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European Fintechs Must Be Nimble to Outmaneuver Pandemic Fallout: Reports Featured

The European fintech industry is under enormous pressure from the fallout of the COVID-19 pandemic, and two recently published industry reports detail the many challenges they are now facing as well as some ways they can reposition themselves to weather the storm.

COVID connection 4884862 640smallOne such report from Finch Capital, the annual “State of European fintech report for 2020,” covers the impact of coronavirus and the financial service provider’s predictions for the industry going forward. The report emphasizes the continent’s fintech sector is a “resilient” growth engine, but still likely facing a difficult six to 12 months as new investor funding is expected to be needed when current backers “run out of steam.”

The report also notes the industry has been buoyed by “massive government support” and some areas performed well despite, or perhaps because of, the changing economy. “Overall impact was in line with expectations, except for payments and mortgages,” it reads. “For payments, on average the lock down had a positive effect, as e-commerce boost made up for travel falls.”

A separate report from McKinsey released just ahead of Fintech Capital’s report, though, paints a more ominous picture. “Most McKinsey COVID-19 scenarios show European economies contracting by 11% in 2020 and not returning to pre-crisis levels until 2023,” the report reads. “Fintechs are already feeling the squeeze. Venture capital funding has slowed, business model vulnerabilities are being exposed, and competitive dynamics are shifting.”

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According to the McKinsey report, the pandemic has greatly threatened the sector’s profitability and long-term model sustainability to the point it projects “the path to profitable scale for many fintechs has been structurally altered.”

Fintech funding dipped substantially as a result of the pandemic. After years of growth averaging more than 25% per year from 2014 on, investment dropped 30% in Europe for the first half of 2020; globally venture capital funding was down 11% in comparison. Post lockdown, those numbers jumped to 44% and 18% respectively.

“This is not at all to write off the sector. Fintechs have several long-term advantages—they are native to the digital arena, with more efficient cost structures, organizational agility, and, most importantly, higher customer loyalty,” according to the McKinsey report. “Consumers are now accustomed to quick, easy, low-cost financial transactions, and we believe there is no going back.”

While some fintechs are in the “enviable” position of recent funding injections or profitability, reports McKinsey, others will likely face three emerging funding effects:

  • “At-scale fintechs and some sub-sectors gaining disproportionately”
  • “General downward pressure on valuations (it’s a buyers market)”
  • “Increased relevance of incumbent/corporate investors”

As for Fintech Capital, it suggests keeping an eye out for how the industry fares as government funding evaporates in H1 2021. Government help provided short-term stability, but likely delayed the true effects of the crisis into next year, reads its analysis.

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