What the COVID Crisis Means for Fintech Now and in the Years to Come
Radboud Vlaar is the Founding Partner at Finch Capital, an early-stage venture capital firm and one of Europe’s most active series A investors.
Prior to starting Finch in 2013, Radboud was a Partner at McKinsey, where he worked for ten years.
Finch recently published a fantastic report on fintech in a time of crisis, which forms the basis for our conversation today.
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Thank you very much for joining us today. Please welcome, Radboud Vlaar.
Full transcript:
Will Beeson:
Radboud Vlaar welcome to Rebank.
Radboud Vlaar:
Thank you. Nice to be here.
Will Beeson:
It's great to connect with you. I've been looking forward to this. Your colleague Aman and I have a great working relationship. He's a very smart guy with a lot of experience in this space I think he joined what's now Finch Capital, maybe a couple of years ago?
Radboud Vlaar:
2016
Will Beeson:
A handful of years ago! Time flies. And you are the managing partner of Finch. Can you quickly introduce yourself and tell us about Finch?
Radboud Vlaar:
My name is Radboud Vlaar. We started Finch in 2013 and before that, I spent almost 10 years with McKinsey, very much focused on the financial sector as well as private equity and corporate finance. We invest in Europe and in Southeast Asia in financial technology, which includes enabling technologies as well as disruptive technologies, and also are active in the artificial intelligence and IOT areas, mainly in Europe.
Will Beeson:
Great. So, I think that European plus Southeast Asian focus made you guys quick to start to wrap your heads around what was happening with COVID-19 in, I guess what, probably from your perspectives, January onwards. I remember, I mean it must've been, I don't know, maybe March at this point, early April, I think I was still trying to understand. It must've been March. I was still trying to understand whether this COVID thing was, you know, was real, whether it was here to stay or whether it was going to, as I hoped, to disappear overnight and never be heard from again, which of course didn't happen.
And while I was trying to make sense of the entire situation, you guys were already putting out a very detailed, 26-page slide deck on the impact of COVID on FinTech both now and over the next four or so years, a deck that is extremely detailed, extremely insightful, and that I thought we might dig into a little bit more today, because there's such rich content in there, a lot of which I think warrants a much deeper discussion.
So firstly, compliments on an excellent piece of work so quickly.
Radboud Vlaar:
Thank you.
Will Beeson:
At one point I read that Finch is the most active fintech investor in Europe. Is that right?
Radboud Vlaar:
No, we're the most active Series A investor. That is correct.
Will Beeson:
Wow, that's, that's impressive. Can you talk about some of the companies that you guys are involved with right now?
Radboud Vlaar:
Yeah, so in the UK, we're involved in companies like, Goodlord, Trussle and Zopa and in continental Europe companies like Hiber which is more IOT, BUX which is in trading, Fixico, which is in the market for car repair for insurance companies as well as fleet operators and ride sharing companies, and in tokenization for investment funds, Brickblock.
And then in Asia, several companies very much centered around Indonesia, a bit more B2C focused than in Europe, which is for a very large part B2B focused.
Will Beeson:
Excellent. You guys are busy. So, to dive into this report, maybe it's worth first talking about the timing expectations. It's an important part of all of this as people start to try to make sense of what's happening now and how long this is going to last. So, I believe your initial expectation at least was this “crisis mode” would last until the third quarter of this year, after which we'd see a 12-to-18 month recovery. Is that still your expectation, and what inputs went into that thought process?
Radboud Vlaar:
I think what we did at the time is we looked at a couple of sources.
So one is, we looked at how previous crises played out, both the financial crisis as well as pandemic led or driven crises, how long it eventually took to recover. That's one source. Second, we looked at several, investment banking predictions, what their perspective was. And, I think what you will, at least the perspective we took out of it is that, it will take at least till the end of the third quarter to be in more crisis mode, with the recovery starting then as of Q4. I mean, and I think it could be, if you look at where things are now, I think maybe some of the things are going a bit faster. It could be July, June, maybe a bit earlier, but it all depends on how quickly the lockdown is being softened. And so, I think we're still standing with our conservative, maybe, looking also at the past, the end of Q3, but with a little bit of luck we could move a bit faster, but this very much depends also on when travel restrictions are being removed.
And that's, which we think is to be safe, more realistically after the summer than before the summer. But I think we'll know every week or month, we will have more clarity on it, but that's still our perspective. And the recovery typically takes longer than people think. It's already hard to slow down a society and the economy, but it's probably even more complicated to, to bring it back.
