Global Economic Challenges Slam European Fintech Sector, Consolidation on the Way: Report

Global economic reality is impacting everyone and everything. Sky-high inflation, interest rates rising, the war in Ukraine, and more, are hobbling economic activity. Fintech is not immune to this fact and a report distributed today by Finch Capital states that Fintech is entering a period of “cooling and consolidation” due to these many concerns and challenges.

Finch Capital is a European Thematic Growth Investor investing in Fintechs and other specific industries.

As should come as no surprise, Fintech venture funding is becoming more difficult. VCs are pumping the breaks, meanwhile, early-stage Fintechs are conserving capital, extending runways, or seeking profitability.

The State of European Fintech Report 2022, the 7th iteration, states that the European Fintech ecosystem started to “stagnate” 12 months ago, with the data revealing this truism now.

The report indicates:

  • Hiring by Fintechs has tanked by a whopping 40% (September 21-March 22 vs. March 22-September 22)
  • Fintech exits have collapsed by 70% (2021 vs. 2022)
  • New Fintechs created have vaporized by 85% when comparing 2020 to 2022
  • Meanwhile, dry powder (available capital) has doubled in the past few years.

Finch states that after peeking in Q1 2022, Fintech funding rounds will drop by 50%.

While private markets have already reverted back to 2019 levels, private markets are starting to follow as the bloom is off the rose. Finch claims that 200% -300% of growth in valuations during 2020-2021 has now been wiped out.

Retreat! Fintech Employee Growth Drops

Virtually all sectors of Fintech have seen a deceleration in hiring with one exception – challenger banks, which tend to lean heavily on digital-only services.

As economic uncertainty has grown, clearly, Fintech investment has slowed with the European Fintech sector now showing a peak in 2018. As funding becomes more competitive and an evasive exit market, things are pretty grim. Finch predicts more activity in private secondaries as investors look liquidity.

So are there any silver linings? Light at the end of the tunnel. Not yet, it seems. Finch predicts a soft landing for the “strongest Fintechs,’ not very encouraging for Fintechs just getting their game up.

Perhaps the one glimmer of hope is that undeployed capital stands at $28 billion – an all-time high. At some point, Fintech investors will want to put their money to work. It is a question of when.

Radboud Vlaar, Managing Partner at Finch Capital, commented on the report, noting that after many years of solid growth, if overheated, cratering economic conditions are hammering the Fintech sector.

“This doesn’t mean that funding has dried up, simply that investors are becoming more discerning and price sensitive. In fact, our research indicates that dry powder is at an all-time high, with $28 billion of undeployed capital among Fintech investors,” said Vlaar. “With investors becoming more cautious about where they put their money, and potentially overinvested start-ups struggling to exit, we are likely to see a period of consolidation in the Fintech space as many verticals are highly fragmented, creating a smaller but more sustainable ecosystem.”

Vlaar added that there was always a question about the sustainability of valuations, especially for growth-stage firms. Vlaar described the shake-up as painful but necessary.

“Consolidation and more competitive investment flows, combined with still significant levels of undeployed capital, will bring maturity to the Fintech sector,” predicted Vlaar. “And, despite difficult near-term prospects in the economy at large, a new normal level of activity will resume in Fintech over the next 12 to 18 months, with a focus on long-term sustainability.”

 

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