This is an excerpt from The Future of Digital Banking in Europe 2023, a Money 20/20 special edition.

Growth across the European fintech industry is fluctuating, and it is becoming increasingly evident that the record levels of funding and deals seen in 2021 will not happen again any time soon. As revealed by CB Insights, funding rose by a staggering 168% to reach $131.5 billion in 2021 from $49 billion in 2020 after fintech firms the likes of Klarna and Stripe achieving monumental valuations. However, 2022 saw rising interest rates, a cost-of-living crisis and continued geopolitical instability which led to trillions in valuation being erased from public markets.

In conversation with Victor Trokoudes, CEO and founder, Plum, says that “it is true that we are now in a different economic climate following the Covid-19 pandemic and the outbreak of the Russian war in Ukraine, with high inflation and more aggressive tactics on interest rates from central banks. However, investors need to keep an open mind and acknowledge the integral role fintech has to play in this environment. Fintechs that provide an essential service, either beneath the bonnet or to consumers, have great potential to rise to the current challenges. European investors are in a good position to capitalise on that and ensure that the right companies are able to flourish and provide value across Europe.”

This macroeconomic deterioration has however resulted in access to financing becoming more difficult, but Europe’s fintech sector remains at the core of the financial services industry, rather than at the fringes as it was once before. According to McKinsey, in each of the seven largest European economies measured by GDP – France, Germany, Italy, the Netherlands, Spain, Switzerland and the UK – at least one fintech firm ranks among the top five banking institutions. 

The McKinsey research continued to state: “If fintech ecosystems in all European countries were able to attain the same level of performance as the best in the region, the upside could be substantial. The number of fintech jobs in Europe would grow by a factor of 2.7 to more than 364,000; the volume of funding would more than double to almost €150 billion from €63 billion; and valuations would grow by a factor of 2.3 to almost €1 trillion—almost twice the combined market capitalization of Europe’s top ten banking players as of June 2022.”

Europe is in need of more jobs, more funding, and more substantial valuations for the fintech industry to flourish, but as Justin Basini, CEO, Clearscore highlights, “the era of over-hyped valuations and the availability of cheap money is now well and truly over. What we’re now seeing is a correction in valuations and any fintechs that need to go to the market to raise further capital are going to face significant challenges.” For progress to continue, Europe’s regulatory approach must continue to balance innovation with consumer protection, as Annelina Koldewe, global head of wholesale banking payments, ING posits.

Koldewe continues: “Europe is supporting the fintech industry in multiple ways. Most visible is the regulatory approach, where Europe’s regulators balance innovation with consumer protection. Regulatory frameworks like PSD2 and GDPR create a level playing field and promote innovation. Collaboration and partnerships between financial institutions and fintechs are very common, focusing on a joint journey to foster innovation and leverage the infrastructure and client base of banks.”

Kilian Thalhammer, global head of merchant solutions - fintech and platform, Deutsche Bank AG, adds that Europe is leveraging “the scale of the ‘single market’ through targeted regulations and market developments to foster innovation and incubate new competition. From open banking, underpinned by the payments service directive, through to fully scalable (and now instant) cross-border payments across SEPA markets, Europe has been a pioneer in fostering a dynamic fintech landscape.”

He continues: “Not only in terms of Europe’s approach to fintech, but so too when looking at the positive impact fintechs have had conversely on Europe – through to the boom in new players, Europe’s previous sometimes sluggish retail banking landscape has been revived, with fintechs setting new standards in digital client interfaces, consumer experiences and whole new offerings resulting in a positive innovation pressure on incumbents in the market to keep up.

“These two strong forces have created a dynamic environment, with European frameworks lowering barrier entries for fintechs, and more fintechs positively pushing the boundaries of new retail solutions, experiences and opportunities for consumers. With continued focus on pan-European innovation, from the digital Euro project through to EPI, Europe still has much more up its sleeve to contribute to the digital banking landscape and to keep the positive momentum further enhancing the fintech players growth by seeing them as co-innovators and partners.”

This Finextra report, a Special Edition for Money 20/20 Europe, collates interviews with a range of leading players across the financial services and fintech industries operating across Europe and explores topics that will be covered at the event in Amsterdam. Key insights from Accenture, Clearscore, Deutsche Bank, ING, Nium, Plum, Ripple, Societe Generale, Tink, Visa and Zopa will discuss how digital banking across the continent will evolve.