Is Fintech Ready For Coronavirus?
The coronavirus outbreak is having a wide range of side effects, from pasta shortages at U.S. grocery stores to a rise in stock prices for videoconferencing companies. The widening ripples could reach far-off distances and unexpected industries, including financial technology.
If people aren’t traveling due to virus fears, they’re spending less on their credit cards. Visa and MasterCard have warned investors that sales will fall short of their expectations in the current quarter by 2% to 4%. Visa has already seen a “sharp slowdown” in its cross-border business, especially travel-related spending. Their stocks have dropped about 12% since the market’s peak on February 19, 2020, compared with a 10% stumble for the S&P 500.
If the virus starts spreading more quickly in America, consumers will dine out less and think twice before shopping at stores where cashiers interact with hundreds of customers a day. That means Square, which helps small businesses accept credit card payments and makes money on transactions, could be affected negatively. It mentioned the coronavirus as a potential business risk factor in its 2019 annual report. While just 5% of its revenue comes from outside America, 65% of that is on transaction fees that could fall quickly if the epidemic escalates here. Square’s stock has slipped 9% since February 19.
In startup-land, where venture capital investors are valuing fintech companies at astronomical levels, the stock market slump could be a catalyst for lower valuations and a funding pullback.
Consumer-facing fintechs face the biggest risks. For instance, if people start staying home more often, digital-first banks like Chime could suffer. That’s because Chime makes virtually all its revenue on the transaction fees merchants pay when Chime customers swipe their debit cards. And if the markets are down, consumers will reduce purchases. For “robo-advisor” investing apps like Betterment and Wealthfront, a decline in stock prices means less revenue, because they charge their fees as a percentage of customer assets under management.
Companies whose growth relies on heavy marketing spend are also in a dangerous spot, says Dan Rosenbaum, a partner at consulting firm Oliver Wyman and former executive at the regional Bank of the West. Marketing is often the first budget that gets cut in a recession, so growth for such companies could slow abruptly. Chime spent tens of millions of dollars on marketing last year, according to media research firm Kantar. But it also has a large war chest to draw on, having raised $500 million in funding late last year.
“One thing last week’s drop in markets reminds me of is the 2001 recession when the tech bubble burst,” Rosenbaum says. Valuations were high, and when the market crashed and the window for initial public offerings closed, early-stage companies had trouble getting funding. Many had to shut down.
Stuart Sopp, who spent 15 years as a Wall Street trader before founding digital bank Current five years ago, agrees that earlier-stage companies could feel a crunch. (Current raised $20 million in “Series B” venture funding last October, and Sopp says they’ll raise money again later this year, although they haven’t started the process yet.)
He thinks the stock market rout isn’t over. “We think the S&P goes to 2,300,” he says. Today it’s hovering around 3,100. “We’re probably about halfway through this correction. It will persist for a couple of months.”
One factor will soften the blow for startups: Private equity and venture capital firms are sitting on record levels of cash—$1.2 trillion, according to PitchBook—that’s waiting to be invested. But that probably won’t stop the power dynamic from shifting away from founders and toward investors, creating downward pressure on valuations.
by Jeff Kauflin