Despite a decline in M&A activity that pulled overall fintech investment in Europe down significantly in H1’20, VC investment continued to be very strong. Q2’20 saw the second-highest quarter of VC investment in fintech after Q1’20.
Several jurisdictions within the Middle East have continued to work to become fintech hubs and fintech investment in the region was focused primarily on early-stage deals in H1’20, although Israel-based wealth manager Pagaya raised US$102 million Series D around in late June.
During H1’20, challenger banks attracted five of the 10 largest deals in Europe, including N26 (Germany), Revolut (UK), Klarna (Sweden), Starling Bank (UK) and Qonto (France). The deals reflect the growing focus on challenger banks as they work to scale and become competitive, not only in Europe, but globally. In H1’20, Revolut and N26 both joined Klarna in the US market.
COVID-19 is a major challenge for fintechs across Europe, particularly early-stage companies with less liquidity. New entrepreneurs and startups are also facing challenges given the typical avenues for making connections are limited. The pandemic, however, is also creating opportunities due to its impact on digital customer behaviors, including a major shift away from cash and an uptick in the demand for digital tools, products and services. Well-capitalized fintechs and those able to respond quickly to the shifting needs of customers could see strong growth.
While the innovation expected from open banking is taking longer to materialize than expected, Europe continued to move forward with its fintech agenda. During H1’20, the European Commission held a consultation on a new digital finance strategy and fintech action plan for Europe to guide its activities over the next 5 years1.
COVID-19 has accelerated the acceptance of digital business models in a region that has a very strong tradition of in person, relationship-based service provision. This is driving traditional banks in the region to increasingly consider partnerships and alliances with fintech companies able to help them with their accelerated digital journey.
The next 6 months could be rocky for fintech investment in Europe depending on the length of time it takes to recover from COVID-19. The challenger banking space will continue to be hot as digital banks continue to grow and enter new markets. Tokenized assets will one key area to watch over the next few quarters.
The fintech market in the Middle East is expected to expand and diversify for the foreseeable future, key jurisdictions all investing in fintech ecosystems. As fintech hubs slowly mature, the region will likely see increasing investment as early-stage fintechs grow.