Europe’s fintech opportunity (2024)

(27 pages)

The deteriorating macroeconomic environment in both Europe and the world has hit fintechs hard, with valuations declining and access to financing becoming more difficult.1For the purposes of this paper, Europe includes Switzerland and the United Kingdom post-Brexit as well as the EU-27 countries. Viewed from a long-term perspective, however, European fintechs continue to gain in strength and relevance for customers and the economy. In each of the seven largest European economies, as measured by GDP, at least one fintech ranks among the top five banking institutions.2Excluding insurance and stock exchanges; valuation of nonlisted European fintechs determined based on latest funding rounds and market capitalization of the largest banks listed in the STOXX Europe 600 banks index as of June 30, 2022; for Switzerland, we used the market capitalization of the largest banks listed in the SMI Expanded index as of June 30, 2022.

About the authors

This article is a collaborative effort by Alessio Botta, Sarina Deuble, Constance Emmanuelli, Fernando Figueiredo, Max Flötotto, Christian Irlbeck, André Jerenz, Timo Mauerhoefer, Tunde Olanrewaju, Alessia Vassallo, Stefanie Vielmeier, and Eckart Windhagen, representing views from McKinsey’s Financial Services Practice.

Strong fintechs offer customers greater choice and convenience. The competition they bring to banking systems is already helping modernize the financial sector ecosystem in several European countries. In this article and the accompanying in-depth report, we focus on three key aspects of Europe’s fintech sector: founding, funding, and scaling—that is, fintechs’ ability to set up in the first place, the ease with which they can access capital, and how well they can grow and thrive.

Our analysis highlights growing fintech activity in every European country. But we also find a wide divergence of maturity and performance among fintech ecosystems by country, with substantial gaps between the top one-third and the rest (Exhibit 1). Two countries in particular stand out for their superior fintech ecosystem performance: the United Kingdom and Sweden.


Europe’s fintech opportunity (1)

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.

Fintechs are a force for growth, modernization, and customer satisfaction in Europe’s financial-services sector

Europe’s fintech sector has moved quickly from the fringes of the financial landscape in Europe to its core. In each of the seven largest European economies by GDP—France, Germany, Italy, the Netherlands, Spain, Switzerland, and the United Kingdom—there is now at least one fintech among the top five banking services institutions, as measured by market value.3Excluding insurance and stock exchanges; valuation of nonlisted European fintechs determined based on latest funding rounds and market capitalization of the largest banks listed in the STOXX Europe 600 banks index as of June 1, 2022; for Switzerland, we used the market capitalization of the largest banks listed in the SMI Expanded index as of December 31, 2021. We define fintechs as digital technology-driven financial-services companies (excluding direct banks) that were launched after 2000, have raised funding since 2010, and have not yet reached maturity.

Underlying this significant growth are the contributions European fintechs make to customers, the continent’s financial sector, and the overall economy and society.

For customers. The growing appeal of fintechs is that they create value with superior service at lower costs. For example, international transfers and the end-customer price of stock trades transacted through fintechs can cost just 10 percent of the rates charged by traditional banking services institutions.4Average end customer price for international transfers including 90 percent lower foreign-exchange costs at a leading UK-based payment fintech than at incumbents. In Germany, the average end customer price for stock trades is 90 percent lower at a leading German neobroker than at incumbents. A recent McKinsey retail banking consumer survey in seven large European countries found that 32 percent of respondents listed pricing as a primary reason to use fintechs or digital banks—the same percentage as those who cited easy access (Exhibit 2).5McKinsey Retail Banking Consumer Survey 2021. The seven countries in the survey are France, Germany, Italy, the Netherlands, Portugal, Spain, and the United Kingdom.

Some fintechs offer financial opportunities to customers who may not have been able to access them otherwise, including asset classes such as private-equity funds, venture capital funds, and infrastructure funds that were previously available only to institutions. Other fintechs focus on previously underserved customer segments, such as small and medium-size enterprises.

