FinTech must prepare for 2021 fallout, Finch Capital report says
By Sunniva Kolostyak
The European FinTech scene must prepare for a 2021 fallout, despite remaining stable at the moment, according to the State of European FinTech report for 2020.
The report, issued by Finch Capital, addressed factors impacting the FinTech industry, including Covid-19 and mergers and acquisitions. It found that while FinTech is a resilient European Tech growth engine, for now, fundraising will become more selective, and could drop in Q4 and 2021.
VC and PE firms funding European FinTechs was reportedly down 10 per cent in H1 2020 but when corrected to include government funding, the sector was up 20 per cent.
The report found that the impact of lockdown measures was mostly in line with our predictions, as challenger banks saw less travel and FX, and commercial real estate saw a drop in the use of offices and shops. However, payments and mortgages both went up, contrary to predictions – for payments, travel rebounded faster than expected and e-commerce skyrocketed 210 per cent as brick and mortar shops closed and people were stuck at home.
Trading firms benefited from the volatility, and InsurTech and Enabling FinTech (such as AI) performed as expected with continued strong demand for digital solutions. Despite this, Finch Capital expects the next 12 months to be dynamic as fundraising becomes more selective and drops in Q4 and 2021, which will be a harsh reality for the many shake out and down round candidates whose runway got extended into 2021.
Radboud Vlaar, Managing Partner at Finch Capital, commented that although the 2020 situation looks good at first glance, European governments have provided a huge amount of support for FinTech start-ups.
“This support offset the decline in institutional funding, but this was a one-off initiative. In the next six to 12 months, start-ups 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.”
Analysis of the top 50 European FinTech hiring and firing revealed that firms have been reducing headcount on sales teams and increased customer support.
European FinTech M&A momentum was hindered by 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. Similar to previous years, there have been no venture-backed exits for European FinTechs greater than €500 million. For scale-ups below €500 million, the report is expecting massive consolidation, like 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.
Other trends that will shape the coming year include a move from cracking the exit path of the challenger banks, to the rise of global privacy and consolidation of fragmented players, as well as a new focus on profitability.
Vlaar added: “A shakeout of the European FinTech is not necessarily bad. 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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