Voice of the Industry

2020 Darwinian shakeout in European fintech

Tuesday 7 July 2020 07:30 CET | Editor: Oana Ifrim | Voice of the industry

Joel Van Arsdale from Flagship Advisory Partners provides insights regarding the rapid growth in licensed payment and e-money institutions in recent years and his expectation for a shakeout among fintechs in 2020 due to challenging market circumstances
In the last decade, the number of fintech startups exploded around the world. Europe, fueled by its market opening regulations, experienced meteoric growth in the number of licensed payment institutions (‘PIs’) and e-money institutions.  We expect the brutal market conditions of 2020 to drive a Darwinian shakeout among this community as revenue expectations disappoint and growth capital tightens.

Flagship Advisory Partners recently examined the entire population of registered PIs and e-money institutions in the UK, which is one of Europe’s largest and friendliest market for fintech startups. We segmented and categorised the nearly 3,700 companies and within this article we analyse areas of the market where we expect the greatest shakeout.

FIGURE 1: Status Distribution of Listed UK Payment and e-Money Institutions (% of total registrations)

Source: UK Financial Conduct Authority

As of April 2020, there were 2,901 listed Payment Institutions in the UK, 67% of which were no longer authorised to provide the services permitted under the PI license. This already suggests relatively high rates of failure given that the Payment Institution license only became available in 2009 (noting that PSD2 required all UK PIs to re-register to be considered authorised). Among the 964 PIs that are still authorised, 551 are classified as ‘Small Payments Institutions’ by the UK Financial Conduct Authority (FCA) (small defined as less than EUR 3 million of monthly payments volume). Given that Small PIs are effectively micro-businesses, we did not conduct further analysis on this population, though we fully expect a high rate of extinction in this population.

There were also 766 listed e-money institutions in the UK, 20% of which were no longer authorised. 53% of these registered institutions are certified as Electronic Money Services Directive (EMD) Agents, which are not themselves licensed as e-money institutions. We excluded these EMD Agents and the 3% of e-money institutions that are designated as ‘small’ from our further analysis.

As of April, there were 413 ‘Authorized Payment Institutions’ and 181 ‘Authorized e-money Institutions’. Flagship examined and categorized each of these 594 UK authorised payment and e-money institutions.  This distribution by business type is shown in Figure 2 and Figure 3 below.  

Figure 2: UK Payments & e-Money Institutions by Business Type (total number of registrations, 594 in total*)


* Excluding institutions no longer authorized and excluding ‘small’ institutions
Source: UK Financial Conduct Authority

Figure 3: UK Payments & e-Money Institutions by Fragmentation & Shakeout Potential (bubble size = no of registrations)
Source: UK Financial Conduct Authority, Flagship Advisory Partners analysis

Money remittance, FX, and x-border payments 

Population fragmentation: High   

Shakeout potential: High

Almost half of the 594 authorized payment and e-money institutions focus on money remittance, cross-border payments, and foreign exchange services. Most of these providers are exceptionally small, often with less than EUR 1 million of revenue. The barriers to entry into these business segments are low, while gross margins are high, which has created a large population. We expect significant pressure on these small businesses in 2020 due to less cash usage and high rates of unemployment in the services sector, among others, which will drive a wave of exits. Traditional providers in this segment have already largely consolidated, including the recently proposed acquisition of MoneyGram by Western Union. Meanwhile, a small number of fintechs have achieved real scale and a path to meaningful profitability (eg TransferWise and WorldRemit). Finally, global digital payments champions are increasingly attacking this market (eg, Alipay’s acquisition of WorldFirst and PayPal’s acquisition of Xoom).

Merchant payment services

Population fragmentation: Med-High

Shakeout potential: Medium

There are 91 licensed merchant service providers ecommerce PSPs, acquirers, and other merchant providers (collectively referred to herein as ‘PSPs’). The PSP marketplace is increasingly mature, with competitive separation of the global providers (eg, Adyen, Worldpay, Stripe) from the smaller, domestic PSPs who are often now struggling to find growth. This market, considered highly attractive for investors, has seen significant M&A-driven consolidation in the last ten years. While we expect this M&A wave to continue, we also expect an escalating failure rate among PSPs who are too small to be attractive acquisition candidates.