I think you will see a quick recovery in GDP percentage wise, but that doesn't mean that it's back to the old level and old momentum. I think there are a lot of other complicating factors like how supply chains will, interact, how the different countries are dealing with opening up, I think some countries have already said until the end of the year we're semi-closed. So, interdependencies there, which make us still think that this will take until Q1 2021 before we're really in the recovery and getting into a new normal.
Will Beeson:
Does it sound like your investments are in large part UK, Northern Europe, and Indonesia?
Radboud Vlaar:
Yeah, so I would say including Switzerland, Eastern Europe, very much Poland-centered, but I would say, the northern half of Europe. Som we have two investments in Spain, but no investments in Italy, Greece, or part of the world. So, it's more the northern half of Europe, including Eastern Europe, primarily Poland.
Will Beeson:
What has the situation been like in Indonesia?
Radboud Vlaar: I must say the speed at which they changed from normal to being in lockdown was way faster than what we have seen in Europe.
I think probably similar to what you see in countries like Singapore, some of these actions were taken and very quickly implemented. If you look at the numbers, I think the impact on the health side is, so far it seems to be manageable. Although there is a lot of connectivity between China and Indonesia.
But yeah, I think also the question there is when it's opening up again, and also there that's more June, July from an opening up perspective, but I think in general, countries like Indonesia are more used to crises, whether it's flooding or whether it's economic crises than the Western world. So, I think therefore there's less disruption in the day to day working then there is probably in the Western world who hasn't had that many shocks to deal with, and therefore it's, it's all completely new.
Will Beeson:
So, one of the things I loved about this report is that, especially in the, in the early stages of this experience, I guess once a lot of people started to finally understand what was happening and what the lasting implications were likely to be, the conversation quickly became digital is going to be the way that everything works going forward.
And while that may well be the case, you guys, actually got into the thought process and the detail around, how that will happen, specifically in, in financial services and fintech. And one of the things that I think you guys determined is that financial institutions will turn to tech companies rather than in house resources to accelerate their digital developments. And that totally makes sense. One, because, in-house resources are going to be strained. People aren't going to have necessarily excess capacity to be deploying against some of these digital challenges. And also, hopefully we've kind of reached a tipping point and, even the most entrenched, organizations realize that, that digital is real and it actually serves a purpose, over and above press releases and UX. So, maybe we could just dig into that point a little bit. Financial institutions will turn to tech companies to drive digital. I guess that could mean a few different things. It could mean fintechs like those that you guys have invested in. Like we have on the podcast on a regular basis, or it could mean that FIS picks up a bunch of new new deals, because even in the best of times, it's easier to buy the proverbial IBM, and now we're in a likely a more risk averse environment for a period of time. So how do you expect that dynamic to evolve? Are incumbents going to look at fintechs as a route to the solutions that they need, or are they going to be overly conservative and push more business to traditional IT vendors.
Radboud Vlaar:
Yeah. So, what we're trying to, let's say the underlying thought behind this is that the crisis, but especially the lockdown, as a result of that, forced a lot of people to work remotely, interact remotely with financial institutions. So that's revealed for a lot of financial institutions whether it's banking, insurance, payment companies, you name it, where actually that were digital ready and were not. Also, it revealed for governments, regulators, where the way people buy houses, buy goods, there is inefficiency in the system that, for example, slows down or completely stopped certain type of activities. Think about the purchasing of a house, which is an important element also for retail banks. From a mortgage point of view or for rentals. I think it revealed where these processes were broken. So, what do we expect to come out of that? There's, on the one hand regulation to enable more things to go digitally. But to your point, the use of technology for financial institutions to exactly, let's say it was like a stress test where they got, very clear areas where they need to fix or implement or accelerate technologies that enable them to work more efficiently.
Now, as a result of that, I think historically, a lot of financial institutions have developed their tech in house, with the help of consultants. But it was more in-house, custom made builds, and what we expect is that as there are so many financial institutions out there, and a lot of the processes are quite standard, that they will look for more ready-made solutions, of course, there are always elements of integration into the legacy systems, to accelerate or to fix certain types of the modules they have. Now, whether that will go to incumbent tech providers or to more newcomers out there, I think the companies that are very young, that just have a few employees and one or two clients, maybe they're not the ideal candidates, but the good thing is that with all the investments of the last years, a lot of companies are actually, now up to the series B phase where they have five to ten million in revenues or more, they have several clients, and they have a product that has been tested already by these clients.
So ,we expect to see an increased usage and decision making in favor of working with some of these companies over doing things in-house. And of course, there will also be established companies benefiting from that. But speed is something that will be important because what, at least we have seen, a lot of the CIOs and CEOs have reduced a lot the cost to have accelerated prioritization of digital initiatives also with external vendors.
