Is Europe’s fintech boom on the verge of fizzling out? New data from investment manager Finch Capital suggests it just might be. A period of record fundraising appears to have come to an end, the data shows, exits are declining and the sector’s hiring has also slowed.
Finch Capital’s research predicts that European fintechs are now in for a period of cooling and consolidation, with the economic headwinds facing the continent beginning to take their toll. While fintechs will continue to raise money, complete exits and recruit staff, they now appear to be returning to a more modest pace of growth.
The slowdown follows a remarkable period for the sector. In 2020, European fintechs picked up $6 billion of funding; last year, that figure rose to $19 billion. FinTech exits also peaked in 2021.
This year, by contrast, has so far seen a 25% decline in funds raised by European fintechs, Finch Capital’s data reveals. Hiring, meanwhile, is down 50% on 2021. Exits in some areas of the market are down by as much as 70%.
The slowdown coincides with a sharp correction for technology companies in the public markets, where a global sell-off this year has taken valuations back down to levels last seen in 2019. Much of the 200-300% growth delivered during 2020 and 2021 has been given up.
The private sector now appears to be following suit – and Finch Capital’s research also reveals a remarkable slowdown in the number of new fintech launches. In fact, new company formations peaked in 2018, but start-up numbers have fallen 80% over the past year.
“We were surprised by the slowdown in start-up numbers, which took place despite a remarkable amount of stimulus made available by governments across Europe,” says Radboud Vlaar, managing partner at Finch Capital. “It is also clear that many fintechs are not growing at the pace they once promised.”
One factor in the slowdown in the sector may simply be the hugely attractive employment prospects it has offered over the past two years. With so many fintechs competing for the best talent in a market where skills shortages are rife, people who might otherwise have launched their own ventures may have chosen to take well-paid roles instead.
Finch Capital’s Radboud Vlaar believes a period of consolidation could be healthy
More broadly, Vlaar also warns that a sense of risk aversion is now slowing the growth of fintechs. “There is no doubt that a worsening macroeconomic situation and tightening money supply are weighing on the fintech sector,” he argues. “This doesn’t mean that funding has dried up, simply that investors are becoming more discerning and price sensitive.”
Finch Capital’s research suggests that some sub-sectors of fintech are faring better than others. Vlaar points to regtech as one area of the market where activity is holding up well; broking, insurtech and even crypto are slowing more markedly, he suggests.
Despite the slowdown, however, Finch Capital believes the sector is heading for a soft landing. Not least, this is because investors are still sitting on record amounts of dry powder earmarked for investment in fintechs. Capital still to be deployed totals as much as $28 billion according to the research.
As a result, the best fintechs are likely to have little trouble raising money – and the most successful established businesses will still be able to pursue exits at attractive valuations.
Nevertheless, Vlaar believes that the party for the fintech sector as a whole is now drawing to a close. In the long run, however, this could prove positive, with small fintechs in fragmented sectors forced to explore M&A and other combinations.
“With investors becoming more cautious about where they put their money, and potentially over-invested start-ups struggling to exit, we are likely to see a period of consolidation as many verticals are highly fragmented, creating a smaller but more sustainable ecosystem,” Vlaar argues. “This shake up, while painful, is also necessary. Consolidation and more competitive investment flows, combined with still significant levels of undeployed capital, will bring maturity to the sector.”
Nevertheless, the slowdown may come as a disappointment to policymakers across Europe, who have been delighted by the emergence of a buoyant fintech sector on the world stage. Activity in Europe has rivalled the US over the past two years, but now looks set to struggle to keep pace.