The impact of COVID-19 has led to an unprecedented level of uncertainty compared to prior crises. Following social distancing orders, economic activity declined rapidly and, in less than 2 months, the U.S. workforce went from effectively full employment (unemployment rate of ~3%) to unemployment of ~15% – its highest level since the Great Depression.
LLR’s FinTech team spent the last several weeks evaluating the impact of this economic decline to our portfolio companies and more broadly to the FinTech sector. As we all assess the implications in real-time, LLR’s FinTech team wanted to share our insights into what we are seeing in our core sectors: Payments, Wealth Management and Bank Technology.
Omnichannel commerce and integrated payments continue to lead the way.
As a result of declining economic activity and reduced consumer spending, processors and other payments ecosystem participants are seeing lower transaction volumes. Visa reported that U.S. payment volume declined 19% year-over-year in April. McKinsey forecasts a near-term impact to global payments revenue of 8% – 10%.
Payment processing portfolios are typically diversified across various end-markets and include both card-present and card-not-present (“CNP”) transactions. Processors with significant exposure to travel, hospitality, restaurants and other card-present retail are facing lower transaction volumes. Those in other end-markets or with a concentration in CNP have been relatively less impacted.
Transaction volumes will return and new sales activity will pick back up in the long-term, however we expect some displacement from SMBs going out of business and consumers’ hesitation to resume previously normal economic activity like going out to dinner or attending a sporting event.
Payments solutions that combine omnichannel commerce with integrated software will lead the way as the economy returns to a new normal.
Trends in favor of contactless payments and digital transactions will also accelerate. CNP has been a bright spot in the current climate, evidencing demand for omnichannel commerce capabilities. Companies that integrate payments with software are also well positioned, as customers are deeply ingrained with these software platforms and rely on them to manage day-to-day operations. Payments solutions that combine omnichannel commerce capabilities with integrated software will continue to lead the way as the economy returns to a new normal.
Meanwhile, B2B payment providers are seeing accelerated interest as work from home requirements force companies to look further into digitizing paper-based processes. Payment security also continues to be a focus, particularly as transaction volumes shift online in favor of CNP. In the short-term, payment security and B2B payment providers with subscription-based revenue models are better positioned than those tied exclusively to transaction volumes, however longer-term trends across both B2B payments and payment security remain positive.
Advisors aren’t going anywhere, but digital wealth management will drive long-term growth.
In a span of four weeks following mid-February highs, the S&P 500 declined 34%, and the VIX, a measure of stock market volatility, reached an all-time high. The U.S. government’s $3+ trillion stimulus package has had a positive impact and the stock market has shown resilience with the S&P 500 posting a 13% month-over-month increase in April. Nevertheless, a high level of uncertainty remains around the stock market and what an economic recovery will look like.
Consistent with our previous wealth management post, we continue to believe that the human element of investing, and therefore the financial advisor, is here to stay. Given the market turbulence, human advice is needed now more than ever. Individuals with investment portfolios want a financial advisor to help them understand the impact to their portfolios and manage risk.
Given the market turbulence, human advice is needed now more than ever.
Financial advisors are looking to third-party technology solutions to help analyze performance, administer portfolios, and communicate with clients on the changing market landscape. Third-party solutions that support a digital wealth management environment, reduce operational burden, and allow financial advisors to more effectively prospect and manage existing client relationships are best positioned to drive long-term growth.
Volume of PPP loans and increasing consumer demand for digital shed light on the value of bank technology.
Banks are tasked with managing the disbursement of $650B+ of forgivable loans available to small businesses via the Paycheck Protection Program (“PPP”) enacted by Congress under the CARES Act. Financial institutions, ranging from Bank of America and JP Morgan Chase to smaller community banks and credit unions, have processed millions of applications for small businesses. Other FinTechs, including PayPal and Square, also successfully lobbied to participate in the distribution of the loans.
As banks reflect on the impact of PPP on their operations, reasons to accelerate digital adoption are stronger than ever.
Management of the PPP loans created a significant burden on all banks. Those with digital processing capabilities were best positioned to handle increased volumes, while others struggled to keep up manually. Many banks cited the need to allocate additional headcount to the effort, which, for some, meant hundreds of employees. As banks reflect on the impact of PPP on their operations and current market conditions more broadly, reasons to accelerate digital adoption are stronger than ever.
LLR will publish a post on growth opportunities in the bank technology sector later this year, but in the meantime, the current environment is likely to further accelerate the digitization of the 10,000+ banks and credit unions in the U.S. Consumers are demanding digital solutions (and a quarantined environment requires them), traditional financial institutions need to keep up with their digital counterparts, and social distancing measures will further contribute to shifting consumer preferences to bank digitally versus in-branch. Market trends are favorable for bank technology companies to support existing financial institutions, and those institutions that adopt new technologies will find themselves better positioned now and coming out of the current downturn.
Here’s the bottom line.
A high level of uncertainty remains but FinTech companies that help their customers embrace digitization are best positioned to manage through the challenging market environment and benefit on the way out.
(This post was published on May 8, 2020)