While the FinTech sector has proven to be quite resilient, Finch Capital believes the real effects will be felt in Q4 2020 and in 2021.
The venture capital investor has released its annual State of European FinTech report for 2020, where it has covered the impact of the coronavirus, the state of mergers and acquisitions and how the market will look in 2021.
Overall, the investor found the European FinTech space has been quite resilient. While funding levels during H1 2020 are reported to be down by 10%, if government funding is accounted for, then there was actually a 20% increase.
While the FinTech sector looks to have maintained growth during the pandemic, Finch Capital believes pressures will become more apparent in 2021. In its report it says that the next 12 months will see fundraising becoming more selective and will even decline during Q4 2020 and 2021.
It also suggests many companies will close or suffer a down round. There have been a handful of FinTech companies to suffer a down round during the pandemic, most notably being Monzo. The UK challenger bank has been hit quite hard by the pandemic, with it’s valuation dropping by 40% from $2bn to $1.24bn. It has also had to drop a high number of staff and even stall its US presence.
Fellow UK challenger bank Tandem has also been a company to reportedly suffer a down round during the pandemic.
Finch Capital managing partner Radboud Vlaar said, “Although the 2020 situation looks good at first glance, European Governments have provided a huge amount of support for FinTech startups. 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 investment firm went on to explain the impact of the virus on the FinTech sectors were as it predicted. This is apart from the payments and mortgages spaces, which both went up, contrary to its prediction.
Travel rebounded quicker than anticipated and e-commerce skyrocketed by 210% as consumers moved online.
Its predictions that it claims have been correct are that challenger banks have seen less business with travel and FX, commercial real estate saw a drop in office use, while trading firms benefited for increased volatility. Finally, InsurTech and FinTech software companies witnessed strong demand.
With challenges being faced across many sectors, this was reflected in staff numbers. The report claims that the top 50 European FinTechs re-evaluated cost inefficiencies to reduce their sales teams due to limited in-person sales meetings. However, they did increase their customer support.
Finch Capital also claimed that mergers and acquisitions were still lacking in Europe, compared with the US.
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”
Moving into the next year, Finch Capital is expecting challenger banks to begin exit paths, global privacy to grow, there will be a consolidation of fragmented players and there will be a lot of opportunities in the FinTech sector.
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