and mission to best navigate the Covid- 19 crisis and prepare for its downstream impact. Inspiring examples of fintech innovation have been witnessed across a variety of sectors, with fintech companies strengthening their capabilities and even launching new products and services to support individuals’ and communities’ health, business activities and economic productivity.

Access to funding has progressively contracted in the first half of 2020, especially for early-stage fintech companies, as a number of venture capital (VC) investors have pulled back on early-stage investments and focused on supporting their existing portfolio companies to ensure they have enough cash runway to weather the projected recession. When they have made new investments, investors have shown an increasing preference for more mature fintech companies with established business models, a clear path to profitability and sustainable cash flows. Investors have also grown far more cautious with their investments theses and terms, have raised their standards in diligence and have amplified their scrutiny on companies’ burn rates and financials. Deal terms have gradually shifted in favor of investors, while eye-watering valuations driven by (often optimistic) assumptions about future growth, profits and exits have been questioned. Down-rounds, hybrid rounds and convertibles have increased as a proportion of the overall funding deals. As the Covid-19 induced market downturn stretches into the second half of 2020, investors will likely remain cautious to get straight back in. Investment committees are expected to become more discerning in their focus and about the companies they can continue funding or should pass as they seek safety with increased flight to quality. Before making major capital available for new investments, investors will first want to deepen their understanding of companies that are best positioned to thrive in the new global economy that is starting to emerge, available consolidation opportunities in the market and how market consumption and engagement will look like post Covid-19 crisis.

In addition, the unprecedented changes in the economic outlook triggered by the outbreak of Covid-19 have rapidly closed down IPO windows for a number of fintech companies and their investors in the first half of 2020, thus forcing a realistic reassessment of their exit strategy. On the contrary, the same period has been particularly active for fintech M&As, with fintech companies buying banks, large fintech companies buying emerging players, established financial institutions acquiring high growth fintech companies and established firms combining for scale.

Against the described background, the Covid-19 crisis has led to an unprecedented governmental assistance on a global scale. Among the various initiatives adopted in response to the crisis, governments in the United States, the United Kingdom and Europe have released a number of extraordinary funding support measures of interest to fintech companies. These measures are intended to mitigate the financial impact of the Covid-19 crisis and ensure that companies in some of the most dynamic and innovative sectors receive the investment and liquidity they need to weather the crisis and continue to grow their activities and innovate.

Although we are still in the midst of the Covid-19 crisis, the past few months have already promoted significant developments and provided important signals of what could change further in the fintech industry in the coming months. Social distancing and lockdown measures imposed to prevent the spread and mitigate the impact of Covid-19 have triggered significant changes in consumer behavior, have enhanced a shift towards a “cashless” economy and have triggered a tremendous growth in the use of digital payment solutions. These measures have also amplified the focus on user experience and have accelerated a wider-scale adoption of financial technology through online and mobile channels to conduct banking activities and perform a variety of financial transactions. The combination of these developments has created new opportunities for fintech companies to improve customer acquisition, engagement and retention, drive further efficiency and innovation and prove their differentiated value proposition versus more traditional players in the banking and financial industry. Actions in the coming months will have a significant impact on performance trajectories for the years ahead. Looking further out, fintech companies will need to examine their core business models and evolve their value propositions to forge a new path forward and stay relevant to their customers. Bold vision and disciplined execution will be key. Fintech companies that went far and beyond to support customers and increased their pace of innovation despite the difficult times are most likely to thrive, see continued customer loyalty and seize new opportunities once the Covid-19 crisis has settled. Only fintech companies that build sufficient resilience and agility and that demonstrate a great ability to evolve their offerings and organizations will be able to drive renewed growth and long-term profitability.

The changes brought by the Covid-19 crisis will likely contribute to reshape the structure of the fintech industry, as well. As the broader economy gradually shifts from respond to recover, leaner organizations are expected to emerge and thrive. The contracting funding environment and reduced revenue streams in the near- to medium- term may force a number of fintech companies to seek growth and cost synergies through collaborations and partnerships with other fintech companies, large tech companies, as well as financial and non-financial strategic players. A number of companies have already begun to strengthen their position in the market and take advantage of the current economic conditions through corporate activities. As valuations materially re-set, fintech M&As are expected to accelerate and the fintech industry is set to become an even more fertile territory for acquisitions and consolidation.