European fintech’s stellar growth may stall in 2022, report finds

18 Oct 2021

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A Finch Capital report found that 5pc of European fintech deals accounted for around 65pc of total funding in the sector.

Even though the Irish fintech sector has seen record investment this year, a new report has suggested that the sector’s stellar growth in Europe may stall in 2022.

Amsterdam-based VC firm Finch Capital’s latest State of European Fintech report has found early signs that, despite record levels of capital being raised this year, European capital markets remain elusive for fintech start-ups.

Future Human

The report found that 5pc of fintech deals this year accounted for around 65pc of the total funding in the sector, signifying a concentration of large funding rounds. Driving this trend are a few large unicorns such as Klarna and Rapyd.

Fintech now attracts more than 25pc of all VC funding, according to the report, but the broader fintech ecosystem is not benefitting enough from the available capital.

Finch Capital managing partner Radboud Vlaar said that that apart from the disproportionate funding trends, there has also been a shift towards the B2B space and an aggressive hunt for fintech talent.

“We expect the market environment for fintech in 2022 to be a bit circumspect, with early signs of structural events that could stall the amazing ride of the last eight to 10 years.”

He also said that the trend of exits predominantly in the €50m to €500m range with limited large ticket listings is “especially concerning for the highly valued loss-making unicorns”.

The report found that B2B funding dominates the market, accounting for 65pc of the total capital. Meanwhile, B2C fintechs have dropped from accounting for half the capital to a little more than a third in the past two years.

War for talent

The report also noted that there has been an aggressive hunt for fintech talent in most areas, corresponding with a shift in workplace dynamics prompted by the pandemic.

However, longer times to find appropriate talent and rising salary costs have meant that growth has fallen behind and financial plans have been put at risk. This has been accompanied by rising interest rates and increased regulatory pressure that are slowing expansion.

“Rising interest rates put pressure on the valuation of loss-making high-growth companies, war for talent puts pressure on economics and ability to grow,” Vlaar said.

The report predicted that Europe will see doubled growth in the number of financial services M&As under €500m by the end of this year when compared to five years ago – higher than in the US and Asia. However, 60pc fewer IPOs are expected this year than in 2015.

“To allow the unicorns to deliver against their growth expectations, we expect significant M&A activity in 2022 of €50 to €500m companies using their cash war chest and valuable stock,” Vlaar added.

Finch’s data in the report has been compiled from industry sources such as Dealroom, CB Insights, McKinsey, Morningstar and equity research, as well as by interviewing experts in the space.

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Vish Gain is a journalist with Silicon Republic