Latest Report By Finch Capital Highlights Potential Fintech Fallout in 2021

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Finch Capital, a thematic investor in software transforming the financial sector, released its annual report earlier this week on the State of European Fintech, finding that though the industry looks stable at the moment, Fintech’s should prepare for a fallout in 2021 due to the effects of the COVID-19 pandemic.

This report covers a range of topics impacting the Fintech industry including where we are today, the M&A conundrum, and trends the Finch Capital team anticipates will shape Fintech in 2021. This follows an analytical report published in April of this year titled ‘Fintech: The Future Post Covid-19’.

Radboud Vlaar, managing partner at Finch Capital, said “Although the 2020 situation looks good at first glance, European Governments have provided a huge amount of support for FinTech start-ups. This support offset the decline in institutional funding, but this was a one-off initiative. In the next six to 12 months, start-ups and scale-ups will face a harsher market test for raising additional funding due as the government funding slows and VCs funds get maxed out, consequently focusing remaining fund capacity on their winners”.

Some key findings of the report include:

For now, Fintech is a resilient European Tech growth engine. European FinTech funding by VCs and PE firms in H1 2020 is reported to be down by around 10%, but when corrected for Government funding it is up 20%. This is because the funding databases only record publicly announced equity rounds, while most government funding went in as a convertible debt note and so was not disclosed. The impact of the lockdown on the FinTech sectors was in line with predictions, except for Payments and Mortgages that both went up. For payments, travel rebounded faster than expected and e-commerce skyrocketed 210% as brick and mortar shops closed and people were stuck at home. Trading firms benefited from the volatility, and InsurTech and Enabling Fintech (such as AI) performed as expected with continued strong demand for digital solutions. Analysis of the top 50 European Fintech hiring and firing showed start-ups took this chance to re-evaluate cost inefficiencies. Coupled with government support programs, they reduced headcount on sales teams given limited in-person sales meetings and increased customer support and lived to fight another day. We expect the next 12 months to be dynamic as fundraising becomes more selective and drops in Q4 and 2021 which will be a harsh reality for the many shake out and down round candidates whose runway got extended into 2021. European FinTech M&A Momentum has been hindered by a lack of big bold buyers and fragmentation. Despite the M&A boom in the US, Europe lacks big-ticket M&A buyers for Fintechs and challenger banks in particular. There has been no venture-backed exits for Fintechs greater than EUR 0.5B in Europe in the last year. For scale-ups below EUR 0.5B, expect to see massive consolidation by FinTechs (e.g. Like the recent acquisition of Vouch by Goodlord) and corporates with a strong focus on profitability to meet the needs of Private Equity firms as potential buyers.

“A shakeout of the European Fintech is not necessarily bad,” Vlaar continued. “In the last five years Europe has seen 100,000s of new companies raise massive amounts of capital, build and start selling new products to meet a market need. Sometimes hundreds of companies are trying to solve a similar problem in different countries. This creates an opportunity for investors to consolidate and back winners at attractive prices and make profitable companies, these companies than can become acquisition targets for Private Equity firms and large industry incumbents”

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