So, it will be a mix, but generally it will accelerate the shift to using in certain areas more ready-made solutions rather than building everything in-house.
Will Beeson:
Can you talk a little bit about your expectations for the winners and losers in fintech coming out of this? Perhaps more by sector than by specific company, necessarily?
Radboud Vlaar:
Yep. I think within every sector, even if there are winners or losers, you will still have relative winners or relative losers, which I think is much more linked to whether they have cash at the moment or not and whether are they going to navigate through this crisis rather than the pure sector they’re in.
But in addition, there will be sectors which we call the winners or the more challenged ones, that will have a more difficult time ahead, and that can be difficult in terms of justifying the valuations of the previous rounds, because growth outlook or profitability outlook could have changed, or it could be a challenge in terms of a complete drop of volume, like there are business models where certainly clients they were serving are no longer, as fast growing or as able to engage with these parties. The winners we see are, we think overall that, there are two areas, f you take from a macro point of view, looking at the pockets within the financial service sector, where limited, disruption to place, which is in the mortgage and the life insurance area. That is because partly regulation required certain in-person, partly because it was an area where people maybe weren't always comfortable interacting in a digital way. Now, we see there that governments and regulation are at least enabling these processes to be end-to-end digital, because they would like to see continuity also in the event future events like this happen, and the same for life insurance. So, we just see an opening up for a more digital interaction model. I think you could see that trend already, in the UK in general, in the real estate space. First it was the parties like Zoopla, than it was the Purple Bricks’, and so step by step, parts of that real estate process have been digitalized and moved to a more online model. And now you see the players like Trussle and Habito, and older models, that will also benefit from that. But of course, also traditional banks will also, and brokers will move with that trend, but we see it as a general trend.
Then on the consumer and SME lending, I think what you see in a lot of cases when there is a recession, is that traditional players are, especially the ones that have big legacy books, are slowing down and getting more conservative, and partly also because they aren’t always effectively using dynamic based and behavioral based race pricing.
And that's where we see an opportunity for the consumer and SME lending players. I think a little bit of P2P players have moved into more balance sheet led, but different types of players are active in this field. There are some, you can do very healthy pricing. Supply from some of the traditional banks might be less.
Actually, a lot of the banks have closed down their branches, so de facto, they don't have this in-person advantage as much anymore, maybe even a bit of a disadvantage. And that's where we see the opportunities there on the more fintech disruptor side. On the enabling side, what we see across the board and we see in our portfolio is all these companies that are providing digital solutions for banks and insurance companies are actually already benefiting now. And on top of that, we'll see even more growth after that.
So, think about KYC, a lot of parties required in-person meetings, especially in southern Europe. You saw some of the banks and with more digital KYC led processes, we see players providing these solutions like a Fourthline and Onfido that will benefit from that.
On the artificial intelligence side, I think there will be a lot of pressure on costs and on return on equities for financial institutions. So, another way to bring down costs further. Providers of solutions that can help, think about insurance to handle the claims, about car insurance where there are issues, about how to do that in a more digital way, better than driving through a garage and doing everything in-person. So, a general pressure to move things digital. These solution providers there are benefiting.
The areas under pressure, what I mentioned, I think a lot of challenger banks launched. I think clearly several of them will come out very well. Especially those that have cash. A question, of course, is valuation. Whether the valuations are still justified or is the outlook in terms of revenues per clients, growth. Is that changing? A lot has been written about that in the last weeks.
Also, wealth management and especially also the FX players as there is a reduced amount of travel and as a result of that, also less FX need.
So that's a bit more the high-level perspective, which we see there, but again, there are lots of areas where, on itself, nothing is changing, but because startups run out of cash, they come into difficulties because the funding market is just more difficult as well. Yep.
Will Beeson:
Can you talk a little bit about your views on the payments space in general? You talked about FX. Sure. Lower travel, lower business volumes would suggest lower FX volumes and then therefore, a bit of volume and revenue pressure on those types of firms.
But it seems like, the payments industry in general, you may expect to show some weakness over the coming years, potentially even post the COVID shock, if I read your analysis correctly. Can you talk a bit about that?
Radboud Vlaar:
Yeah, so I think within payments of course there lots of different players. So, players focused on the point of sale, PSPs focused on ecommerce, to players doing remittance, players doing FX transactions for SMEs, so there's a wide spectrum of players involved in the payments space.
