FinTech and Covid-19 start-ups: impacts and perspectives

Interview with Alain Clot, President of the association France FinTech which represents French fintechs and promotes the excellence of the French financial sector around the world. He gives us his analysis of the impact of the crisis on the sector and the future opportunities for French start-ups.

Start-ups are by nature agile but also fragile. Has the agility of fintech start-ups enabled them to weather the crisis better? How did they have to change?
FinTech, that is to say the start-ups specializing in the financial sector that we represent, have also suffered from the crisis. Many have experienced a sharp decline in activity, like the entire sector in which they operate, due to the general and massive slowdown in the economy. For example, we have noticed a decrease in the number of payments linked to traditional commerce or events. They have also suffered to find the financing necessary for their growth. This subject, which prevailed before the crisis, has become more pronounced in particular with regard to the youngest of them.
Like most companies, they have also experienced serious human resources issues. Recruitments have stalled, or even have been completely interrupted and a large proportion of employees have been placed on short-time work, even if, according to our observations, the rate of use of this modality by our start-ups is lower than the average. national.
That said, start-ups are particularly adaptable, which has enabled them to organize themselves immediately by teleworking, and to lower their costs wherever possible, especially with regard to subcontracting or paid rents.
On the contrary, some fintech have benefited from the situation. The confinement having imposed to do everything remotely, applications related to financial services have seen a sharp increase in their use. The fintechs linked to electronic commerce have also seen their activity grow strongly. Even if we can expect some correction from these exceptional levels, we believe that a significant part of this increase, in the order of 20%, will be sustained.
With the France FinTech Association, we reacted quickly by staying in contact with our entrepreneurs to inform us of their difficulties and identify those who were in distress. We also spoke a lot with regulators and the state. We still lack perspective, but to date we have not identified any failures, only degraded situations and most start-ups in difficulty of financing have found solutions, at least temporary.

Were the economic support measures put in place in France adapted to fintech players?
The first announced financial support measures hardly concerned start-ups. In fact, they traditionally receive very little funding from banks and are therefore outside the banking circuit through which State Guaranteed Loans were issued. If you weren't a borrower before the crisis, it was very difficult to get a loan. The government finally became aware of the problem by announcing a specific plan to support their treasury. We have also worked with Bercy so that crowdfunding platforms are integrated into the distribution system for State Guaranteed Loans.

The crisis has provoked an unprecedented outpouring of solidarity. What initiatives have emerged from fintech?
During confinement, our start-ups immediately demonstrated their solidarity when they were often themselves in a difficult position. There have been many initiatives because it is in their DNA to give meaning to their work. They have also demonstrated exemplary responsiveness, characteristic of their highly responsive structures.
Many actions have emerged to support caregivers. We can cite among many others the call for donations from Bankin, the services set up by Lydia to optimize the payment of teleconsultations, or the donation made by Linxo to the Fondation de France, up to € 5 per subscription. annual subscription during confinement.
Other initiatives have made it possible to support companies and individuals in difficulty. For example, October froze the principal repayments of loans for 3 months and Kriptown set up a partnership with Business Angels to help SMEs obtain emergency financing.

What recovery do you anticipate for fintech? What lessons should they learn from this epidemic episode?
In my opinion, this is not a crisis of rupture but of acceleration, that is to say that a certain number of phenomena which were observable until then will become more pronounced.
I am thinking of the use of payment applications, the use of neo-banks, the use of artificial intelligence to create new services. In addition, the clientele segment of professionals, entrepreneurs and very small businesses is becoming a preferred investment theme for fintech. The crisis is playing a role of accelerator here because entrepreneurs have made extensive use of remote payment applications and therefore fintech solutions. We also observe a phenomenon of “platformization”, that is to say an evolution of models towards a wider range of services, or even an almost complete banking course, which transforms certain fintechs into neo-banks.
The second consequence will probably be a cycle of consolidation, or even in a few cases of mergers and acquisitions. We are gradually seeing champions emerge, category by category.
Our players are accelerating the internationalization of both their model and their funding. This has already started with, in recent months, funds or international players in technology and digital technology who have invested in French start-ups. We can cite Tencent (editor's note. The “T” of Chinese BATX) which took part in raising capital for two emerging French champions: Qonto and Lydia.
Finally, let's not forget that beyond Covid-19, we are also in a period of transition linked to the consequences of Brexit. There is a regulatory provision within the European Union, the “European passport”, which makes a financial authorization obtained in a member country valid throughout the Union. Actors based in London, the leading financial center in Europe, will lose this European regulatory passport. In this context, France is more than ever a privileged entry point in a market of 500 million consumers.

