For the past years, the Israeli Fintech industry has positioned itself at the front of the financial innovation, boasting several unique strengths and advantages that have enabled its success within the global market, and offer distinctive benefits. These include leveraging local expertise such as cybersecurity, big data analytics, and AI, as well as an active and diverse entrepreneurial Fintech community with a global outlook.
Israel is indeed a world leader in the development of financial technologies, exporting several unicorns, such as Lemonade, Pioneer, Next and Rapid. Global financial institutions have also recognized it and chosen to open R&D centers in Israel.
2019 has been epic for the Israeli FinTech ecosystem. According to Start-Up Nation Central’s Finder. The Israeli FinTech startups raised a record $1.8 billion in equity, more than double over 2018.
The advantages of B2B ecosystem
The Israeli Fintech industry is mainly B2B, the geographic distance from large markets enforced Israeli entrepreneurs to sell to large corporations rather than to the mass market. 76% of Israeli Fintech companies offer solutions to financial institutions or enterprises, and 45% produce solutions for SMEs.
The B2B business model has a huge advantage, as the financial world adopting a partnership model under which large financial service providers collaborate with startups to offer the latest technology while helping them overcome regulatory and capital issues. This trend is expected to grow rapidly over the next few years with the last developments in open banking regulation.
Moreover, B2B startups may also be more robust to the crisis caused by the COVID-19 pandemic, as their business models are often based on long-term contracts and lower marketing costs.
Covid-19 Crisis management
We’re going to see some Israeli fintech startups struggle soon due to the COVID-19. Early-stage startups were already struggling with funding as investors in the sector tend to focus on well-established companies with a clear business model (most equity investments were concentrated among a small number of companies in Mega rounds- over $100 million in equity each).
Foreign investors may lose their appetite for risks during this challenging period, and local Investors are likely to give preference to their portfolio companies. According to Startup Nation central report, since investments in the sector are highly concentrated (only 21% of the companies have secured more than $5 million) and many of the companies are still in their early stages (the sector’s median age is four years), it is likely that many startups will struggle.
Besides, startup revenues are expected to decrease as corporations are forced to cut down on their innovation budgets, while new big organization clients are harder to reach.
According to BCG, the negative impact of COVID-19 will be more severe for those FinTech’s in international payments, unsecured and secured consumer lending, small business lending, and for those where risks may be highest. It is believed that those fintech firms focused on B2B banking are less vulnerable as a group.
As for late-stage startups or well-established FinTechs, at present, they do not appear to have been severely affected by the epidemic. In general, Israeli Fintech companies have been agile in their response to the outbreak of the global pandemic; they have implemented new policies regarding hiring employees, work from home plans, and measures to safeguard budgets and targets. Currently, there are no reports of significant layoffs or pay cuts by Fintech companies.
According to BDO Global Fintech report, most fintech companies are still in – or in the process of exit from - a react phase, “working through the initial ramifications of Covid-19, safeguarding their business, and addressing immediate risk factors such as changes in cash flow. Companies and sub-industries will then move into a RESILIENCE phase, looking to build out risk mitigation and growth initiatives such as business continuity planning, permanent remote working strategies, and access to growth funding. Such initiatives play a pivotal part in being able to realis the trending opportunities, such as increased digital transformation and a push toward cashless transactions present for Fintech companies across the globe”.
Opportunities
However, the crisis also creates plenty of opportunities for the Fintech industry, digital has gained momentum in every area following the pandemic, the same trends will happen in the financial field which is one of the big areas (and a huge market) that have not yet undergone significant digitization. Fintech companies are still on the margins of the tech industry, but this all about to change as the world is shifting to “contactless” by reducing its reliance on physical financial interactions and the need for cash.
With the increased usage of e-commerce during this pandemic, businesses and customers are adopting new digital platforms by necessity, which in turn accelerate the use of digital payments. This trend will only speed up as people are adapting to the new reality of digital life.
One of the post-COVID 19 Fintech opportunities is the trend of sinking banking into daily activities. The expectation of complete availability of financial service providers and the development of the Internet of Things creates the need for the customer to find the bank anywhere and anytime. This is a trend known as Embedded Banking, which is in its early stages. This is the process of weaving banking services into common everyday operations and making them visible and imperceptible.
An example from the non-virtual world is the physical store opened by the Amazon retail giant. In this store, customers collect the products from the shelves, go through the checkout gate "and do not pay". In other words, the payment operation becomes bogged and woven into buying itself.
In the post-COVID world, there is an immediate need to move towards complete digitization, paperless, and presence-less end-to-end processes, moreover, digital financial services can help reduce the spread of the disease, especially in the developing countries, but not just.
In light of all those changes, policymakers should enhance collaboration, share experience, and coordinate their efforts to promote an orderly adoption and integration of innovation that will benefit all.