Fintechs are in for a period of consolidation and collaboration as macro economic conditions grow more challenging, according to the latest State of European Fintech report from Finch Capital.
However, the study also said that an abundance of undeployed growth capital is cause for optimism for for funders and talent to make a soft landing.
The European fintech sector has seen significant growth in recent years with funding volume increasing from around $6 billion in 2020, to around $19 billion in 2021.
The total number of fintech exits globally also peaked in 2021 at 966. Over the same period, investment globally topped $210 billion, with crypto and blockchain businesses performing especially well.
This year it is a different story with the report noting that as economic conditions have become more uncertain over 2022, fintech investment has slowed.
The report shows that new business formation in the sector peaked in 2018 and, over the last year, has declined by 80%.
Since Q2 2022, public tech markets have come down back to 2019 levels after a strong rally since 2020.
The private markets are also undergoing a similar but slower transition to 2019 valuation levels, wiping out the 200-300% growth in valuations during 2020-2021.
This decline has coincided with a 70% drop in initial public offerings and a dearth of M&A exits.
Caution in the fintech market is also highlighted by a decline in recruitment, with new hire growth down 50%.
Europe accounts for only 10% of total reported fintech layoffs globally, despite receiving 25% of global funding.
Despite it is not all good and gloom. The sector is still hiring, with around 10% of fintech firms currently advertising vacancies.
Demonstrating a shift towards a less-well funded and more competitive landscape, existing vacancies are becoming more focused on revenue generation such as sales roles, and less on technical skills such as engineering.
“After many years of impressive growth, perhaps overheated, there is no doubt that a worsening macroeconomic situation and tightening money supply are weighing on the FinTech sector,” said Radboud Vlaar, managing partner at Finch Capital.
he added, “This doesn’t mean that funding has dried up, simply that investors are becoming more discerning and price sensitive. In fact, our research indicates that dry powder is at an all-time high, with $28bn of undeployed capital among Fintech investors.
“With investors becoming more cautious about where they put their money, and potentially overinvested start-ups struggling to exit, we are likely to see a period of consolidation in the FinTech space as many verticals are highly fragmented, creating a smaller but more sustainable ecosystem.
Vlarr also noted that “Consolidation and more competitive investment flows, combined with still significant levels of undeployed capital, will bring maturity to the fintech sector.
And, despite difficult near term prospects in the economy at large, a new normal level of activity will resume in FinTech over the next 12 to 18 months, with a focus on long term sustainability,”
