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Trends · 3 September '18

Fintech….UK and beyond!

How does the UK FinTech market compare to other European economies such as Germany and France – and also major economies such as the USA/ China? What can we learn from them – what do we do better?

The venture and M&A activity in fintech dipped to a 5-quarter low in Q1’18, with VC-backed fintech companies in Europe saw the most considerable pullback in early-stage investment compared to the US which saw a 38% boom in capital and deals invested.

In Europe, we are witnessing the beginning of a consolidation of various verticals within fintech, marked by the $12.8 billion acquisition of WorldPay by Vantiv and the $2.2 billion purchase of iZettle by PayPal.

The European market has been more conservative compared to the US or Chinese ones, thus allocating most of the capital to few top deals is quite natural for a maturing ecosystem. It can be justified by major banks reducing their exposure to early stage technology throughout 2017 and early 2018, with top deals attracting substantial backing for the VC and PE investors.

The UK, while still in the midst of uncertainty retains its central role compared to other European markets, notably France and Germany. The top UK fintech deals include a $250 million raise by Revolut, a $100 million raise by eToro, a $60 million raise by Flender and a $54 million raise by MoneyFarm.

In Germany, notable rounds have been raised by N26 ($160 million) and SolarisBank ($70 million). In France, the investment activity is on a downward trajectory, perhaps signalling that post-2019 it will not represent a significant competitor for the UK ecosystem.

Major Trends

A few trends could define the outlook of our relatively conservative European market.

As CVC participation increased, we could potentially see more deals in both the UK and continental Europe. The CVCs participation is at an all-time high with 323 deals and €4bn invested (Source: Pitchbook European VC Report Q2 2018), with over 30% in software and IT hardware solutions.

Regtech innovators are predicted to attract substantial funding, potentially sparking activity across the continent, with over $311m already deployed in Q1 2018 (Source: CB Insight Fintech Report Q1 2018). Major financial institutions have already backed disruptors with solutions in AML, tax compliance and risk management, including Canopy, Ever Compliant and Digital Reasoning.

In Europe, the introduction of these four significant regulatory measures will deepen the impact across financial institutions, trading organisations and other market actors.

  • 3 January 2018: Markets in Financial Instruments Directive II (MiFID II)
  • 3 January 2018: The Markets in Financial Instruments Regulation (MIFIR)
  • 12 January 2018: Revised Payment Services Directive (PSD2)
  • 25 May 2018: General Data Protection Regulation (GDPR)

Similarly, InsurTech is also catching pace with $645m in Q1 2018 (Source: CB Insight Fintech Report Q1 2018) as the ancient sector is disrupted by new products and solutions, from risk management to on-demand technologies. These are of course early days as the industry adapts to new consumer demands across traditional areas, from auto to life and health.

Not all financial technologies have performed equally well, with ICOs and alternative finance solutions registering a reduction in the number of deals and capital invested, in the first part of 2018.
As we are heading for a period of economic tightening, the incentives to lend are not strong enough, and default rates on a cusp of an upward move. The shift in national base rates and the creeping inflation, that end of the fintech world could face harsher times ahead.