For the financial ecosystem. Fintechs are a catalyst for disruptive innovation and growth. With their agility and speed, fintechs are well equipped to accommodate many new trends in the financial sector, including embedded finance and distributed-ledger technology (DLT). They tend to launch new products and services much faster than incumbent banks, with an average time to market of two to six months versus 12 to 18 months for incumbents. Fintechs also act as ongoing challengers and front-runners in providing a unique customer experience and lean-banking processes. Today, many leading European banks rely on various fintech partnerships across a wide range of areas, particularly in operations and payments.

For the overall economy. Fintechs are an important source of potential growth. Across Europe, they have created approximately 134,000 jobs.6As of June 30, 2022. Vibrant start-up hubs such as Amsterdam, Berlin, London, Lisbon, Madrid, and Paris attract international talent; fintechs in Europe have scaled up their hiring significantly at a time when incumbent banks in Europe have been reducing their workforces. As of June 2022, from a value creation perspective, fintechs in Europe represent a total valuation of almost €430 billion. That is more than the combined market capitalization of Europe’s seven largest listed banks as of June

Fintech performance in Europe varies widely

Our research highlights a huge variance across European fintech ecosystems. For example, the United Kingdom and Sweden significantly outperform their European peers across all critical performance areas.For our analysis of overall performance, we ranked the EU-27 countries, the United Kingdom, and Switzerland based on the performance of their fintech ecosystems along the three growth stages: founding, funding, and scaling. We measured against five KPIs. For founding, we used the number of fintechs founded per million capita in 2021. For funding, we used two KPIs: fintech funding per capita in 2021 in euros and the number of deals per million capita in 2021. Finally, for scaling, we analyzed the number of fintech unicorns8A fintech unicorn is defined here as a technology-based company with a valuation exceeding $1 billion. per capita in 2021 and the size of the fintech workforce as a proportion of the total workforce in 2021.We acknowledge that these KPIs do not constitute a comprehensive analysis of all factors that can contribute to overall performance. Nonetheless, they are indicative of the key strengths and weaknesses of fintech performance.

Exhibit 3 provides an overview of fintech performance based on these metrics. As well as showing clear leadership across all the dimensions by the United Kingdom and Sweden, it also highlights a second tier of countries with strong fintech sectors across most of the dimensions we examine: Switzerland, Ireland, the Netherlands, and Denmark. Together with the top-ranked countries, they constitute the top one-third of fintech performers in Europe.


Europe’s fintech opportunity (3)

Performance gaps are evident in each of the three stages of founding, funding, and scaling.

Filling the fintech pipeline. More than half of European countries have fewer than ten fintechs per million capita, creating a significant gap. This compares with 30 fintechs per million capita in Ireland and Switzerland and 26 fintechs in the United Kingdom (Exhibit 4). On average, the top five countries (with a GDP of less than $100 billion) have 25 fintechs per million residents.


Europe’s fintech opportunity (4)

Funding growth. The countries in Europe that perform the best have among the highest funding per capita (Exhibit 5). In countries that perform less well, including Greece, Poland, and Romania, per capita funding is significantly lower. While some countries have managed to increase per capita funding by as much as a factor of six in the past three years, Hungary, Italy, Poland, and Portugal still lag behind their peers significantly because the total volume of funding is still low.


Europe’s fintech opportunity (5)

The growth rate in recent years of fintech funding in some countries—such as Germany, Greece, and Ireland—has slowed or even decreased in comparison with markets such as the Netherlands and France. The United Kingdom is the top country in both early-stage (seed and series A) and late-stage (series B+) per capita funding (Exhibit 6). The United Kingdom led the European market with a total volume of approximately €1.3 billion for early-stage funding and €8.3 billion for late-stage funding in 2021. That performance compares favorably with other countries, including the United States: while US GDP is about ten times larger than the United Kingdom’s, US spending on funding is only four times larger.


Europe’s fintech opportunity (6)

Scaling fintechs. As a proxy to judge the ability of countries in Europe to scale their fintech ecosystems, we looked at the prevalence of fintech unicorns. The United Kingdom has the best scaling track record by far with 32 unicorns in total—four times as many as France and the Netherlands, the countries with the next largest numbers of unicorns.

How fintech in Europe compares with the United States

Using the same three life cycle aspects of founding, funding, and scaling, a comparison between Europe and the United States is instructive (Exhibit 7). The United States exceeds the European average across all three dimensions and is in the top third across all KPIs, with particular strength in the contribution of US fintechs to the economy and the workforce.


