Jake Zammit
AcrossLimits
Fintech (financial technology) is one of the fastest growing economic sectors in Europe, despite its initial lower level of penetration compared to other regions of the world, with a relatively smaller number of fintech companies in Europe compared to Asia/America. A paper titled European Fintech’s Current State Of Development delves into the intricacies of the sector. This difference between Europe and the other regions is likely due to the strong banking presence and surviving preference for the use of cash for transactions, and certain pieces of legislation. However, in more recent times, European fintech has boomed in growth and continues to shake up the traditional finance scene with its many innovations and shows no sign of slowing down.
Sectoral Growth
The above is in no small part thanks to the European Union (EU) with its adoption of regulations such as the Payment Services Directive 2.0 (PSD2) and the General Data Protection Regulation (GDPR) which have aimed to create a benevolent ecosystem for the growth of fintech businesses while protecting consumers and maintaining data privacy. PSD2 in particular was created with the intention to foster competition, hence lowering the costliness of financial services making it more attractive for consumers, and to create an open banking environment, thus facilitating innovation. It is also of note that in 2025, PSD3 will be coming into effect, which will likely bring about further innovation.
As a result, fintech investment in Europe has increased from €8.8 billion to €10.6 billion in 2020, with the top three countries for this investment being the UK, Germany, and France. In fact, 20% of all venture capital (VC) investments go to the fintech sector1. Furthermore, the rise of fintech in Europe is also highlighted by the more than 190,000 people being employed in the sector, with the UK having the largest such workforce in the world, standing at 76,000.
This level of growth and attractiveness for investment is perhaps not surprising when over 80% of consumers make use of one, if not more, fintech service with consumer demand increasing particularly for digital and mobile financial services. In fact, the fintech market in Europe is expected to grow at a compound annual growth rate (CAGR) of 7.1% between 2021 and 2026. All these highlights not just the current framework of the European fintech sector, but also its continued potential.
Competition with Traditional Financial Services
In the wake of this seismic shift in the financial sector, traditional financial services remain active and contend with the European fintech services, offering stiff competition.
However, fintech businesses retain a number of advantages over their more established cousins. People living in underserved or isolated areas represent a market that is more difficult for traditional services to expand into. Since fintech can be accessed via mobile phones or other such portable devices, such services have an edge. Moreover, this ease of access via portable devices is also attractive to most customers in general since it is very convenient especially in the world of today where everyone is near-constantly on the go.
Another major factor in favour of fintech is its cost; frequently the cost to the client is lower than traditional services, which not only widens its reach amongst the less well-off segments of society but also makes it more attractive to many more clients.
How much the financial sector will continue to be changed and how the traditional services will evolve remains a question, but it is difficult to escape the notion that the traditional financial services will need to further embrace fintech tools whether by developing them themselves or by acquisition to remain competitive in this new market.
Success Stories
According to the Digital Cities Index (2022)2, around 5,000 fintech companies are based in Europe with three of the top five most digital cities being European ones (Copenhagen, Amsterdam, London). This high rate of digitization in Europe also helps explain the fast growth of fintech in Europe. The main fintech industries that have shown the highest growth are digital payments and banking, aided by the COVID-19 pandemic. Insurance, blockchain and investment management are other industries which have found a fertile fintech environment in Europe.
The success of the fintech sector of Europe is perhaps best exemplified by none other than the number of unicorn companies (companies which have been valued at more than €1 billion) which have risen up.
Germany hosts a number of these companies; N26 – a mobile banking company that provides free bank accounts, debit cards amongst other such services – boasts 7 million customers in Europe and has received more than €800 million in investment. Scalable Capital, based in Germany, offers a number of different services under their brand, which include a robo-advisor (an automated, algorithm-driven financial planning and investment service), and a broker platform that allows for direct trading and investment in stocks, ETFs, and even cryptocurrencies.
Bitwala is another financial services company that provides bank accounts, debit cards, and cryptocurrency wallets. The business aims to facilitate management of traditional financial and cryptocurrency assets for its clients. On the other hand, Lemonade is an insurance company which offers both household and liability insurance which aims to provide customers with customizable insurance options and a fast AI-driven claims process.
Revolut and Wise, (previously known as TransferWise), are another two such unicorn companies both based in the UK. Revolut is another online banking service offering a myriad of services like cryptocurrency trading and banking. With an impressive client base of 15 million and a recent expansion to the US and Australia markets the business shows continued potential. The same is true for Wise, a rapidly growing money transfer service offering low-cost international transactions, which has continued to expand its offered services as it grows.
The Swedish based unicorn company of Klarna is partnered with more than 200,000 businesses and has also expanded operations in the US. It offers a variety of payment options when customers shop; such as paying now, paying in thirty days, or over time. Adyen (Netherlands) is another company that offers a plethora of payment options and allows businesses to accept mobile, e-commerce and point-of-sale payments. It works with more than 5,000 businesses and has now opened offices in Asia and Latin America.
Such examples showcase beyond doubt the robustness of the fintech sector in Europe and the opportunities present for those businesses who can offer innovations to meet the demands of a technologically proficient customer base.
Conclusion
Europe provides a healthy environment for both new up-and-coming fintech businesses and existing ones. The sector continues to grow, nurtured by a growing consumer demand and a benevolent regulatory environment. Further confidence in the future of fintech in Europe can be stimulated by keeping in mind that thus far fintech has shown a remarkable ability to create effective, transparent goods and services which frequently end up replacing more traditional options. This innovation and continued job growth in the sector indicate that it will play a key part in the overall economic growth in Europe, furthering optimism in fintech’s future.
