Europe’s Fintech boom is quickly running out of steam

Is Europe’s fintech boom about to explode? New data from investment manager Finch Capital suggests it just might be. A period of record fundraising appears to be over, the data shows, departures are slowing and the sector’s hiring has also slowed.

Finch Capital’s research predicts that European fintechs are now in 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 employees, they now appear to be returning to a more modest pace of growth.

The decline follows a remarkable period for the sector. In 2020, European fintechs raised $6 billion in funding; last year this figure rose to 19 billion dollars. FinTech exits also peaked in 2021.

This year, however, has so far seen a 25% drop in funds raised by European fintechs, Finch Capital’s data shows. Hiring, meanwhile, is down 50% compared to 2021. Departures in some areas of the market are down as much as 70%.

The decline coincides with a sharp correction for technology companies in the public markets, where a global selloff this year has taken valuations back to levels last seen in 2019. Much of the 200-300% growth delivered during 2020 and 2021 has been abandoned.

It now appears that the private sector is following suit – and Finch Capital’s research also reveals a notable decline 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 decline 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’s also clear that many fintechs are not growing at the pace they once promised.”

One factor in the decline in the sector may simply be the hugely attractive employment prospects it has provided over the past two years. With so many fintechs competing for the best talent in a skills shortage market, people who might otherwise have launched their own ventures may have opted to take well-paid roles instead.

More generally, Vlaar also warns that a sense of risk aversion is now slowing the growth of fintech. “There is no doubt that a worsening macroeconomic situation and tightening of the money supply is weighing on the fintech sector,” he claims. “This does not mean that funding has dried up, just that investors are becoming more discerning and price sensitive.”

Finch Capital’s research suggests that some sub-sectors of fintech are doing better than others. Vlaar points to regtech as an area of ​​the market where activity remains strong; brokerage, insurtech and even crypto are slowing down more markedly, he suggests.

However, despite the decline, Finch Capital believes the sector is headed for a soft landing. This is not least because investors are still sitting on record amounts of dry powder earmarked for investment in fintech. Capital still to be distributed amounts to 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 incumbents will still be able to pursue exits at attractive valuations.

Vlaar nevertheless believes that the party for the fintech sector as a whole is now coming to an end. In the long run, however, this could prove positive, with small fintechs in fragmented sectors being forced to explore mergers and acquisitions and other combinations.

“With investors becoming more cautious about where they put their money, and potentially over-invested startups 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 idle capital, will bring maturity to the sector.”

Still, the decline may come as a disappointment to policymakers across Europe, who have been cheering the emergence of a vibrant fintech sector on the world stage. Activity in Europe has rivaled the US for the past two years, but now appears to be struggling to keep pace.