Funding for Europe fintech jumps as investors eye regulatory opportunities

VCs have been piling into Europe’s fintechs but cooling their interest in the sector in the US, according to the latest snapshot of the industry globally. Kam Patel reports.

bank investment in fintech

Venture capital funding for Europe’s fintech sector soared over the first quarter and could hit record levels over 2017, according the latest global snapshot of the industry from research firm CB Insights.

The CB Insights report shows that over the first three months of 2017 Europe secured $667m in funding to VC-backed fintech startups across 73 deals. That amounts to a 222% jump in funding and a 74% rise in deals closed versus the fourth quarter of 2016. (See Chart 1 below)

Positive investor sentiment over the region is being fuelled by regulatory developments, says CB Insights, pointing in particular to initiatives like the UK government’s “sandbox” programme to help develop startups and new, upcoming EU rules that promise to offer fintechs plenty of scope to disrupt services in their own right as well as help institutions handle regulatory changes.

The new EU rules include PSD2, which promises to shakeup online payments, and MiFID II, a  wide-ranging piece of legislation from Brussels that, depending on a firm’s business model, could impact a wide range of  institutional operations ranging trading, transaction reporting and client services through to IT and HR systems. Both are due to come into force in January 2018. 

chart 1 eu fintech finance trends

Corporates keen on slice of the pie

It’s not just VCs that are giving the thumbs up to Europe fintech. Corporate venture capital (CVC) investment deal activity in the region climbed to a five year high in the first quarter, with CVC units like Santander bank’s  InnoVentures arm and Google Ventures involved in nearly 40% of all European fintech deals compared to just 17% a year ago.

At the global level, CVCs participated in one third of all fintech deals in the first quarter via their in-house venture arms, up from 22% in the same quarter last year. The growth in CVC involvement is due in part to more incumbent financial institutions launching their own venture arms. Santander, Goldman Sachs, and Citi have participated in the highest number of deals to venture-backed fintech companies over the last five quarters. (See Chart 2 below)

It is still early in the year but CB Insights reckons that at the current run rate, Europe fintech funding would top £2.6bn for the year - more than double 2016’s $1.1bn - on deal activity ahead 60% to total 186.

An especially bright spot for fintech in Europe is early stage funding (seed and Series A). Deals focused on this phase grew 72% on a quarterly basis while funding soared almost four times and included a number of $10m plus deals.

Chart 2 bank investment fintech

US fintech funding cools

VC funding for UK fintech alone jumped to $328 over the first three months, up 170% on the last quarter of 2016. The big increase is due mainly to $200m raised in rounds by Atom Bank and Funding Circle. 

At the global level VC funding for fintech rose 33% to $2.7bn over the first quarter but was down 47% from a year ago. On current run rate, global funding is on pace to drop 18% versus last year.

There was a notable cooling of investor interest in the sector in the US with fintechs there raising $1.1bn over the first three months - 8% down on the previous quarter and nearly 40% lower than for the same period a year ago. US fintech deal activity also eased to 90, down 9% from the previous quarter.

The slowdown in the US follows several years of very strong growth in fintech funding there, especially during 2014 and 2015. Investors likely now see valuations across the US sector as rather too frothy. Sentiment over the US fintech sector has also been dented by industry scandals including that of P2P lender Lending Club which last year got caught falsifying loan documentation. 

CB Insights says that if the pace of US investment in the first quarter continues, funding to VC-backed fintechs will drop 20% over 2017 versus last year, with deal activity falling below 2013 levels.

Asian fintech funding, meanwhile, doubled to $826m in the first three months after the region experienced a three consecutive quarter drop. Deals rose slightly on a quarterly basis, but stood 14% lower than the same quarter last year. On current run rate, Asia could see 8% fewer deals in 2017 versus last year. 

Other key findings from the CB Insights report include:

  •  VC backing for bitcoin and blockchain startups rebounded in the first quarter to $113m after dropping to $77m in the previous quarter. The largest deals over the three-month period included BitFury’s $30m Series C and Veem’s $24m Series B.
  • Investment in VC backed payments focused fintechs (online and mobile payments, point of sales systems) fell 39% to $300m on a quarterly basis – a five quarter low – but deals rose for the second consecutive quarter.
  • Of the 10 largest fintech deals outside of Asia, Europe, and North America over the last five quarters, eight took place in Australia or Brazil.
  • There are 22 fintech unicorns globally with the total value of $77bn. The first quarter saw the second most highly valued fintech unicorn in the US, online lender SoFi, raise $500m at a $4.5bn