Neo & virtual banking, Open Banking APIs, and banking aggregators

Population fragmentation: Med-High

Shakeout potential: Med-High

There are 81 licensed institutions that focus on digital, virtual, and Open Banking, and the provision of technology and services underpinning these banking services. Most of these institutions are young and lack meaningful revenue scale; almost none are profitable. While there are good reasons to believe in the long-term value-creation potential of open/virtual banking, we do not expect Open Banking to drive a competitive revolution in which many startups succeed. Rather, we expect a small group of service and platform providers (such as U.K.’s token.io) to capture scaling momentum and move beyond basic open banking API access services to more lucrative value-added services such as authentication an verification services.   For the neobanks serving consumers and small business directly, 2020 will surely be challenging as we are still waiting on that elusive data monetization revenue model and SME startups  and customer bank switching will diminish. The insolvency of Wirecard will also have an immediate and potentially deadly impact as some neobanks see their card programs fail (as many are issued by a now frozen Wirecard).  Companies such as the UK’s Revolut that thrive in this segment will have proven revenue models and a sharp focus on specifically underserved customer segments. 

Card Issuing and consumer finance

Population fragmentation: Medium

Shakeout potential: Medium

There are 44 UK authorised institutions that focus on card issuing or consumer finance. Clearly, the business of unsecured consumer lending is facing a reckoning in 2020 as unemployment reaches near historic highs. As with the economic crisis in 2008, this crisis will surely lead to more exits, with the smallest and newest being particularly vulnerable as their balance sheet comes under pressure. Many of these card issuers, however, focus on card products other than credit cards, including prepaid, fleet cards, commercial (charge) cards, and gift cards. These other classes of card issuers will face less macro-economic pressure, although those issuers specifically focused on travel will come under pressure as will those who are not digitally advanced (plastic to mobile accelerating rapidly). 

Wallets and payment schemes

Population fragmentation: Low Shakeout potential: Medium-Low

This group (26 institutions in total) contains both huge, lasting global companies such as Visa and Google, as well as startups. We see no threat to the well-established global companies who are generally winners in digital commerce and will sustain (or even thrive) through the challenges of 2020.  For the startups, however, we do expect a shakeout as they will generally fail to establish revenue traction in an increasingly crowded market.

Software (ISVs/SaaS), commerce platforms, and business services 

Population fragmentation: Low

Shakeout potential: Low

There are 26 licensed payment and e-money institutions whose core focus is not payments or financial services, but rather software and business services (eg, accounting/ERP software, payroll services, cash management, digital commerce platforms, etc.). These providers are increasingly expanding into payments as a revenue source and as a value-added service for their B2B customers.  This trend will continue and even accelerate (no shakeout), regardless of the external market pressures of 2020.

The European objective to stimulate entrepreneurship via payments market openness has been a smashing success with thousands of licensed payments companies entering the market.  However, we expect market conditions in 2020 to stop the music (at least temporarily) and to drive a shakeout.  Dozens and even hundreds of small companies with limited liquidity and less patient capital backers will fail in the coming months.  We expect significant shakeout in the money remittance and FX segments of the market where demand will be hard hit by the pandemic and where institution fragmentation is high, but failures will also occur across segments.  Longer term, the fittest of EU fintechs will thrive in a somewhat less crowded market. 

About Joel Van Arsdale

Joel is the Managing Partner of Flagship Advisory Partners, and has worked as a payments specialist for more than 20 years. He is a leading advisor and recognized thought leader on value creation in digital payments. Joel is also a trusted M&A advisor to private and strategic investors having advised clients on dozens of M&A transactions globally.


About Flagship Advisory Partners

Flagship Advisory Partners is a boutique strategy and M&A advisory firm specialized in payments fintech. We provide strategy, delivery, and M&A support to financial institutions, payment service providers, fintechs, technology providers, merchants, and investors. Our key differentiators are deep expertise, a uniquely rich perspective on value creation and marketplace success factors, and personal commitment to our clients success.


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Keywords: Joel Van Arsdale, Flagship Advisory Partners, fintech, payments , Payment Institutions, e-money, finance, commerce, money remittance, Open Banking, banking, FX
Categories: Banking & Fintech
Countries: United Kingdom
This article is part of category

Banking & Fintech