Fintech, the challenges of 2021 amidst collapse and blockchain

In 2021 there could be a collapse in the fintech sector, where the use of blockchain and cryptocurrencies could increase. This is what Finch Capital‘s annual report states in the document “State of European Fintech 2020”.

• The 46-page document is divided into 4 chapters:
• The impact of Covid-19 on Fintech
• Government support for the sector
• Mergers and acquisitions
• 2021 Trends

What emerges from the analysis is that Covid 19 has actually had a positive impact in fintech. This is the case with online purchases, which rose by 210% in the second quarter of 2020.

By contrast, the air transport sector has experienced a downturn, with a fall in bookings. According to the report, the sector will not return to pre-lock-down levels before 2024, which is why the recommendation is to diversify the market in order to survive. 

If fintech companies have managed to survive this difficult time, Finch Capital says it is also thanks to government support programmes. The real challenge will be in the next 6-12 months, when external investors will be needed, who seem to have abandoned the market at this time.

In the meantime, there is nothing left for fintech companies in Europe but to reduce inefficiencies, which in some cases meant cutting staff due to reduced sales. 

2020 according to Finch Capital’s report

This 2020 still in progress has proved to be surprising. 

According to the report, it has been the banking and payments sector that has had to face major changes, moving towards simplification of services. 

In such a troubled year, the best opportunities are being reaped by insurers. But this is also the year that has changed the real estate industry, which Finch Capital says will have to digitize itself for good. 

Finally, this year is the year that, according to the report, can lead to the mass adoption of artificial intelligence and open banking tools. 

On the M&A (Merger and Acquisition) front, according to Finch Capital, Europe is lagging behind the United States. In the old continent, the fragmentation of the fintech sector means that there are no large acquirers willing to do business at the moment. 

The challenges of fintech in 2021

The real challenge for the fintech sector is set for 2021, when companies will have to be able to stand up without the help of national governments and with significantly reduced external investment funds. 

One of the areas to keep an eye on is payments, which are starting to be faster and easier. And above all, cheap and safe.

The report also includes the blockchain and stablecoin sectors, which, in the view of Finch Capital, can give hope to the capital market. Blockchain technology can be used to validate data. At the same time, financial companies are euphoric about the efficiency that stablecoins could bring.

The cases in which stablecoins are used include daily payments, but also salaries, rents or any other recurring payments. Loans and predictive markets are not exempt from the use of stablecoins either. 

Radboud Vlaar, Managing Partner of Finch Capital explains: 

“Although the 2020 situation looks good at first glance, European Governments have provided a huge amount of support for FinTech startups. This support offset the decline in institutional funding but this was a one-off initiative. In the next six to 12 months, startups and scale-ups will face a harsher market test for raising additional funding due as the government funding slows and VCs funds get maxed out, consequently focusing remaining fund capacity on their winners”.

Finch Capital therefore expects the next 12 months to be very dynamic as fundraising and capital raising will be much more selective. This will be a problem for companies planning to launch in 2021. 

Nevertheless, 2021 will also offer its opportunities, albeit to a few players: 

“A shakeout of the European FinTech is not necessarily bad. In the last five years Europe has seen 100,000s of new companies raise massive amounts of capital, build and start selling new products to meet a market need. Sometimes hundreds of companies are trying to solve a similar problem in different countries. This creates an opportunity for investors to consolidate and back winners at attractive prices and make profitable companies, these companies than can become acquisition targets for Private Equity firms and large industry incumbent”.