Europe’s fintech opportunity (7)

Many factors could help explain this relative strength of the United States compared with the European average. For example, the United States has a large home market, but it also has just one primary language and largely harmonized banking regulation. Market maturity is also stronger than in various European countries, with the venture capitalist (VC) community in general, especially in the tech sector, perfecting funding mechanisms from earliest seed funding through to IPOs. Access to capital can also be easier: US pension funds and other institutional investors provide venture capital in ways that are restricted in some parts of Europe. Nevertheless, some individual countries, including the United Kingdom, outperform the United States in the funding stage, according to our analysis.

Country-specific market conditions explain some of the differences in ecosystem performance across Europe

Closing the gap between leading European countries and those in the bottom or middle third of the rankings requires an examination of the factors inhibiting the sector’s success. Here we focus on six factors that can have an impact on the ecosystem, and for which strategic improvements can make a difference in both the short term and medium term.

Market structure and maturity. These elements can depend partly on culture, language, and history. For example, having a widely spoken language or a common currency and harmonized regulation can help. One differentiating factor is how long a fintech or broader start-up scene has been present, because markets learn and improve over time. Another factor can be the extent to which a second generation of entrepreneurial founders is emerging that can learn from the previous generation and count on them to be mentors, supporters, advisers, or investors.

Access to capital. Fintech funding in Europe has significantly increased over the past five years, but not uniformly. We find that less than 20 percent of all capital raised goes to early-stage financing. More than one-third of European countries—most of which are in Eastern Europe—did not have any late-stage (series B) funding. Significant European money pools such as pension funds and life insurance tend not to be sufficiently tapped because of more restrictive regulations compared with the United States.

Regulatory and legal landscape. Some European countries, such as France and the Netherlands, see their regulators as an important facilitator of innovation. But in general, existing regulatory frameworks to support the establishment, growth, and the value of fintechs have room for improvement. European payment service directives for data exchanges in financial industries may create new opportunities for fintechs. These directives will enable fintechs to access customer data from all financial players in Europe, giving rise to new business models. This has happened in the United Kingdom, a pioneer in open data for finance.

Mobility and acquisition. Europe has a major skills gapthat needs to be closed, and not just for fintechs.9David Chinn, Solveigh Hieronimus, Julian Kirchherr, and Julia Klier, “The future is now: Closing the skills gaps in Europe’s public sector,” McKinsey, April 27, 2020. Along with an overall shortage of talent, visa requirements and bureaucratic processes for obtaining work permits in some countries can impede talent acquisition, as can high income taxes.

Europe’s fintech opportunity (8)

Fintech in Africa: The end of the beginning

Read the report

Requirements for scaling and internationalization. To scale up, fintechs in Europe need to be able to expand beyond their home markets. Even within a single market such as the European Union, differences in languages, regulations, cultures, and sometimes currencies can act as barriers.

Customer openness. Different levels of digital maturity, the lack of broadband infrastructure, and other structural challenges in some countries can limit the reach of fintechs. Customers may also have a limited understanding of risks, including data security. Such issues play out in favor of incumbent banks, which tend to have a higher level of trust among the public than fintechs. Regulatory differences can be factors here, too. For example, customer protection laws are tougher in some countries than in others.

Calculating the upside: Europe’s fintech opportunity promises more jobs, larger funding volumes, and higher valuations

What is the potential upside for European fintechs if the lower-performing countries rose to the level of the top third in region and if the leading third could catch up with the United Kingdom? We have built a model that estimates what could happen to fintech jobs, funding volume, and valuations if all the countries in Europe attained the per capita levels of the best-performing countries.

Exhibit 8 shows the result of this hypothetical exercise. The overall number of jobs could grow by a factor of 2.7, to more than 364,000, and the number of jobs in the “follower” countries—those catching up with the leaders—could increase sixfold. Potential funding would grow by a factor of about 2.3 adding about €84 billion in investments. The relative strength of the United Kingdom is evident here—funding volume for the top third of European countries would grow fourfold if lifted to the United Kingdom’s level. Overall valuations in Europe could grow by approximately 2.3 times to €981 billion.


