Europe's financial technology industry is bouncing back amid growing digitization during the coronavirus-induced economic downturn. The impact of the pandemic has weighed heavily on the fintech industry as venture capital funding slowed in Europe. A study by McKinsey & Company showed fintech investment falling by 11 percent globally and 30 percent in Europe in the first six months of this year.
The fintech industry's loss per customer is meanwhile expected to increase by roughly 25 percent, McKinsey estimated. Furthermore, the industry saw a more precipitous decline in fintech investment in July, when it fell by 18 percent globally and 44 percent in Europe compared with the corresponding period last year, the US-based management consultancy said in a blog post. To avert the worst, European fintech players have increasingly shifted to digitization and broadened their offerings across their customers' daily lives.
Fintech adoption growing strong in the business-to-consumer sector
Looking back to last year, European consumers are already big fans of fintech. According to the 2019 EY Global FinTech Adoption Index, fintech adoption among digitally active European consumers was at or above the global average of 64 percent. It reached 73 percent in the Netherlands, 71 percent in both Ireland and the UK, and 64 percent in Germany, Sweden and Switzerland. Since the beginning of the pandemic, the European business-to-consumer fintech sector has experienced rapid growth in fintech adoption. According to research by deVere Group, the pandemic has driven a massive 72 percent rise in the use of fintech apps in Europe.
The way the coronavirus crisis changed how people manage their finances can be an indication of the pandemic's long-term legacy. There will be an increase in the digital and online society, said James Green, deVere Group's divisional manager of Europe. Today's tech-savvy consumers are now more reliant on low-cost financial apps, which is helping the fintech industry weather the storm. Up to 80 percent of consumers in Western Europe prefer handling everyday financial transactions digitally, while between 5 percent and 20 percent expect to do more digital banking in the future, according to the results of McKinsey's Financial Decision Maker Pulse Survey published in early April 2020.
Business-to-business fintech to accelerate digitization
Rising demand to digitize, automate and reduce payment costs is also fuelling an increase in fintech adoption throughout the business-to-business sector. With the pandemic still out of control, the finance industry must rely on end-to-end digital alternatives to stay competitive. Fintech adoption gained significant traction because many companies need partners to help them innovate rapidly and continuously.
As the industry transforms, financial components and services also gain value. European organisations were found to be more dedicated to fintech adoption and investment than their US counterparts, allocating between 11 percent and 30 percent of their profits, Goodwin's 2020 Fintech Survey showed. The study also found that 39 percent of banks and financial institutions around the world are prioritising fintech adoption, thus highlighting global demand for a more advanced financial landscape. For instance, in July Deutsche Bank invested in German fintech firm Traxpay to integrate the lender's supply chain financing technologies and solutions. Daniel Schmand, global head of trade finance and lending at Deutsche Bank, said the ongoing health crisis acts as a catalyst to the supply chain finance market.
Although fintech helps financial institutions in achieving economies of scale, they must still deal with increasingly challenging environments. McKinsey, therefore, recommends that business-to-business fintech firms reconsider their pricing structures and shift to a usage-based model to attract cost-conscious buyers.
Key drivers of European fintech resilience
The pandemic is a huge test of the fintech industry's resilience, with lots of capital on the line, according to Finch Capital's 2020 State of European Fintech Report.
Open-banking growth became a key driver of fintech's rapid growth in Europe in recent years. Under the EU's revised Payment Services Directive (PSD2), banks are forced to share their customers' data with third-party providers, including fintech firms. Via open application programming interfaces, the PSD2 mandates stronger security requirements for online transactions through multi-factor authentication. The pandemic has pushed the adoption of open banking and changed financial services in more ways than anyone could have imagined. In the move to a cashless society, open banking has unlocked the gateway to a more efficient and effective financial sector, according to Ed Molyneux, chief executive and co-founder of cloud-based accounting software firm FreeAgent.
The European fintech sector must deal with the economic disruption caused by the pandemic. But despite mounting concern among investors over the sector's resilience, fintech will survive and thrive. Fintech's positive impact is expected to continue as it meets growing demand. It will also play an increasingly important role in people's daily lives, with the pandemic fuelling the shift, said Green of deVere Group.