Fintech, which is the intersection of finance and technology, came on the scene more than a decade ago but it is gaining even more momentum in 2021. No longer are fintech firms just coming on the scene and trying to muscle their way into the bigger landscape. Now they have become the trendsetters whose innovation is sought after by even the largest tech firms and financial institutions.
Fintech encompasses a large swath of market areas, including but not limited to digitalization, payments, peer-to-peer (P2P) investing, lending, wealth management, delivery apps, trading apps and even cryptocurrencies and blockchain startups.
Fintech really came into its own last year as the value of companies like video-conferencing platform Zoom, food-delivery apps and others were thrust to the forefront as a result of pandemic-fueled lockdowns in the global economy. Those trends, however, don’t appear to be going anywhere even though the pandemic is winding down as vaccines are distributed around the world. And while the landscape is one that is still being shaped, we’ve captured some of the top trends as they currently stand in the fintech space.
One of the notable trends that we’ll explore below is the rise of ‘buy now, pay later.’ This segment has benefited from the push toward e-commerce as a result of the pandemic and it is especially catching on in Sweden. Overall there are several themes unfolding in fintech:
- The pandemic accelerated the push to digitalization, a trend that appears to be here to stay.
- Consumers are flocking to e-commerce platforms and are in search of contactless solutions.
- Big tech companies are muscling their way into the fintech space.
- Governments are looking at regulating fintech as innovation persists.
- P2P investors are back after getting spooked during the coronavirus year.
E-Commerce and Digital Payments
E-commerce was already growing at a healthy clip before the pandemic, and the lockdowns put in place around the world only accelerated this trend. EMarketer predicted that e-commerce sales were on pace to increase nearly 17% last year in Western Europe, which was almost double the original estimate for 2020 from pre-COVID days. That places the value of e-commerce in the region at USD 498 billion for 2020 followed by estimates of USD 529 billion for 2021, as brick-and-mortar stores begin to reopen and capture some of the sales momentum. Nonetheless, e-commerce projections only go higher from there, with estimates for 2022 and 2023 calling for USD 567 billion and USD 604 billion, respectively, in Western Europe.
One way to measure how a market segment is resonating is to look at the fundraising totals. Overall, European startups attracted USD 41 billion in venture capital investments last year, a new all-time high, across sectors of the economy.
Payments startups in particular — including payment processors, card makers, money transfer firms, and software-tracking businesses — have been a success story even throughout the pandemic-fueled economic slowdown. Payments startups attracted more than USD 12 billion to their coffers in 2020, an increase of 3% over 2019 levels, according to CB Insights. Interestingly, the number of mega-deals, or transactions worth more than USD 100 million, increased last year by seven to 37 vs. 2019.
One standout is Checkout.com. The London-based fintech startup, which operates in the digital payments sector, is worth an eye-popping USD 15 billion, easily giving it unicorn status. The company, which harnesses cloud computing technology, is a case study in how digital payments companies fared during the pandemic. Checkout.com experienced a 250% jump in transactions when COVID-19 came on the scene, and its processing volumes grew threefold last year vs. 2019 levels. It recently expanded with a Southern European hub in Barcelona, Spain. Now Checkout.com is eyeing a U.S. expansion. The company says it follows the following merchants:
- Freshly Cosmetics
Regulation & E-Commerce
Given the push into e-commerce and digital payments, it seems like the right time to bring up regulation. The latest development affects UK-based small and medium-sized businesses (SMEs) and it involves value-added tax (VAT) rules. Some 26,000 e-commerce businesses are now expected to have to sign up for the tax as a result of an overhaul on sales generated outside of the eurozone. While U.K. sellers weren’t a part of the original design of the new VAT rule, which takes effect this summer, they are getting lumped into it as a result of Brexit. This translates to additional costs of EUR 8,000 annually for each of these SMEs. Among the expenses, business owners must have the right software so that the VAT is charged at the till. Some e-commerce businesses will find it useful to register their business in the eurozone instead of the U.K., depending on the amount and location of transactions they do per year.
