Will Israeli FinTech Continue to Thrive in the Post-Coronavirus Era?

Almost six months have passed since COVID-19 was recognized as a global pandemic, and Israeli FinTech continues to raise money at a fast pace, similar to the levels recorded last year: $604 million in the first six months of 2019, and $594 million in the first six months of 2020. The trend of mega rounds (financing rounds of $100 million or more) also continues, with BioCatch raising $145 million, and Pagaya Investments raising $102 million since the beginning of 2020.

Moreover, Israeli FinTech led America’s most successful IPO so far this year, when InsurTech company Lemonade went public in June 2020 for an outstanding valuation of $1.6 billion, which quickly jumped by 140% when its stock surged on the New York Stock Exchange on the first day it traded.

Nevertheless, it is clear that risks and opportunities will not be distributed evenly across FinTech’s subsectors. While some startups reported that investors are delaying investments (mainly early-stage startups) or that they are struggling to secure new customers, others have indicated a brighter picture.

Anti-fraud, risk, and compliance: possible growth

In times of crisis, fraud tends to intensify, and compliance becomes more challenging; the situation is leveraged by hackers to increase attacks. Since mid-February, new coronavirus-related malicious domains have been rapidly emerging, according to Check Point.

As Israel is globally known for its cyber protection capabilities, many Israeli startups in this subsector will likely experience growing sales and attract new investors. In the first half of 2020, this subsector has secured $151 million in equity funding, almost doubling compared to the equivalent period last year; the increase is mainly attributed to BioCatch.

In addition, 96% of the startups in this subsector are offering solutions to large enterprises or financial institutions, which are more likely to continue paying for services during times of crisis, compared with small- to medium-sized enterprises (SMEs) and individuals.

The payments sector might be negatively affected by COVID-19

The overall impact of the COVID-19 pandemic on the Payments and Money Transfer subsector is expected to be negative due to a decrease in consumption, although eCommerce payments are less affected and some startups in this field have seen an increase in revenue in recent months. The subsector’s client risk is high, with 74% of the companies in this subsector offering solutions to SMEs and 48% to individuals.

On the other hand, this subsector is relatively well funded (20% of the companies have raised more than $10 million by 2020), which may help them secure additional funds from existing investors who wish to protect their investment. In the first six months of 2020, this subsector has actually secured more equity investments compared to the equivalent period last year, mainly thanks to two rounds of $60 million in January and June 2020.

Trading and investing: mixed projections  

The effect of the COVID-19 pandemic on trading and investing companies is highly dependent on their business model. With trading volumes increasing on stock exchanges, some companies operating a transaction-based revenue model have seen an increase in revenues.

Regardless of their business model, some solutions are more in demand during the COVID-19 pandemic. For example, startups that offer data analysis solutions such as TipRanks and Skyline AI can help their clients make sense of the markets in times of turmoil. According to Uri Gruenbaum, CEO of TipRanks, “companies offering data and analytics on capital markets are enjoying a 200% increase in sales due to coronavirus.” 

In the first six months of 2020, equity investment in this subsector has increased by over 200%, amounting to $132 million (compared to $41 million in H1, 2019). This is mainly attributed to the aforementioned Pagaya round.

Lending and financing: high risk in the short term

In the short term, companies in this subsector are at high risk, as their clients’ default rates are expected to increase. In addition, it is harder to grant new loans, since a borrower’s creditworthiness is difficult to predict. Startups that offer loans to SMEs (62% of the companies in this subsector) are the most exposed, as this market took the hardest hit. This has made fundraising somewhat tougher this year.

In the longer term, the demand for loans will increase as businesses try to recover from the economic impact of the COVID-19 pandemic. Lending and financing startups that survive the crisis will be in a better position to win new business given the trust established with clients during this period.

Technology adoption is accelerating

In the long term, Israeli FinTech companies that survive the current crisis will see more business opportunities, as COVID-19 has accelerated many trends toward technology adoption, such as digital payments and anti-fraud solutions. As banks are forced to adapt their legacy systems (older IT systems) and complex processes to the new normal of working remotely and maintaining social distancing, collaboration with FinTech startups is the key to the success of their digital transformation.

Meir Valman, Director of Research at Start-Up Nation Central, contributed to this article.

Click here for our interactive FinTech report.