European fintech investment plummets, but more sustainable future lies ahead

Investment in fintech across Europe fell by 70% in the first six months of this year, with “more pain” expected for the sector as investors take a more disciplined approach. But a more mature and sustainable future lies ahead, finds fintech report.

According to a report from Finch Capital, the European fintech market’s total investment – including major centres such as the UK, France and Germany – was €4.6bn in the first six months of 2023, compared to €15.3bn in the same period last year.

The report revealed that US investors are reducing their activity. There were no US investors in the top five in the UK, Europe’s biggest fintech market, during the first six months of 2023, compared to three investors in the same six-month period in 2021. The UK’s share of total funding actually increased from 45% to 50% during the comparison period.

“Overall, the UK showed more resilience than some others and accounted for over 50% of the funding in Europe,” said the report.

The fintech boom over the past few years has been largely driven by consumer facing fintechs, but the Finch report said an increased focus on business-to-business (B2B) fintechs is a trend that is set to remain, adding; “As payment and open banking consolidate, regulation technology is driving increased enthusiasm in the B2B fintech sector.”

It said that the complexities faced by companies meeting know-your-customer (KYC) and anti-money-laundering legislation, combined with increased government oversight, has “renewed interest from investors”.

It added that retail banking and insurance are prime candidates for adopting generative AI, which will also increase B2B fintech investment.

The view that B2B fintech investment is increasing is supported by recent research by East & Partners for financial services software firm Finastra, which found that three-quarters of banks plan to work with an average of three fintechs in the next 18 months.

It found that, globally, over half (56%) want to plug into fintech platforms, with just 6% preferring to build in-house. In Europe, 73% want to connect to fintech platforms, and just 5% want to build them themselves.

Radboud Vlaar, managing partner at Finch Capital, said: “Since mid-2022 we have seen an increase in investment discipline in public and private markets, resulting in less funding, lay-offs, less IPOs, flight to quality and focus on capital efficiency. This will continue to be painful for the next 12 months, but will result in a more healthy and sustainable startup, hiring and investor ecosystem.”

Vlaar said a more mature and sustainable fintech sector will emerge from the current challenges. “Last year’s shake up with valuations coming down, fundraising slowing down and the exit window closing up, was painful yet necessary.

“Consolidation and more competitive investment flows, combined with still significant levels of undeployed capital, will bring maturity to the fintech sector. This new normal level of activity demonstrates the refocus of the fintech ecosystem on long-term sustainability versus short-term gains.”