While total investment across EMEA dropped from $61.5 billion in 2019 to $14.4 billion in 2020, VC investment remained robust, propelling the region to an annual record high of $9.3 billion. Europe saw the majority of the region’s VC investment with $4.8 billion flowing directly into European fintechs throughout the year.
KPMG’s Pulse of Fintech 2020 report outlines the attraction held by payments companies and challenger banks in the region, a trend which gained pace given the digital acceleration see as a result of the pandemic. The report explains that fintech ecosystems are also strengthening across Europe, as governments and regulators worked throughout 2020 to develop their fintech ecosystems to support firms scale and mature.
The UK’s Tech sector also showed resilience throughout 2020, as Tech Nation’s 7th Annual Report applauded the $4.5 billion raised in venture capital investment for fintech despite the year’s obstacles. This is significantly greater than the VC investment in France and Germany combined at around $1.77 billion, $2.9 billion when including Sweden.
Despite this strong performance, whether fintechs and payment service providers (PSPs) can bolster sufficient resources, skills, and long-term strategies in order to successfully compete or cooperate with Big Tech remains to be seen, however, it appears that a drought on VC investment is not going to present a core concern throughout 2021.
Key trends driving EMEA fintech in 2021
While there was a significant dearth of M&A activity across EMEA, France saw strong fintech investment, increased collaboration between established players and fintechs, and greater adoption of fintech solutions by the market. KPMG notes that Paris has been one of the fastest-growing fintech ecosystems and preferred destinations for VC investors, particularly in the later stages of growth.
Stephane Dehaies, associate partner, management consulting, FSI, KPMG in the UK states: “In France, we are also seeing a lot of interest in mobile payments (including the ‘buy now pay later’ market), lending platforms, regtech and cybersecurity because of the increased demand for and use of digital channels in this new reality.
“Traditional players are now embracing technology with a new cooperation with fintech because they need to be very efficient right now (reducing processing costs) and to offer a better customer experience but they also need to reinforce their cybersecurity as it is a critical aspect of providing digital services.”
The report also continues we should expect to see fintech extending their footprint across the region to build scale, and that consolidation among fintechs to bring together the strongest players, technology platforms, and customer experience technologies will increase.
Germany also saw a stall in M&A activity, but performed even better than France in VC investment with $1.2 billion invested into Bavarian fintech. Bernd Oppold, partner, advisory, KPMG in Germany notes that Germany, expects to see more e-commerce platforms emerge which will need payments services.
“The question is ‘will they really want to set up infrastructure themselves?’ It will be an exciting area to watch as these platforms could drive a significant amount of demand for investment in areas like white-label Banking-as-a-Service and Payments-as-a-Service offerings.”
Are there any limitations to digital adoption and innovation?
The UK saw a decline from its record of almost $6 billion raised in 2019, Tech Nation reporting that the numbers are strong and cement the UK as second only to the US for VC funding. Strength in investment particularly during 2020 also underscores the commitment to long-term digitalisation across the UK and the world.
However, the question of securing resources, skills and long-term strategies is essential for fintechs and PSPs which are seeking to find their footing in the hyper-digitalised, post-pandemic world.
Providing comment in Tech Nation’s report, Tim Levene, CEO of Augmentum Fintech, states that “fintech was at the forefront of the UK technology sector’s step-change in 2020, driven largely by the pandemic accelerating digital adoption. We have continued to see the UK fintech sector attracting a significant level of investment, despite the disruption in the market caused by Brexit and Covid.”
In Europe, Levene notes that the arrival of several large, international tech-focused investment firms from overseas, is serving to both deepen and validate the UK’s fintech ecosystem.
Zeroing in on the strongest blades of fintech performance, Levene adds that “the spotlight on revenue-based financing, DeFi and payments in particular intensified in 2020, with maturing, accelerating challengers attracting increasing investment, a trend we expect to continue in 2021.”
Does fintech have a glass ceiling for scale?
In KPMG’s report Ian Pollari, global fintech co-leader, partner, national banking leader, KPMG Australia observes that “we’re going to see larger and more wide-spread M&A in fintech in 2021 - whether it is fintechs seeking to achieve a position of dominant scale in a segment or geography or incumbents needing to accelerate their digital transformation agenda.”
With fintech M&A activity taking a hit globally and across EMEA during 2020, KPMG expects that fintech will experience a strong rebound during 2021 driven largely by incumbents. Large, traditional institutions will be looking to accelerate acquisitions of digital capabilities while fintechs aim to scale with global growth or nearby adjacencies in parallel.
Digitalisation pressures faced by payment service providers will be a core topic discussed at the Euro Banking Association and Finextra’s EBAday 2021. Running in digital format on 28-30 June for its sixteenth year, the event will welcome a host of board directors, chief executive officers and payments and technology heads from Europe’s leading banks, as well as selected fintechs and registration is now open.