What are the advantages and disadvantages of France in attracting fintech players?
Today France offers many advantages. In particular, it has an exceptional pool of skills, linked to the excellence of our training in digital technology and finance, as well as globally efficient infrastructures. In addition, the French State is mobilized and regulators are now very attentive to innovation. France gives access to the European market, via the European passport which we have spoken of. Finally, the strength of traditional French banks and insurers, among the most solid in the world, is very stimulating. It should also be noted that setting up a business in our country is now quick and easy.
France still has its drawbacks. The level of charges and taxation weighs on competitiveness, even if the situation has started to change in many aspects.
The main difficulty concerns funding. Start-ups in France actually have very little access to bank credit. They therefore only have four modes of financing: the close circle at launch, public money via the effective mechanisms of the Public Investment Bank, Business Angels when start-ups are still small and finally venture capital for those who are starting to prove themselves.
Our network of Business Angels is unfortunately insufficiently developed, due to the lack of appropriate taxation, in particular with regard to the treatment of losses carried forward unlike in other countries. The disappearance of the Solidarity Tax on Fortune (ISF) paradoxically increased the difficulties of start-ups, since young shoots were supported by the deduction of the ISF from the sums invested, something now impossible with the Tax on Fortune Immobilière (IFI).
With regard to venture capital funds, although they have grown significantly over the past ten years, they do not yet cover all of the financing phases satisfactorily. Thus, the supply is less abundant than in Germany or England in the start-up phases, i.e. up to € 500, and acceleration, from 000 to 15 million euros. euros. Remember that we have neither a huge domestic market like the USA or China, nor a large financial innovation market like the NASDAQ, nor a huge Chinese or American public order.
These financing problems thus generate difficulties from the first years and later in creating economic giants. Thus, if France is the country in Europe which has created the most companies, it is also the one where the death rate in the first years is the highest.

Do you think that “classic” banking players and fintech start-ups are sufficiently armed to resist GAFA?
First of all, we must keep in mind that we are talking about "coopetition" between banks and fintech, that is to say both cooperation and competition. Indeed, this dual status often coexists in the same start-up, which can have a white label activity on behalf of banks and a private label activity, in autonomy, which competes with traditional establishments.
GAFAM (nldr. Google, Amazon, Facebook, Apple, Microsoft) and BATX (nldr. Baidu, Alibaba, Tencent, Xiaomi), which we can call the "Big Tech", constitute the main challenge for the industry. financial. A subsidiary of Alibaba, Ant Financial, is also the biggest fintech in the world. Its valuation is already much higher than that of the largest European banks.
All of these giants have started to invest heavily in financial services, especially payments. It is indeed at the heart of their e-commerce activity, but above all it constitutes an exceptional source of data, which is their central objective.
The offensive of GAFAM and BATX in this sector has largely started and Europe represents a particularly interesting market for them. In this context, France, a source of skills which gives access to the whole of the European Union with still modest valuations, can come into their sights. We must therefore move quickly and promote the emergence of French and European champions.
The state has an important role to play in this competition. In addition to improving financing conditions and appropriate regulations, it can also place orders to support the sector, as has been done on a massive scale from the outset by the Americans and Chinese, who are also showing themselves to be totally protectionist.
Finally, accelerating investments in Artificial Intelligence is essential. The levels currently prevailing in Europe are only a fraction of those agreed by China and the United States.