So, if we take maybe, piece by piece. I think if you look at point of sale, I think in general, it was first a big adoption to put all the terminals in place there. I think the good thing is, the positive side was the shift towards even more cashless societies than the ones before. Actually, governments actively stimulated people to pay electronically. So, I think that that is helping there.
On the other hand, during lock down, short term, there are a lot of challenges. A lot of their shops and businesses and restaurants where their terminals are installed are closed.
Long term, there is the question how much that all will come back and how fast. So, we expect that the recession as a whole and the economic slow down is not good for point of sale. Then, the PSPS are, I think you see at the moment in the payment service providers, there are pockets where there is high growth and then there are areas where there is like 70% up to a 100% percent decline in volume.
So, the areas of travel bookings, ticket swapping for vouchers, everything which is related to travel, entertainment I think are massively down. On the other hand, you ssaw that a lot of people were ordering goods, whether sports equipment or other goods while they’re at home, and also, food delivery.
So, I think you see there depending on what type of customers, the different PSPs were focused, it very much determined the impact it will have on their business. Now, the impact might look less dramatic than it maybe really is. I think post the crisis situation. So, let's say as a Q4, the big question is how quickly will travel rebound and will eCommerce stay at that level or were people just doing a quick boost to get the stuff they needed while they're locked down and as part of the recession, reduce their spending?
Our perspective is that it will take longer than people think before travel and all the local travel activity and entertainment comes back and that the peak in ordering goods during lockdown, that will gradually slow down also as part of the more, recession situation.
And then on the FX side, I think in general, we feel that the recession is not good for trade, for the growth of that. I think on the consumer side, people are traveling less. So overall the FX part is coming down. Of course, volatility could be good for spreads, but, volume wise, the growth outlook is much lower than it was.
And for remittances, that depends very much whether the senders are also hit by the economic crisis. Maybe less money to send abroad. So ,across the board, I think for different reasons in the different subsegments, we feel it's either staying the same or more challenged, and in the short term you see a very blurred picture.
But if you look underlying, there are different factors playing a role.
Will Beeson:
And I guess, I guess similar question, in the other direction around insurtech. So I know that Aman specifically has an interest in insurtech. I know that you guys have a number of insurtech companies in your portfolio.
It's not an area that we've seen really fulfill expectations at scale in the way that we may have expected and in the way that other areas of fintech maybe have so far. But it sounds like you guys are quite bullish about various, sub segments within insurtech now and coming out of the crisis.
Radboud Vlaar:
If you look at our report, part of it is what people call insurtech, because I think the ones where we are skeptical to neutral are more the disruptive side, of insurtech. We think across the board, like you said, there was a very high hope or high expectations, But so far, if you look at the impact they've had, I think it's a different story than what you saw for instance on the challenger bank side.
Where we see a lot of potential and actually a lot of traction is, I think what you maybe could call AI, IOT, or software companies that are selling their solutions, data, products to insurance companies to help them reduce costs, better serve their customers, et cetera.
And that's, I think for the outside world not always called insurtech, because some of these companies might also serve other industries, but that's where we see an increased appetite for insurers to work with these third parties, but also ,following the crisis, increased momentum, to digitalize further their solutions and products and interactions they have.
Think about claims handling, think about the analytics, IOT, software. I think a lot of issuers realize that some of their processes were very traditional based and are looking to digitalize them further. So, across the board, we see there a lot of opportunity and it’s also an area where a lot of the insurers have tried to do that first in-house with a lot of their internal projects and see that and have realized that maybe that took too long, cost too much, and we'll see more partnerships, or usage of third party providers.
Will Beeson: I'd love to switch gears a little bit, and, and talk about the funding side a little bit more. You as a, a professional investor will have great insight here. Whereas, people like me, more on the operator side have less visibility. We've, I mean, if, if I just, just generally think about the providers of capital to this, to this space, you know, the fintech space more broadly, there are the, you know, large name brand, venture capitalists. The Accels and Indexes and Sequoias and Benchmarks of the world. There are corporate venture capitalists. There are, depending on, on the round and on the type of deal, strategic investors, you know, VISA has been decently active, for instance, as have a number of other companies.
And then I think over the past, probably what, you'd know better than me, five, six, seven years, there's been a significant development in the kind of like $100 million, more or less, size fund, across the US and Europe and presumably other parts of the world as well. Whereas, at least from, from memory and conversation with Hussein Kanji of Hoxton, you know, circa like 2012, 2013, there just wasn't much in that space. You guys were certainly early to market. I think we've seen a boom in that, in that type of fund. How do you expect availability of capital to venture investors and to the types of firms that are supporting these fintech investments, fintech valuations; how do you expect that to play out and what, what knock on implications do you expect there to be for the fintech industry itself?