Europe’s fintech opportunity (9)

A focused push along six strategic action areas could help European countries catch up with fintech leaders

For lower- and middle-performing countries, catching up with the leaders will require a clearly defined programmatic agenda. We conclude by examining several of the strategic options that fintechs and their stakeholders in Europe can consider as they look to grow and develop the sector.

Drive the alignment of market structures within the European Union

An overall simplification and harmonization of fragmented national country regulation is already taking place in the European Union, enabling fintechs to understand key pillars of legal frameworks and to focus on regional specifics. Cultural exchange among countries can equip fintechs to understand key customer needs outside their home market. Meanwhile customers may catch up with a more digitalized way of living.

Encourage more diverse, ‘homegrown’ capital

Local political players and regulators have an important role to play in shaping restrictions on institutional investors’ access to growth capital. For example, they could create stronger incentives for venture capital and private-equity investments compared with debt investments. Relaxing investment restrictions for capital accumulation institutions could also make a difference. For example, only about 10 percent of German insurers’ investments are currently in alternative assets such as venture or private capital,10“Investing in private markets: A road map for insurance companies,” StepStone, October 2021. whereas in the United Kingdom this share is approximately 30 percent.

Foster regulation with an innovative mindset

The aim here is to create a regulatory framework that fosters innovation and provides companies with the necessary conditions to compete domestically and internationally, while ensuring stability and protection of both investors and customers. Programmatic coordination aimed at strengthening fintech ecosystems is particularly important in this context. Specifically, this can mean minimizing the administrative burden and associated costs for fintechs, adapting regulatory requirements where necessary, and making implementation more customer friendly.

Become a magnet for global talent

Fintechs can do their part by offering attractive jobs with excellent development opportunities. They can also commit to creating a modern work culture that responds to a diversity of backgrounds and needs. For example, the ability to work remotely without an in-person office requirement can be a valuable offering for many prospective employees. Political players and regulators can also help establish modern ways of working within their countries and make the tax framework appealing to foreign talent.

Enable fintechs to thrive in target markets

Fintechs may be able to make more informed decisions about future target markets if all stakeholders—from investors and incumbent banks to public players and regulatory bodies—bundled their insights on foreign markets with the respective foreign regulations and industry requirements in one central hub.

Increase customer choices and access

If fintechs put as much focus on product safety and stability as they do on customer experience, they might be able to avoid some regulatory challenges from the start. For example, they could go beyond established data and customer protection norms and be more transparent about securities and the inherent risk to customers before trading. Political players and regulators could also develop Europe-wide initiatives to make it easier for fintech companies to demonstrate their credibility to customers.

Fintechs have made major inroads into Europe’s banking landscape and are becoming central to its core. That is good news for customers, who will benefit from increased choice, and for financial systems, which will become more competitive and modern. But this is just the beginning; while a few countries have already emerged as European leaders in the fintech space, the potential for growth is strong everywhere in the region. If countries could rise to the level of the best in region, the upside could be significant for the economy as well as for fintechs themselves. What will be critical in the coming months and years is for all stakeholders—including public institutions, established financial industry players, and fintechs—to combine their strengths by setting up the enabling structure and mechanisms the sector needs to reach its full potential.

Alessio Botta is a senior partner in McKinsey’s Milan office, where Alessia Vassallo is an associate partner. Sarina Deuble is a consultant in McKinsey’s Frankfurt office, where Timo Mauerhoefer is an associate partner and Eckart Windhagen is a senior partner. Constance Emmanuelli is a partner in the Paris office, and Fernando Figueiredo is a partner in the London office, where Tunde Olanrewaju is a senior partner. Max Flötotto is a senior partner in the Munich office, where Stefanie Vielmeier is a consultant. Christian Irlbeck is an associate partner in the Düsseldorf office, and André Jerenz is a partner in the Hamburg office.

The authors wish to thank Christopher Blaufelder, Pascal Bretländer, Sven Enkirch, Pierre-Matthieu Gompertz, Reinhard Höll, Laura Hofstee, Himanshu Jatale, Matthias Lange, Deepa Mahajan, Fernando Martin del Agua, Mohcine Ouass, Hiro Sayama, Giuseppe Sofo, Dominik Termathe, and Birgit Teschke for their contributions to this article.

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