Finch Capital has issued its annual State of European FinTech report for 2020. The report covers a range of topics impacting the fintech industry: where we are today; the impact of COVID-19; the M&A conundrum; and trends the Finch Capital team anticipates will shape fintech in 2021.
A resilient tech growth engine
Overall, the report finds that fintech is a resilient European tech growth engine for now. European fintech funding by venture capital and private equity firms in the first half of 2020 is reported to be down by around 10%, but when corrected for Government funding it is up 20%. This is because the funding databases only record publicly announced equity rounds, while most government funding went in as a convertible debt note and so was not disclosed.
"Although the 2020 situation looks good at first glance, European governments have provided a huge amount of support for fintech startups," said Radboud Vlaar, managing partner at Finch Capital. "This support offset the decline in institutional funding but this was a one-off initiative. In the next six to 12 months, startups and scale-ups will face a harsher market test for raising additional funding due as the government funding slows and VCs funds get maxed out, consequently focusing remaining fund capacity on their winners."
The impact of lockdown on the fintech sectors was in line with expectations, except for Payments and Mortgages, which both went up. For payments, travel rebounded faster than expected and e-commerce skyrocketed 210% as brick and mortar shops closed and people were stuck at home. Challenger banks (less travel and foreign exchange) and commercial real estate (drop in use of offices, shops etc) saw change. Trading firms benefited from the volatility, and insurtech and enabling fintech (such as AI) performed as expected with continued strong demand for digital solutions.
Analysis of hiring and firing at the top 50 European fintechs showed that startups took this chance to reevaluate cost inefficiencies. Coupled with government support programmes, they reduced headcount on sales teams given limited in person sales meetings, while increasing customer support.
The Finch Capital report also found that European fintech M&A momentum is still hindered by a lack of big bold buyers and fragmentation. Despite the M&A boom in the US, Europe lacks big ticket M&A buyers for fintechs, and challenger banks in particular. Finch say they have seen no venture backed exits for fintechs greater than €0.5bn in Europe in the last year. For scale-ups below €0.5bn, the firm expects to see massive consolidation by fintechs (such as the recent acquisition of Vouch by Goodlord) and corporates, with a strong focus on profitability to meet the needs of private equity firms as potential buyers.
The report anticipates the next 12 months to be dynamic as fundraising becomes more selective and drops in Q4 and 2021. This will be a harsh reality for the many shake out and down round candidates whose runway got extended into 2021.
In terms of the trends that will shape 2021, From cracking the exit path of the challenger banks to the rise of global privacy and consolidation of fragmented players, the report suggests there will be a lot of opportunity in the sector with a new focus on profitability.
“A shakeout of the European fintech is not necessarily bad," concluded Vlaar. "In the last five years Europe has seen 100,000s of new companies raise massive amounts of capital, build and start selling new products to meet a market need. Sometimes hundreds of companies are trying to solve a similar problem in different countries. This creates an opportunity for investors to consolidate and back winners at attractive prices and make profitable companies, these companies than can become acquisition targets for private equity firms and large industry incumbents”
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