After a decade of growth, the European fintech ecosystem is entering a period of cooling and consolidation reflected by a dropping number of new fintech companies being founded, decreasing funding activity and a decline in exit deals, a new report by Dutch venture capital (VC) firm Finch Capital shows.
New business formation in the fintech sector peaked in 2018 with more than 700 new fintech companies founded in H1. Since then, however, the number of new fintech companies started declining and plunged in 2020, dropping 80% from more than 400 new fintech companies founded in H2 2020 to less than 100 in H1 2022.
Number of fintechs founded per year, Source: State of European Fintech 2022, Finch Capital
Over 100,000 startups have been founded in Europe over the last decade, according to the State of European Fintech 2022 report. The UK has been the most prolific country in the region, with 23,000 fintech companies, followed by France with 14,000, and Germany with 12,000.
Over a 100,000 startups founded in Europe over the last decade, Source: State of European Fintech 2022, Finch Capital
Consolidation ahead
2021 was a record-breaking year for fintech funding, with 603 deals in Europe and a total of EUR 25 billion secured by fintech companies in the region. In 2022, that sum stood at a little over EUR 10 billion, as of October, showcasing the contraction.
Fintech funding in Europe, Source: State of European Fintech 2022, Finch Capital
Forecasts for the years onwards are rather gloomy. Finch Capital predicts a 60% decline in fintech deals between 2021 and 2024, plunging from more than 1,100 rounds to less than 400. The decrease will be partly due to less mega-rounds and the end of the payments, lending and crypto funding boom.
The number of fintech deals in Europe, Source: State of European Fintech 2022, Finch Capital
Total deal volume is expected to halve in the next 12 to 18 months, driven by declining valuations and smaller round sizes. And in the lending, payment and crypto segments, the momentum appears to be wearing off with stagnating funding activity, the report notes.
Capital invested in European fintech companies, Source: State of European Fintech 2022, Finch Capital
The past year has also seen a decline in initial public offerings (IPOs) and large venture mergers and acquisitions (M&A) deals. Public exits have dropped by 74%, the report says, and M&A deals have also been on a downturn, except for deals below EUR 200 million.
These trends are hinting at a forthcoming period of consolidation in the fintech space, it says, especially considering that many verticals like payments, know-your-customer (KYC) solutions, and expense management software, still remain highly fragmented.
Global fintech exits by value, Source: State of European Fintech 2022, Finch Capital
Global fintech downturn
This downward trend for European fintech venture funding this year is in line with global funding trends. In 2021, fintech companies secured a total of US$129.4 billion globally, according to Dealroom data. This year, total funding reached just US$75.3 billion in late October 2022.
Global fintech funding, Source: Dealroom, Oct 2022
Unicorns are also becoming rarer this year, with just eight fintech companies reaching a billion dollar valuation in Q3 2022, against 53 the same period last year.
So far, over 60 fintech companies reached the status this year, according to CB Insights data. In Europe, these include Qonto, a business digital banking startup from France, Backbase, a banking technology financial technology company from the Netherlands, GoCardless, an online direct debit specialist from the UK, and PayFit, an integrated payroll and HR management platform from the UK.
