As 451 Research launches Europe, Middle East and Africa coverage as part of a new financial technology research channel, we provide a three-part overview of the European and U.K. fintech markets. We begin with an analysis of venture capital, institutional investment and private equity flows into European fintech, exploring the geographies and segments of the market most favored by investors.
The take
Investment into European fintech has slowed in 2022 following a boom year in 2021. The U.K. receives the lion’s share of investment, followed by France and Germany. London is widely regarded to be on a par with New York and San Francisco as a hub for fintech investment and innovation. Changing consumer habits, supportive regulation and a drive on the part of banks to modernize their tech capabilities by buying the services of fintechs have contributed to the rapid maturation of the European market, and have solidified its appeal to investors.
As funding comes down from peak levels, investors are likely to become a lot more selective about what they fund. In particular, venture capitalists have dwindling patience for consumer-facing fintechs with high customer-growth numbers and strong brands but no clear path to profitability. By contrast, business-to-business fintechs, particularly “pure tech” plays that sell directly to large incumbent financial institutions, are increasingly finding favor with investors.
Context
European fintechs attracted €19.26 billion in investment in 2021, up from €6.2 billion in 2020, according to S&P Global Market Intelligence data. Investment in 2022 (through Q3) totaled €11.31 billion.
Investors of all styles and risk appetites are represented in the European fintech market, including venture capitalists, private equity funds, North American pension funds and a handful of sovereign wealth funds. VC arms of large incumbent banks such as Barclays and Santander are also active investors in European fintech, and can be found participating in everything from seed to mature funding rounds. Growth in e-commerce and a rapid uptick in the number of customers using mobile payments during the pandemic have cemented the appeal of the payments segment to investors.
European and U.K. regulation aimed at breaking down the dominance of incumbent banks has also strengthened the investment thesis for fintech. The Second European Payments Directive (PSD2) and its U.K. counterpart, Open Banking, which both came into force in 2018, require incumbent banks to open up account data (with permission) to third parties, such as fintechs, payments providers and even other banks. In practice, this makes it easier for consumers to mix and match financial service providers, for example, by getting instant credit decisions on loans from alternative lenders. It also allows financial service providers to offer consumers more personalized products and makes the customer experience of connecting a bank account with a digital wallet more seamless. This has created opportunities for neo-banks, alternative lenders, payments companies and fintechs providing APIs. Fintechs that facilitate Open Banking functionalities include Tink (acquired by Visa Inc. in 2021), Bud, TrueLayer and Yapily.
European banks have increasingly turned to fintechs to help them modernize poorly aged infrastructure, which in many cases has suffered from underinvestment since the global financial crisis of 2008, and to improve their tech capabilities. This has created demand for the services of so-called banking enablers — fintechs in the fields of data analytics, ID verification, APIs, cybersecurity and payments — and has made these companies an attractive prospect for investors.
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Embedded finance, which is made possible through Open Banking and allows nonfinancial companies to embed financial products into their offerings at the point of need (for example, consumer credit current accounts and cards), emerged as an important investment theme in 2021 and 2022. Fintechs providing banking as a service, the API-based technology that makes embedded finance possible, have been investor favorites in recent years. Israeli fintech Unit raised $100 million in a series C in May 2022, while British fintech Railsr, which rebranded from Railsbank, raised $46 million in a series C in October 2022.
The U.K. leads, Southern Europe plays catch-up
The U.K. has consistently attracted the highest volume of fintech funding in the region, at €9.31 billion in 2021 and €6.48 billion in 2022 through Q3, according to S&P Global data. Germany comes in second with €4.11 billion in 2021 and €820 million in 2022 through Q3. This is followed by France with €1.13 billion in 2021 and €1.16 billion in 2022 through Q3. Other markets that have attracted significant fintech investment include Sweden, Denmark, the Netherlands and Switzerland.
Italy, Europe’s third-largest economy, has been a laggard in attracting fintech funding, but this is starting to change, especially as digital payments and e-commerce gain traction in what has traditionally been a heavily cash-based society. Italian fintechs closed a number of significant funding rounds in 2022. “Buy now, pay later” company Scalapay raised $497 million in a series B in February 2022, led by China’s Tencent Holdings Ltd. and New York-based family office Willoughby Capital, making it Italy’s first fintech unicorn. Mobile payments specialist Satispay raised €320 million in a series D, with Tencent Holdings and the fund management arm of Italian bank Banca Mediolanum participating in the funding round alongside several private equity and VC firms.
Investment activity also picked up in Spain in 2022, with some 25 fintech funding rounds taking place during the year. Most of these were seed or early-stage rounds involving comparatively small amounts of capital (sub-€10 million).
Investors double down on B2B and “niche” fintechs
Investors are increasingly drawn to B2B fintechs that provide tech or infrastructure solutions to other financial institutions, and to fintechs serving more niche audiences — for example, small and medium-size enterprises or customers wanting loans for a specific purpose, such as homebuying. This is a departure from funding trends of recent years, in which companies with broad-based consumer appeal, such as neo-banks and BNPL fintechs, dominated the top-10 lists for the largest capital raises.
For example, German challenger bank N26 raised $900 million in October 2021, while U.K.-headquartered Revolut, which provides banking services such as currency exchange and stock trading (but does not have a banking license) raised $800 million in July 2021. BNPL fintech Klarna raised $1 billion in a mega round in March 2021, which it went on to top off with another $639 million investment from SoftBank Corp. in June 2021.
However, there has been a palpable shift in the type of fintechs achieving blockbuster capital raises in 2022, with household-name neo-banks and fintechs conspicuous by their absence. Many of the challenger banks that have been firm favorites with investors in recent years, such as N26, bunq and Monzo, still have yet to reach profitability, despite being relatively mature. This may partly explain why investors are refocusing on the B2B segment.
The biggest funding round of 2022 by a wide margin was by U.K.-based FNZ, which provides tailored wealth management infrastructure and tech to other financial institutions. It raised $1.4 billion in February from Canada Pension Plan Investment Board and private equity firm Motive Partners, and counts major banks and insurers such as Barclays, Santander, Generali and Aviva among its clients.
Another wealth management fintech featured in the 10 largest capital raises of 2022, Germany-based Trade Republic, which provides savings accounts and allows retail investors to trade exchange-traded funds, cryptocurrency, stocks and derivatives, raised €863.7 million from investors including Ontario Teachers’ Pension Plan Board and New York-based venture firm Thrive Capital Management.
Olinda SAS, a French fintech that trades as Qonto and provides finance and accounting tools for SMEs, was behind another of 2022’s largest funding rounds, raising €486 million. Investors were a mix of VCs, corporate investors and private equity firms, including China’s Tencent Holdings and Tiger Global Management.
Another notable mention goes to British fintech Seven Summits Financial, which trades as StrideUp. The property investment platform, which bills itself as an alternative to mortgage lending and allows customers to buy a share in a property and gradually build up to full ownership, raised €325.6 million in 2022.
The enduring appeal of payments
Payments appears to be an evergreen investment theme for investors targeting European fintech. Consistent with previous years, payments and payments infrastructure companies saw some of the biggest capital raises in 2022, with U.K.-based payments gateway provider Checkout.com bringing in €875.4 million in a series D in January. Participants in the funding round include the Qatar Investment Authority and San Francisco-based VC fund Dragoneer.
Global Processing Services, another British-based payments specialist, raised €383.7 million in January 2022, with investments from Singaporean state investment company Temasek Holdings and private equity fund Advent International. GPS provides a cloud-based platform through which clients (which currently include Revolut, Starling Bank and cards aggregator Curve) can launch and scale card programs.
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