Beyond governmental support, the European FinTech markets can step up their game through M&A, applying aggressively competitive innovations, and hiring the right skills.
In the 19th century, Europe was the center of trade and commerce with markets for precious metals such as gold and steel, etc booming. But within the global fintech ecosystem, Europe seems to be lagging behind. Investment in the European fintech market only hit a record figure of $34.2 billion in 2018 according to Goldman and Sachs report, a figure which was considered as a massive increase in comparison to the previous year. While Europe now looks to catch-up with the Asian and the U.S. fintech markets, the coronavirus pandemic seems to be derailing the wheels of progress and thereby posing an “existential threat” to it.
Successful Scale Up For FinTechs
There are key factors a fintech company has to pay attention to in order to scale up successfully in the market. A company needs to scale successfully across country borders and have their services run seamlessly to make a mark. This can present the fintech company with huge market opportunities. The introduction of fintech services and features that can help customers process transactions in a very short time and at little or no cost (compared to traditional banks) is yet another factor.
The fintech industry services need to be up to date with consumer needs since the system is more consumer dependent than the traditional banking system. Interestingly, the fintech companies are living up to expectations in their services and products supplied to customers but more is expected to weather the coronavirus financial impact.
European Fintech Facing Industry Malaise
Fintech in Europe is facing industry malaise and so are the fintech markets globally. Venture capital investments in the industry have seen a steep decline in the first quarter of the year, accompanied by reduced financial transactions from customers, and a sharp decline in the rate of borrowings from consumers. In the first half of 2019, the number of financial deals struck in the European fintech markets was as high as 541 but this figure has since shrunken to as low as 380 in the corresponding period in 2020. The figure of 154 recorded between July and August 2019 also could not be matched in the corresponding period in 2020, dropping to just 98 deals.
11% Economy Contraction Until 2023?
According to a report issued by Mckinsey, a financial service provider, the European economy could contract to as much as 11% in 2020 and may not be able to recover to its pre-covid situation until 2023. The fintech industry is feeling the brunt of the economic crisis and likely to face contraction since the flow of venture capital has recorded a marked decrease.
FinTech Shows Vulnerability During The Pandemic
“Venture capital funding has slowed, business model vulnerabilities are being exposed, and competitive dynamics are shifting. This has brought the sector’s underlying profitability and long-term business model sustainability into sharp focus- to a point where we believe the path to profitable scale for many fintech has been structurally altered,” said senior consultants at Mckinsey.
Massive Pre-Covid Investment In Europe
In the previous years, the industry experienced massive investment which saw the inflow of venture capital rise by about 25% each year since 2014, in Europe. Following the Covid-19 pandemic the sector recorded a 30% downturn in the first half of 2020 while globally, the sector declined by 11%. After the lockdowns, the global decline in venture capital funding increased to 18%, and 44% Europe wide.
Massive Bailout Funds Required To Save European FinTechs
In order to help the European fintech industry weather the Covid-19 financial storm and increase industry sustainability, the sector requires €5.7 billion investment bailout funds which could help the industry through the second half of 2021, according to the report from Mckinsey.
A delimiting factor besides the difficulty in sourcing the bailout fund is the high cost of running a fintech company. Additionally, while some of the fintech companies do not satisfy conditions for bailout loans due to bailout pre-profit status, the high fixed cost of running and maintaining a fintech company is yet another delimiting factor when considering government-backed wage support.
Vicious Circle Starting With The Customer
The Covid-19 crisis also affected the income and spending of families who now apply caution in spending. To generate their revenue, fintech companies hugely depend on transaction fees and commissions generated from mass customer activities which have now dwindled whereas very few customers have signed up for such services. A relief funding initiative by the European Government to the fintech industry could up the industry by 20%.
How Can The European FinTech Ecosystem Tackle The Financial Issues?
The European fintech ecosystem needs to tackle the financial challenges by creating new market niches and opportunities to scale through the current financial Covid-19 impact and subvert “existential threats.” The report issued four strategic plans that could help the industry up their ante through the pandemic, and post-pandemic crises which includes: reduced and targeted spending, flexibility, and speed in meeting changing and increasing customer needs, changing customer buying and consumption patterns, and increasing growth through mergers and acquisition (M&A).
How Can Mergers And Acquisitions Help The FinTech Ecosystem?
Mergers and acquisitions have become a common activity among the fintech ecosystem in the U.S. which will help to boost the companies spending and help them scale through the financial impact of the pandemic. Europe can also take a queue from this. The latest merger was by Italian digital payment firms which have formed a titan in the fintech market. The two companies Nexi and SIA formed a fintech group valued at $17.8 billion. Kabbage, a fintech company that was battered by the Covid-19 financial crises, was acquired by American Express (AmEx) in August. To expand their credit services, Equifax acquires Ansonia Credit Data. Such massive M&A will be substantially beneficial among the fintech companies in Europe.
The global fintech market is highly competitive. Beyond government support in the wake of the coronavirus pandemic, European fintech companies must learn how to deal with this competition. There is a need for continuous incremental and radical innovations. This would entail, amongst others, finding and keeping the right skills, as well as cooperating with the relevant stakeholders. The European fintech players who are not able to do this may find it hard recovering from the pandemic, even when the overall economy itself has long recovered.
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