Europe’s Fintech Startup Environment – And How The Current Crisis Drives Its Further Development

Europe is great in many ways, and a favorable environment for many economic sectors to flourish – and the fintech startup industry is definitely among them. While the Silicone Valley is booming, and Atlanta is following as a close second, the regional players, such as Estonia, are emerging to challenge the world’s most prominent fintech hubs.

European fintech environment today: an overview

One can easily see the benefits available to the fintech entrepreneurs that choose to base their companies in Europe. Among the most prominent ones is the European regulatory environment, which is both start-ups oriented and tailored in a way that fits the specifics of each of the states in the region and the European market as a whole.

Having said that, we should also note that there are a number of challenges that are preventing Europe from making a strong standing among those with the most attractive start-up environments in the world.

Firstly, unlike the US start-ups, ones based in Europe need to rethink their line of development. While the former is more focused on market penetration and a marketing boom that will make them widely known, the European start-ups need to secure the revenue first, before thinking of what the next step should be like.

And, secondly, despite London and Berlin – the current fintech startup hubs of Europe – entrepreneurs based elsewhere can sometimes struggle to have access to funding opportunities. The lucky few manage to get initial funding outside the region – in the USA or Asia, however, once that is secured, the start-up is also likely to abandon Europe for a more favorable environment.

Despite the challenges listed above, Europe remains to be the birthplace of the fintech unicorns, such as the Swedish payment system Klarna, the UK’s bank for entrepreneurs OakNorth, N26, and the Revolut, that we will examine in a bit more detail later.

Amidst the outbreak of the COVID-19 pandemic, the European fintech sector is likely to flourish even further. With the digitalization of most of the products and services, the demand for fintech solutions is growing – and European start-ups are all too happy to cater to it. The main sectors that the regions’ fintech entrepreneurs are targeting are blockchain, banking, and financial trading, and we will discuss them in more detail below.

Blockchain – The Newest Solutions To The New Trends

Ever since the blockchain solutions were first introduced, their popularity did not cease to stop growing. The current estimate is that the world blockchain spending will increase to more than 15 billion in 2023.

However, with such a rapid expansion, it became apparent that some sort of regulatory mechanism is imperative to ensuring the safety of all the parties involved. But how does one control something so strongly based on anonymity?

The solution was once offered by Ethereum (which, coincidentally, was co-founded by a programmer of Eastern European descent – Vitaliy Buterin). Smart contracts that the company came up with are now widely used to document the details of transactions, and can even be used as a legal confirmation in court disputes. The technology is especially popular with the individual lenders in Europe, as they act as an additional layer of security for both the lender and the borrower alike.

Financial Trading ”” Innovation With Benefits For All

Financial trading is one of the rare few of the markets that was always glad to welcome new technological solutions and incorporate that into the traditional way of functioning. It is, therefore, unsurprising that European start-ups are often trying to tailor their services in a way that best caters to the needs of this market niche.

A good example of that would be the UK-based fintech company Revolut. In an attempt to both expand their customer base and penetrate the financial trading market, Revolut came up with an idea of integrating their services with the brokerage offering, and it worked out very well for them both. Revolut did expand their client base and made themselves even more recognizable, trading service providers obtained an efficient payment system to offer, and the traders benefited from a mechanism that significantly reduced the hassle involved with depositing or withdrawing funds.

After proving to be both efficient and profitable, the integration of services with financial trading was soon picked up by the European fintech start-ups and continues to be done so today. There are only a few downsides to this development, and the most prominent among them is the lack of accessibility to the full services that either a trading company or the Revolut (and other fintech companies of a similar nature) has to provide. The client of a fintech service provider would still have to join a trading company separately, and, similarly, the trader will have to get in touch with the fintech to get access to the full variety of their services.

Other than that, functional integration goes a long way to show that there is definitely potential for the Europe-based fintech start-ups to come up with breakthrough technologies and reclaim the title of being listed among the world’s top largest technological hubs.

Banking – A Means Of Achieving The Ultimate Goal

Although the banking segment is strong in Europe, there is one struggle that it is yet to win  – namely, the desire to achieve 100% of the inhabitants of the region being banked. While the numbers are sufficiently high in Western Europe, the situation is very different in the Eastern part of the region.

With that in mind, European fintech start-ups have stepped in to try to solve the issue of unbanked citizens. Russian Tinkoff online banking, recently valued at over 5 billion USD, is a shining example of how financial technology can offer a working solution. Tinkoff is completely digitized, and, in that, reduces the hassle of having to physically visit one’s bank to virtually non-existent. With such convenience combined with the efficiency and trustworthiness of the service provider, Russia saw a significant increase in the coverage of the previously unbanked population.

