This article was written by Toby Triebel, CEO and Co-Founder of Spotcap, an online lender for small and medium sized businesses headquartered in Berlin, with local offices in Madrid, Amsterdam and Sydney.
There is no such thing as Europe. Well, there is, but there is not just one Europe. The fintech industry reflects the fragmented nature (financially speaking) of the continent – prospering in the North and West, struggling in the South and barely existing in the East. Although the continent is creating the best ecosystem for the industry in the world, it is only the North and West fintechs which will truly reach customers.
The paradox is that these startups will drive the European machine, but will also have less impact than their Southern and Eastern counterparts. Fintechs in the South and the East have the potential to solve urgent social issues, while fintechs in the North and West will mainly improve UX.
N.E.W.S. about Europe
Western and Eastern Europe are different cultures with different markets. Southern Europe differs from the North just as much. The North and West – comprising the UK, Germany, France and Scandinavia – are developed markets, with stringent banking regulations. Southern Europe – Spain, Greece, Italy – suffered after the recession in 2008, with immense unemployment and restricted credit. And in the East, the banking sector is heavily regulated and recovering after the recession too. The Eurozone and European Union memberships and trade agreements make this mix a bit more complex.
Therefore, speaking of a single ‘European’ fintech scene is tricky.
In the North and West, fintechs unbundle. Everything from credit to insurance to lending and wealth management is being made much simpler for consumers, which McKinsey forecasts will enable fintechs to take 60% of bank’s retail service profits. Regulation and supportive governments, particularly in the UK and Germany are making the industry strong. Fintechs are also boosted by heavy incubation and global investment. Consumers will switch over to better retail UX in this market, and fintechs will develop sophistication beyond unbundling. eToro, for example, is a London-based startup that lets users copy the trades of top traders, and make the investments they make. Significant investment also means fierce competition. The market will have to crowd some startups out. While fintechs will make retail services easier to manage, the social impacts of the industry are hard to foresee.
In the South, the developed markets of Spain, Greece and Italy contracted during the recession, reining in lending to consumers, entrepreneurs and small businesses. Despite the public crying out for new solutions to financial problems, fintech has not yet created strong awareness of its capabilities. Fewer incubators operate here than in the North and West, and mainly payment-oriented startups have proliferated in the South.
There is enormous hype surrounding bitcoin, dogecoin and other cryptocurrencies in these markets, but this is misguided – in these markets, the real potential lies in fintechs working in more traditional areas, such as alternative-finance. Consumers are desperate to kickstart their financial lives, and are interested in familiar areas of finance – cryptocurrencies are simply too new for there to be widespread enthusiasm for them. Alternative finance and lenders have the potential to have enormous social impact, rebooting entrepreneurialism in nations where banks have long ceased serving the credit needs of individual entrepreneurs and consumers.
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While populations are well-banked and smart-phone savvy in the East, the growth of the fintech sector in Eastern European countries is more focused on cyber-security and big data: providing informational changes to the way money is handled by institutions. Initiatives like the European CyberSecurity Forum, co-funded by NATO are helping Polish firms grow. I could well foresee that Poland becomes home to data-management and security fintechs, providing a power-base of financial security expertise in the country that far outstrips the reputation of their London and Berlin-based counterparts.
The anomaly to the whole of Europe is Turkey. Not only has Turkey managed to resist disruption from fintechs, it has managed to strengthen its traditional banking industry by focusing on user experience and serving its customers.
Europe from the Outside: the US
Like American fintechs, Europe is shaping the global fintech scene – but only the North and West are gaining prominence. Unlike the US, Europe encourages disruption. The US is losing ground to North-West European fintechs, due to its regulatory and licensing confusion. The license you need to become a money-serving business only applies to the US State you applied in – to operate throughout the country, you likely need 47 more authorizations.
Where Europe encourages disruption, the US still has no clear policy or message of support.
Fintech is nevertheless booming because of the incredible amount of investment startups received from adventurous VCs, but conflicting legislation between states regarding fintech definitions, and a clear lack of government support mean fintech is not exactly being given the right ecosystem in the US to grow.
This is why so many American fintechs launch in Europe – to make use of the clear and efficient regulations in the EU, to take advantage of so-called ‘passport’ licensing, where a payment-fintech can set up in one EU country and then operate in another straight away. With London and Berlin home to a particularly non-home-grown type of startup, not only will Europeans generally feel the benefit of fintechs earlier and more pervasively than in the US, it means the European scene will feel an invigoration of creativity and money from abroad.
Fintech in Emerging Markets
Fintech’s impact will not be most keenly felt in Europe. It will be in emerging markets. In developed markets, fintech disrupts financial models by exploiting service gaps between provider and consumer. In emerging markets, however, fintech is on its way to becoming the financial industry. European fintech entrepreneurs have an opportunity to take advantage of the paucity of traditional financial institutions in these markets; if not by operating in these markets, then by offering opportunities for partnership, offering financial and business expertise, as well as hosting international knowledge-sharing events. Not only will this create opportunities for business development, it will strengthen the industry globally, as when it comes to disrupting the financial industry, we are all in this together.
There is international interest in developing fintech. Take the Philippines as an example. A quarter of the population owns smartphones, and there is over 50% internet penetration. Yet, only 10% of Filipinos are banked and roughly 98% of all transactions are cash-based. This is a situation that is ripe for exploitation by fintech. Which is why the Phillipines government, USAid and mainstream banks have teamed up to create the e-Peso, an e-payment system that is not only B2C, B2B and C2C – but also in the public space. This will help to create a cash-lite society, while creating greater security for consumers generally, and limiting corruption in the public space thanks to tracking capabilities. This example shows there is not only opportunity for fintech, but international interest in emerging markets.
European fintechs have a chance to leap into a niche in these markets, providing their knowledge and expertise, which will be invaluable in the future for their business. And while North-West European fintechs will help shape UX for the foreseeable future, it is in Southern and Eastern Europe, as well as emerging markets, where the opportunity to really make social impact exists.