Radboud Vlaar:
At the moment, I think whether parties have a lot of capital, a little capital, are bit funds, small funds, I would say in general, there has been a slowdown in parties making new investments, but maybe not so much driven by whether they have capitals or not but either by travel restrictions or just massive uncertainty of how the world is playing out.
And a lot of the good companies are also not willing to raise money at what they feel might be at distressed pricing. So, I would guess the capital availability and how it all plays out for funding rounds, I think we'll see more of that in the coming quarters rather than now at the moment.
I think now it's really those companies that were close to being bust and are not able to convince their existing investors to help them that I think are in difficulty.
Capital wise, I think, like you said, there's a lot of capital available in the market, from different types of investors. I think the hundred million funds, actually, there are also in Europe, I would say there are not that many funds in the 150 million - 100 million range. You have a lot of seed funds. There are a lot of 50-100 million funds or, a lot, I think it's still compared to maybe some of the other markets, there are, but it's not like, overwhelmed.
The issue really is more that there are a lot of funds that have been raised that have only raised one fund or that are about to raise their first fund, and I think if there is a short history, short set of data, I think for some of those funds, depending how this crisis is impacting their businesses, there are funds that are focused on travel for example, I think they're going to be hit quite a bit.
I think there are funds that have no follow-on reserves, and it's quite likely that to get real value out of the portfolio, you need to be able to help some of the companies to get to a good place. So, I think there are certain types of fund strategies, sector strategies, where investors in new funds, might have less appetite going forward. I think if you look also at the stock performance, I think a lot of people are very bullish on technology in general. So, our view is that, technology investing and appetite remains there. Yes, there will be, implications for maybe those firms that bet either, unfortunately, because of the nature of the fund strategy or companies that they invested in impacted their track record or their ability to raise, but I'm not so sure that the fund size as a whole is an issue.
I would say maybe contrary to what you said, I think the one thing that has really changed in Europe in the last five years are the 500 million plus funds, or even the 400 million plus funds. I think, before, that there was maybe one fund that really had the size in venture or growth more than 400 million. I think you now have Atomico, Lakestar, Index, Accel, Northzone I think is at that range, Balderton. I think there are lots in the 400 million range, and up.
I think if you look at fund economics, to return four times, or three times your fund, it requires a lot of big unicorn companies. Returns from that point of view require less big outlier companies for the smaller funds. So, I think there are a lot of different factors that play a role, whether it's your first time fund, sector of exposure, but I would say in general, if there is a more skeptical outlook on big outcomes, that is impacting more the bigger funds than the smaller funds.
Will Beeson:
Okay. And what about the corporate venture side and some of the strategic investors that have helped provide capital?
Radboud Vlaar:
Yeah, I think that’s a good question.
And I think it's not a single answer, so I would describe it that the financial sector was on a journey to figure out what type of role they wanted to play in the ecosystem. And I would say across the board, maybe most of the players were probably spending too much at too high valuations, in the first periods and too broad, from a sector point of view.
So, I think what the current situation will do is I expect a rationalization of the corporate venture capital community of where they really want to use their balance sheet, where they would like to invest, what stage. Some of them all started with the seed funds and the incubators, whereas I think a lot of them have realized that to have a real material impact on the business and companies that can deal with a big financial institution, you need to start to move more as of series A, otherwise the companies are just small.
So, we've seen a lot of that moving up to a little bit more later stage. We have seen in the beginning, some of them starting investing quite globally. I wouldn't be surprised if that becomes more closer to home, especially if flight restrictions are there. I don't think everybody will keep flying to Silicon Valley.
So, there will be a closer to home proximity. And I think it very much differs sector by sector. Like the reinsurers have been very active. I think over the last year, it's not related to corona, I think you saw them already taking a more selective approach, where they invest in, at what valuations.
The payment companies, like the VISAs are examples you gave, I think they’ll continue to be very active there, but it might very well be that they shift the regions. I think you see increasingly them also in Asia, being active. So, I expect more choices to be made. And as a result of that, less capital being available, which doesn't mean that they move out of this, because I think they also all realize that technology and digital is super important in the next years to come.
Will Beeson:
Fantastic. Well, look, you have a brilliant team. Again, I'm extremely impressed with the depth and the quality and the speed of the insight that you guys have put out. I highly encourage everyone to check out the report. It's available on your website, finchcapital.com. All the best going forward.
Radboud Vlaar:
Thank you.
Will Beeson:
Radboud Vlaar, thank you very much for joining us today.
Radboud Vlaar:
Thank you. It was a pleasure.
