Fintech sector may need to refinance £825m in wake of COVID-19

A new KPMG report out today, Fintech Focus, finds that investors are continuing to take a longer-term view to investing in the sector whist fintechs refocus on resilience rather than scale in the wake of the pandemic.

The sector, estimated to be valued at $48.5bn, is still providing attractive investor returns on paper, particularly for early stage investors. The report shows that the median internal rate of return (IRR) on paper for first round investors, as of the latest round of funding, is 71%. Paytech, particularly, is thriving with a median IRR of 98%, exemplifying the rising demand for fintechs offering payments processing and open banking solutions.

Anton Ruddenklau, Global Co-Head, KPMG Fintech said: “COVID-19 is sharpening the minds of the entire fintech ecosystem when thinking about what makes a thriving and sustainable sector. For the fintech firms that are truly transformative with their business models, the path to profitability at scale is still likely to be 10 years plus, and for these firms to remain competitive they will need to be systemically important. Nonetheless, patient capital must be found, and now more than ever institutional investors need investment data to support their participation.”

Fintech Focus estimates that annual losses for fintech start-ups in the UK currently stand in the region of £1.5bn, with 6% of fintechs breaking even and 84% of businesses reporting increasing losses in their last financial year. These ongoing losses, and the need for regular fundraising, meant that going into this crisis, almost half the sector had less than 18 months of funding runway. For all of the fintechs in this report to achieve that 18 months of runway, the sector would need to raise approximately £825m. The crisis will also push out the time at which fintechs might be able to break even, creating more pressure to refine business models and adjust strategies to reduce the need for further financing.

Liam Gray, Head of Fintech programme, TechNation said: “Raising funding is always a difficult process, even for some of the most promising fintechs, and the crisis has exacerbated the problem. Not only has capital become more challenging to raise, many that do raise have been forced to accept lower valuations. That being said, raising capital – even at a lower valuation – is still a great achievement in this climate.

Female founders are also, for the second year running, outperforming the industry average, with only 22% of female-led fintechs entering COVID-19 with less than 18 months of runway, around half of the representative percentage for the sector as a whole.

Anton added: “It’s also really encouraging to see that the picture is still positive for female founders. Last year we found that UK fintechs with a female founder or co-founder typically achieved 113% higher returns on paper for investors. This year, female founders make up 4 of the top 20 fintechs with the highest IRRs as of their latest funding round.”