FAMGA: Big Tech Dives Into Fintech
While fintech came on the scene as a disruptor to the financial services and tech industries, it has increasingly become a bridge for these industries to the evolving consumer. Now it is not uncommon to see big technology companies, including FAMGA — Facebook, Apple, Microsoft, Google and Amazon — partnering up to gain a foothold in the fintech market. As per CB Insights, the following developments happened in Q4 2020:
- Facebook scored a patent for processing payment transactions via AI-fueled messaging services.
- Apple inked a four-year partnership with Tel Aviv-based Isracard to gain a foothold in Israel with Apple Pay.
- Microsoft started supporting Paysafe for online cash payments in the Microsoft store across nearly two-dozen European countries.
- Google teamed up with Axis Bank and Visa to introduce the ACE credit card.
- Amazon Halo became available to John Hancock Vitality Program members, connecting health technology in the way of wearable devices with life insurance contracts.
Peer-to-peer (P2P) investing was still coming on the scene during the Great Recession, and it has come into its own since then. Investors look to the asset class as an opportunity to generate higher returns than would be available in the traditional markets, potentially between 7-11%, which is attractive in any market but especially in the low interest rate environment that currently exists.
During the pandemic, European investors reportedly pulled back from P2P investing, with volume declining as much as 80% in April 2020, as per P2Pmarketdata.com and TodoCrowdlending.com. Investors have returned, however, with 2.5 more capital being directed in Europe’s P2P scene as of March 2021 compared to April 2020.
There is also a push toward digital workplaces that is being fueled by the cloud. This trend allows employees to continue working regardless of their physical location, and it has revolutionized the workforce model in the wake of the pandemic. Whether companies take on a hybrid model in which employees rotate between the office and remote work or they go entirely digital, there is a clear shift toward distant working.
The rise of platforms such as Zoom and Vimeo have played a major role in this shift, giving colleagues and industry peers an opportunity to connect in real-time and providing efficiency in the transition to this new paradigm. While the distribution of vaccines has led to a slow reopening of the economy, the shift toward the digital workplace is expected to remain. Gartner senior director analyst Michael Woodbridge said, “The need for an effective digital workplace is now critical and acceptance of change is at an all-time high.” Gartner is hosting a virtual digital workplace summit for the EMEA region on June 14-15.
Fintech has also introduced the opportunity for real-time pay. A fintech in the spotlight for this technology is Hi55 Ventures, whose mission it is to give workers the ability to access their pay on demand and relieve them from the constraints of monthly or bi-weekly paychecks.
Hi55 has teamed up with Mastercard to create a card that works similarly to a debit card. It gives employees access to their income as it is earned. In order to use it, employers must sign up on the Hi55 platform. The card itself is issued by Railsbank.
They are responding to a trend in which the workforce’s lowest earners are having to wait longer for their pay. In the year 2000, 50% of workers on the lower end of the pay scale were paid weekly or every two weeks. That percentage has dropped to just 17% most recently, according to The Fintech Times.
Another market segment that is on the rise in Europe is insurtech, which represents the intersection of insurance and technology. Some of the key U.S. players in this market are Lemonade, Bestow, Next Insurance and Hippo.
In Europe, one of the companies to watch is Getsafe, which boasts more than 175,00 customers across Germany and the U.K. The company likens itself to the Uber or Netflix of insurance thanks to its focus on technology through a mobile-first strategy. There are no brokers or other third-parties involved. Getsafe is the most popular insurance platform for German millennials, where it has captured close to 10% of the market share pie. Since the pandemic, this company has adopted a remote work model and it is banking on the fact that digital insurance is here to stay. Other European market players in the Insurtech segment include but are not limited to Clark, Luko, Zego, DeadHappy, Instanda, wefox, Insoore, Neosurance, INSTANDA and Charles Taylor Insurtech.
It is impossible to discuss financial technology these days without touching on cryptocurrencies. Bitcoin, Ethereum, Dogecoin and others have taken the markets by storm as they continue to disrupt traditional financial services and deliver returns hand-over-fist, severe volatility notwithstanding.
Billionaire Elon Musk thrust cryptocurrencies into the mainstream by tweeting about them, first endorsing bitcoin and announcing that Tesla would accept the biggest cryptocurrency as a form of payment. He later reneged on that, however, complaining that the mining process for new bitcoins was not environmentally sustainable.
