2024 continued to be a turbulent year for European fintechs. Although funding continued to decline, the sector is much more resilient with some green shoots on the horizon. While funding dropped by 25% as fewer deals came to market, there is also less funding is required post the focus on profitability. The sector also saw some positive news – higher interest rates resulted in record profits for challenger banks and attracted large rounds (Monzo, Revolut) which gave a boost to funding combined with the end of the crypto winter. In general, unicorn chasing has subdued, with the focus now shifting towards backing more sustainable, B2B software businesses as the next evolution.
The challenges that fintech faced in 2023 were necessary for the sector to mature and become more sustainable. While funding may be down, and unicorn chasing has slowed, there is plenty of opportunity for companies that are capital efficient and have a clear path to profit. AI has taken the fintech sector by storm, with several public announcements from insurers or BNPL players on the success they have had in implementing these solutions. I expect more money to go to B2B solutions as the share of funding will increase to over 70% over B2C. With AI transforming the industry and significant dry powder still available, we believe the next 12-18 months will mark a turning point for fintechs in Europe.
There have been a couple of mishaps in BaaS, leading to increased regulatory scrutiny (Railsr, Solaris). I believe a winner is emerging in broader banking infrastructure, and additional opportunities for investment will remain slim. The one area where further niche solutions can become large markets is around payment reconciliation and client money protection. This is critical for Embedded Finance to truly establish itself as a leading driver of the BaaS movement. Of course, getting a licence is not easy, and far and few will be given, so the winner will already have had a licence.
In short, an API-first strategy. I expect a move beyond account-to-account payments which has been a core recipient of the broader Open Banking Era to have account information services more readily available to a diverse set of audiences. While we have talked about it for ages, very few people still use Open Banking to make credit decisions, reference their customers, and provide truly personalised services. In addition, the proliferation of Embedded Finance products in other industries beyond consumer facing fintech apps will be something to watch out for: retail, healthcare, hospitality, and travel. The insurance industry has seen the most benefit, but others can too.
I am most interested in ClearBank (the leading licenced player which is making inroads), Mambu (non-banking licence approach to providing technology), and Griffin (the up-and-coming startup). There is a lot of UK focus in general here, but there are questions around who becomes the leader in Europe as Solaris focuses on Germany.
The competitive landscape is likely to continue evolving, with providers focusing on niche markets, technological advancements, and customer-centric solutions to gain a competitive edge.
Increasing regulatory complexities and cybersecurity threats will make robust compliance and security measures indispensable. BaaS providers that adeptly navigate these challenges while delivering innovative, customer-centric services are likely to dominate the market, drawing substantial interest from investors and clients alike. I expected moderate growth over the next three to five years, driven by supportive regulations like PSD2, rising demand for digital and embedded financial services, and technological advancements in AI.
In Europe's competitive BaaS sector, startups aiming to attract investment must strategically showcase their ability to navigate complex regulatory landscapes – demonstrating compliance with PSD2, GDPR, and AML directives – to mitigate investor concerns over legal risks. They need to highlight technological innovation by leveraging cutting-edge technologies ensuring their platforms are scalable and secure to handle rapid growth and cyber threats. Articulating a clear, differentiated value proposition backed by market validation and existing traction with clients or partnerships is crucial.
Aman is a Partner at Finch Capital and is on the boards of AccountsIQ, Symmetrical, eFlow, Lavanda, Lantum amongst others. Previously he was a product manager at companies like Nordeus and Facebook. Before joining Facebook, Aman was an investor with Accel Partners, where he was actively involved in various technology investments including Spotify, HouseTrip, and Hailo. He was also a board observer at Supercell and Space Ape Games. Aman started his career at Credit Suisse, where he was part of their global technology group and was involved in various technology transactions including Ogone, a leading pan-European PSP, as well as IPOs and capital market transactions for Interxion, NXP, and Nokia.
Finch Capital partners with ambitious founders in financial and business technology verticals by backing teams to build and grow capital efficiently. We invest EUR 5-15 million in companies generating EUR 2-15 million in ARR. We help accelerate the path to profitable scale by allowing founders and team to maintain control and provide liquidity for certain stakeholders as well. We’ve invested in ±50 companies including Fourthline, Goodlord, eFlow, ZOPA, AccountsIQ, NomuPay, and Lavanda.
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