As Covid-19 continues to impact almost every aspect of life and business, the question of how it has and will continue to reshape Fintech has been a major concern for industry members.  Speakers at a recent Tech In Motion webinar took time to examine the issue, and while the answers are complex, the ultimate thesis is simple enough:  this is a new era for the industry, and the old expectations and ways of doing business no longer apply.

“The biggest challenge we’ve seen, both for small- and medium-sized enterprises and consumers is basically the same – income has evaporated,” said Kristen Anderson, CEO and Co-Founder at Catch, which provides a personal platform for employee benefits.  “The volatility of the markets is also not really reflecting what most people think should be happening right now, which creates a lot of uncertainty for businesses that run on AUM Models.  The numbers suggest we’re in a v-shaped recovery, but unemployment numbers don’t match that at all, so basic expectations for the market do not apply right now.”

That uncertainty has made for demand shifts that would have been impossible to foresee six months ago.

“A lot of SMBs are looking for lending products, as there’s a need to supplement revenue and payroll to keep the doors open,” Anderson said. “For some places, that means demand is actually up, but other industries have gone way down.  All of our businesses have had a lot to respond to:  is demand rolling you over, or are you scrambling to keep any revenue at all?”

Despite that basic volatility, Fintech has had some important advantages over legacy firms as the world has forcibly moved in digital directions.

“Platforms have gone from ‘nice to have’ for digitally native Millennials to really important for disaster recovery and continuity plans,” said Margaret Hartigan, CEO and Founder of Marstone, Inc., an enterprise-ready digital wealth management and robo-advice platform.  “For the legacies, what kind of institution you are matters a lot.  Core technology companies or custodial stacks are like a big, complex electrical grid.  Many people draw power from it, and there are all these legacy systems people don’t understand in place.  So while it may sound like a great idea to have some Fintech come in to overhaul, there are so many interconnected pieces that the unintended consequences of pulling the wrong one can be quite dramatic.

“But I do think we’re going to see innovation in this space.  This trauma has proven the resiliency of new technology transformations:  they’re more scalable, and give you an electronic audit trail.”

Hartigan predicts that, with this shift, there will also come a lot of consolidation, and that the age of single-service Fintechs may be reaching an end point.

“I was part of the dot com boom and bust, and when it failed in 2000 people said ‘oh, it’s over,’” Hatigan said.  “But no, industry came in and bought the R&D of those companies, bringing them in-house. This will change how we work, how things function, but all of these early innovations are going to be applied everywhere.”

If the boom of the 2010s was about creating hyper-focused platforms and products, that notion of consolidation may be important for the 2020s.

“In order to compete with the large institutions, you have to have an advantage that goes beyond just recreating the existing packages legacy institutions already have in place from the last innovative cycle in the 80s and 90s,” Anderson said.  “The large financial institutions have all these different tabs of services.  The 2010s were about creating a startup to handle each tab.  The answer now will be not just to create all of those tabs ourselves, but also to find ways to blend them together.

“The one-trick ponies were able to exist before because digital acquisition was so much cheaper 10 years ago.  Facebook is not a sustainable way to build your business for 99.9% of businesses out there.  The one-trick pony won’t survive long enough to reach that kind of lifetime value anymore.”

That question of sustainability is especially core moving forward.  Profitability will be a core piece of the puzzle for investors going forward in Fintech.

“Even at the angel investor level we’re seeing less speculative investing,” said Stephen May, Founder of Acuity Financial Experts, which provides online bookkeeping services.  “It’s slowed to a halt for this quarter as people reassess. Time will tell, but in general we’re seeing much more focus on EBITDA (earnings-focused) than we’ve ever seen in recent history.”

It’s a shift that necessitates a core change to the way many Fintech startups think.

“This is the most important thing you can measure against right now, everything else like adoption rates are kind of magical math,” Hartigan said.  “You have to control your margin and drive from profitability. It’s unsexy, of course—you can’t get these incredible modeled multiples on a profitability chart. But whether it’s a sponsor or private equity or whatever else, the tolerance for losses is going to change.  Everyone has an unprofitability period, but you’re going to need to have a clear path out of it that doesn’t rely on extraordinary events.”