Musk is a fan of Dogecoin, which is a meme coin with a Japanese Shiba Inu breed dog as its mascot that started as a joke but has delivered returns of more than 6,000% year-to-date. Whether those gains can be sustained remains to be seen. In the interim, there is a great deal of innovation happening in the cryptocurrency and blockchain space that is disrupting traditional finance.
Non-fungible tokens (NFTs) are digital assets comprising some type of real-world item, whether it’s art, video, audio or something else — wherever the creator’s imagination can take them. NFTs are collector’s items that have been compared to collecting baseball cards or fine art. Their value is in the eye of the beholder and some of them are selling for millions of dollars. The most famous NFT was a piece of digital art called “Everydays — The First 5000 Days” that was created by virtually unknown digital artist Beeple at the time and sold for USD 69 million on Christie’s auction house.
Decentralized finance (DeFi) represents the democratization of finance, giving users access to financial services that might have otherwise been left out as a result of being unbanked or underbanked. The nature of decentralized finance is such that there is no need for a middleman, as agreements known as smart contacts use code to automatically execute transactions when certain conditions are met.
DeFi has soared throughout the pandemic year as users have turned to the market to bolster their returns. The industry is measured by a metric known as total value locked (TVL), which represents the size of the market and has soared to USD 63 billion at last check. The DeFi market has introduced use cases in crypto such as borrowing and lending, yield farming, staking, stablecoins, decentralized exchanges and more.
Fintech Regional Focus
Fintech covers a broad swath of use cases, and the market segment has penetrated global economies in different ways. Some countries are better than others for launching a fintech startup, and it has to do with which ones have friendlier regulatory and investment environments for tech innovation.
As mentioned, the buy now, pay later (BNPL) trend is catching on in Sweden in particular. According to CB Insights, nearly 25% of e-commerce payments in Sweden went to the BNPL method last year. The next closest country for BNPL penetration was Germany, at about 20%, followed by Australia, Finland, the U.K., France, Japan, Italy, Spain and the U.S. The trend of BNPL is also apparent in funding levels, where startup funding accelerated at a CAGR of 93% in the five years leading up to 2020.
The Baltics & Fintech
Latvia has recently revealed that it has plans to create a national framework for the startup community comprising a support policy and a fintech strategy. The strategy, which is expected to be complete by Oct. 31, 2021, is designed to provide support to entrepreneurs in the country.
Latvia has already proven itself as “startup-friendly” alongside its Baltic neighbors Estonia and Lithuania, as per Index Ventures. The Baltic nations outshined the U.S., the U.K., Israel, France, and Germany, not least because of generous stock options policies in the region that make drawing in and keeping employees easier. Latvian e-commerce platforms generated more than USD 280 million in revenue in 2017, an amount that is projected to increase to reach USD 418 million this year.
Latvia-based fintech Sun Finance, an online lender, has been named Europe’s second-fastest-growing company in 2021. Sun Finance boasts a CAGR of 752% and is second only to the UK’s Bulb Energy, according to the Financial Times. Estonia makes the top list for Bolt Technology, a micro-mobility startup that is ranked as Europe’s 15th fastest-growing company this year. Lithuanian e-commerce play Poppri, which is dedicated to sustainable fashion, also made the list and is ranked 478th.
Back to Latvia, the country is breaking new ground for fintech in the Baltic nation. A local startup called Nordigen is behind the milestone, fueled by the rise of open banking, which led the fintech to provide a free application programming interface (API) for gaining access to banking details. Nordigen did this in the name of open banking even as its industry peers were charging for access to bank account information. The move is expected to pave the way for millions of people to become credit-worthy. Nordigen CEO Rolands Mesters is quoted by Sifted as saying that pivoting the focus from “credit histories” to “banking data” opens up the credit system to twice as many consumers.
Latvia is a hotbed for fintech innovation and has given the world the following brands, to name a few:
- Mintos (P2P lending)
- VIAINVEST (P2P lending)
- Twino (P2P lending)
- Nordigen (data analytics)
- LendSecured (real estate crowdfunding)
- VIALET (e-wallet)
Fintech has the wind at its back in 2021, as evidenced not only by the innovation that is unfolding in this category but also the funding that is underpinning the creativity. The pandemic has changed the playing field, and this has largely benefited the fintech industry as shifts in consumer behavior when it comes to banking/financial services, payments and P2P investing appear to be here to stay.