New research has warned that once governmental support programmes wind down, European FinTech startups are in for a bumpy ride.

Finch Capital’s annual State of European FinTech report accepted that this COVID-19 capital has offset the decline in institutional funding, but added that it 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 venture capital funds get maxed out, consequently focusing remaining fund capacity on their winners" says Radboud Vlaar, managing partner at the FinTech investment firm.

European FinTech funding by venture capital and private equity firms in the first half of this year has been reported to be down by around 10 per cent, but when corrected for government funding it is up 20 per cent.

This is because the funding databases only record publicly announced equity rounds, while most government funding went in as a convertible debt note and so was not disclosed.

Comparing with a report at the start of April, Finch stated that the impact of the lockdown on the FinTech sectors was broadly in line with previous predictions, except for payments and mortgages, which both went up contrary to that forecast.

For payments, travel rebounded faster than expected and e-commerce rose as brick and mortar shops closed and people were stuck at home. Trading firms benefited from market volatility, while InsurTech performed roughly as expected, with continued strong demand for digital solutions.

In terms of hiring and firing, the report showed that startups took this chance to re-evaluate cost inefficiencies. Coupled with government support programs, they reduced headcount on sales teams, given limited in person sales meetings, and increased customer support teams.

Finch expects the next 12 months to be “dynamic” as fundraising becomes more selective and drops in the fourth quarter and into 2021, “which will be a harsh reality for the many shake out and down round candidates whose runway got extended into next year”.

While mergers and acquisitions appear to be booming in the US, Europe lacks big ticket buyers for FinTechs, and challenger banks in particular.

As illustrated in Finch’s 2019 edition, there has been no evidence of venture backed exits for FinTechs greater than €500 million in Europe in the last year.

“For scale-ups below €500 million, we expect to see massive consolidation by FinTechs - like the recent acquisition of Vouch by Goodlord - and corporates with a strong focus on profitability to meet the needs of private equity firms as potential buyers,” read the report.

Vlaar concluded that a shakeout of European FinTech is not necessarily bad. “In the last five years Europe has seen thousands 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 incumbents.”

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