The Rise and Resilience of European Fintech in 2023
In 2022, European fintech was undeniably in its heyday. With 22% of European unicorns emerging from the financial sector, fintech companies collectively raised a staggering $22.2 billion, solidifying their status as the most well-funded sector of the year. However, as we transitioned into 2023, the landscape began to shift dramatically. The macroeconomic environment, jolted by rising interest rates and soaring inflation, has led economists to predict an imminent recession. This shift has resulted in restructuring and mass layoffs across the tech industry, including fintech. Notably, some of Europe’s fastest-growing fintech startups, such as Klarna, Uncapped, Freetrade, and Zego, announced significant layoffs, prompting investors to adopt a more cautious approach to capital deployment. As fundraising becomes increasingly challenging, the fintech sector faces a pivotal moment.
Opportunities Amidst the Chaos
Despite the turbulence, there are bright opportunities on the horizon for fintech. The anticipated market correction signals a departure from the “growth at all costs” mentality that has dominated the sector. Companies that present compelling propositions and demonstrate sustainable unit economics are poised to thrive in this new environment. Investors are ready to deploy capital into businesses that can weather the storm and adapt to changing market conditions. Finch Capital’s research reveals that European fintech investors currently hold an unprecedented $28 billion in dry powder—undeployed capital that could fuel the next wave of innovation.
Consolidation on the Horizon
The fintech space has become increasingly crowded, with many companies struggling to achieve profitability while competing for the same customer base. As the macroeconomic and fundraising environments tighten, we can expect to see a wave of consolidation in 2023, characterized by increased mergers and acquisitions (M&A) activity. Nina Mohanty, Founder of Bloom Money, predicts that embedded finance and Banking-as-a-Service (BaaS) will be key areas for consolidation, as mature fintechs or banks seek to acquire innovative technologies or entire companies. Gemma Young, Founder of Women of Fintech, emphasizes the growing collaboration between banks and fintechs, suggesting that mutual benefits will drive partnerships in the coming year.
This consolidation will not only streamline the fintech landscape but also pave the way for the next generation of fintech entrepreneurs. As liquidity for shareholders is unlocked and talent from acquired companies seeks new opportunities, a new wave of repeat founders is expected to emerge. Akash Bajwa, Investor at Earlybird, notes that these founders will have valuable insights gained from years of experience, enabling them to build innovative solutions across the financial services spectrum.
A Focus on Financial Well-Being and Personalization
In the current economic climate, there is a growing emphasis on products that promote financial well-being. Layla White, Founder and CEO of TechPassport, believes that consumers will increasingly expect their banks to offer services such as bill management, debt avoidance, and identity theft protection. Beyond general consumer needs, there will be a significant focus on fintechs that cater to specific demographic segments and affinities. These companies aim not to compete with traditional banks but to provide tailored financial management solutions.
In Europe, we have seen the emergence of fintechs that address the unique financial needs of various demographics. For instance, Kestrl focuses on financial management for Muslims, while Your Juno and Alpher aim to close the gender financial education gap. Additionally, Bloom Money serves diaspora communities, highlighting the demand for products that resonate with specific lifestyles and values. As Nina from Bloom Money articulates, demographic groups are often united by shared values and experiences, creating opportunities for fintechs to develop products that align with these communities’ financial needs.
The Rise of B2B Fintechs
As consumer spending tightens, investors are increasingly bullish on B2B fintech startups while exercising caution with B2C investments. In 2022, investment in B2B fintech in Europe reached $18.5 billion, significantly outpacing the $7.5 billion invested in B2C fintech. Akash from Earlybird suggests that B2B fintechs present more attractive business models during economic downturns, particularly in sectors like SaaS fintech, which includes workflow software for small and medium-sized businesses (SMBs) and enterprises. Payment companies are also expected to continue thriving, as businesses seek efficient solutions to manage their financial operations.
A Potential Web3 Rebound
Despite the challenges posed by the crypto winter and the high-profile collapses of companies like FTX and Celsius in 2022, there remains optimism for growth in blockchain technologies in 2023. It is estimated that by 2027, up to 10% of the world’s GDP could be stored in blockchain-enabled transactions. Juliette Souliman, a fintech investor at Portage, believes that technologies bridging Web2 and Web3 for wealth management will present attractive opportunities in the coming year.
The consensus within the fintech ecosystem is that a slow recovery in the Web3 space is on the horizon, albeit with increased scrutiny and regulation. Nina from Bloom Money views this as an opportunity for a reset, suggesting that if efforts to establish trust in blockchain technology are executed properly, it could unlock a renaissance for decentralized finance (DeFi). Juliette from Portage echoes this sentiment, emphasizing the need for a more professional and robust ecosystem in light of recent industry events.
Conclusion
As we navigate through 2023, the European fintech landscape is poised for transformation. While challenges abound, the potential for innovation and growth remains strong. With a focus on consolidation, financial well-being, B2B solutions, and the evolution of Web3, the fintech sector is set to adapt and thrive in the face of adversity.