The opportunities for fintech start-ups in Europe are widely known and actively used, and on top of the prominent regional fintech centers, such as Berlin and London, Europe is currently seeing a rise of the new players, such as Estonia, Bulgaria, and Lithuania. The niches to occupy are plentiful, and the outbreak of COVID-19 is generally favoring technological advancement, however, there are still a number of aspects of the industry that need to be refined – with the lack of accessible funding among the most obvious ones.

If the current crisis and the fintech boom associated with it will lead to those challenges being successfully resolved, Europe can easily become a strong competitor to the United States and Asia in the development of modern fintech solutions.

Photo by Jonas Leupe on Unsplash

Why Scotland should harness its influence in the global fintech industry

Guest blog from Corporate Partner and Technology Lawyer at Addleshaw Goddard, David Anderson

In Scotland, we undoubtedly have one of the strongest fintech clusters in Europe. At the turn of the year, the Scottish fintech sector became the first in the UK, and only the third in Europe, to receive formal accreditation as a cluster of excellence from The European Secretariat for Cluster Analysis (ESCA).

The body looked at 36 economic factors before awarding Scotland this accolade, and our innovative, dynamic and collaborative ethos must, I believe, have had an important role to play in why we received this title.

Looking at growth from 2019 to 2020, the number of fintech SMEs based in Scotland increased by more than 60% from 72 to 119. This notable boost is something that we should continue to celebrate and use as a foundation to build upon to attract even more leading fintechs from across the globe to expand and invest in Scotland.

Most recently, it was announced that our fintech sector will receive a further £22.5 million of funding to establish a Global Open Finance Centre of Excellence (GOFCoE) in the Edinburgh and Central Belt region. Funded by the Strength in Places Fund, this is a remarkable opportunity for Scottish fintechs as the new research and development centre will explore how open banking and financial date can be used to deliver social and economic benefits.

We have world-class talent on our doorstep and as a Corporate Partner and Technology Lawyer at Addleshaw Goddard, I am fortunate to get the opportunity to work with a number of entrepreneurs, CEOs, advisors and customers in the fintech discipline every day.

As a firm, we recognise the importance and wealth of the fintech sector. That’s why in 2017 we launched our dedicated Addleshaw Goddard Elevate programme – a 10-month initiative for selected fintechs designed to accelerate them through legal challenges faced by start-up and fast growing businesses.

Year on year, we are enthused at the calibre of entrants to the programme and to date we have supported 22 fintechs with our expertise across financial services, regulation, IP and corporate and commercial transactions.

Successful applicants to Elevate programme receive advice covering funding, payments, financial regulation, investment and technology at no cost to them as well as ongoing mentoring and access to the firm’s resources. By combining our client-side experience with regulatory and legal expertise, gives us great insight into the concerns and priorities to help fast growing businesses become more productive and even more successful.

In 2019, we welcomed nine businesses to the cohort including Scottish businesses Amiqus , OBR-Open Banking Reporting and Trace, all of which are contributing to and bolstering the tech scene in Scotland. In the next few months, we will be launching the 2020/21 programme and are already looking forward to working with more forward-thinking technology firms with revolutionary ideas.

Whilst this paints an incredibly positive picture of the Scottish fintech sector, which is true, we must remember the Covid-19 cloud that currently hangs over our professional and personal lives. It is a challenging and sometimes worrying time, and the consequences of it will live on long past the ease of lockdown and other restrictions.

The last few months have, however, allowed many Scottish tech firms to adapt and highlight their invaluable contribution to society. I have been extremely encouraged at the response of Scottish technology businesses to the current situation as they adapt themselves or help to aid businesses, people and the economy with their agile approach.

For example, Airts, which uses AI tech to help people at large professional services firms plan projects, has reshaped its working pattern and working from home structure to ensure clients still receive an excellent service.

XDesign ”“ which plans, builds and develops digital products that solve your business challenges – has moved quickly to introduce new processes across the business to succeed throughout this challenging period. This has even resulted in the firm welcoming new clients and staff, which is incredibly encouraging for the industry.

A great local example of this came from Occupyd – which connects businesses to underused workspace ”“ who has used the time to support chefs and caterers access underused commercial kitchen space in closed pubs, cafes, churches and other locations. Occupyd also created a Secret Takeaways’ list which has helped diners in Edinburgh and London find their favourite local restaurant options which are not present on the main apps.

Tech has of course always been important, but through the covid-19 pandemic it is proving to be invaluable as we rely on it to communicate with family, friends, colleagues and in some cases, life-line services. From my perspective, I have seen an acceleration in strategictechnology projects which are driven by improving customer experience and developing the best possible customer proposition.

Looking to the immediate future, nobody can predict to what extent the pandemic will impact the tech ecosystem in Scotland. However, the agile, innovative and inclusive nature of the industry, particularly the fintech ecosystem gives me great confidence that we will come through this with the ability to continue our success and growth, but with new insights and perhaps a refreshed outlook.

Interested technology businesses can register their interest for the 2020/21 AG Elevate programme here.