The European fintech sector is grappling with adverse changes, with a decline of 70% in funding for H1 2023 compared to the same period last year. Amid these challenges, the industry is shifting its focus towards profitability and long-term sustainability. The cryptocurrency industry is taking the lead, currently attracting the most capital.

The Funding Drought in FinTech

The newest report by Finch Capital highlights that the total capital raised in the European fintech sector for H1 2023 was €4.6 billion, which is a stark decline from €15.3 billion in H1 2022. This fall is attributed to a return of investment discipline, which has led to the end of mega funding rounds.

The funding environment has had a disproportionate impact on different stages of companies. Seed rounds continue to attract investment, but companies in the Series A to C stages have been the most affected. The Payments sector, traditionally resilient, has seen a decline, while Crypto has emerged as the main beneficiary of early-stage investments. Currently, one in three fintech companies has been labeled as 'crypto' or 'blockchain'.

🔥Hot off the press! @FinchCapital's latest State of European #Fintech 2023 - The Return of Funding Discipline triggered the ecosystem to Fight for Profitability to Survive...https://t.co/cvhWLguE8E pic.twitter.com/jot2EiZG6Y

— Finch Capital (@FinchCapital) September 12, 2023

"Since mid 2022 we have seen an increase in investment discipline in public and private markets, resulting in less funding, layoffs, less IPOs, flight to quality and focus on capital efficiency," Radboud Vlaar, the Managing Partner at Finch Capital, said. "This will continue to be painful for the next 12 months, but will result in a more healthy and sustainable Start-up , Hiring and Investor ecosystem."

Although funding is declining in major European markets such as the UK, Germany, and France, the United Kingdom has managed to increase its share of total funding to 50%, which is up from 45%, even as US-based investors have pulled back from European markets.

Europe Experiences Decline in Funding

The findings align with a previous report, 'The Pulse of Fintech' by KPMG in July. The report indicated that the EMEA region experienced a significant decline in funding, plummeting over 50% from $27.3 billion across 963 transactions to $11.2 billion across 702 transactions in H1 2023.

Similarly, a report published by Innovative Finance a few weeks earlier corroborated these numbers. The report showed that the total capital investment stood at $27.3 billion across 1,714 deals, marking a decrease of 14% from H2 2022. On a global scale, investment in the fintech sector fell 30% to $95 billion this year.

In contrast to the downturn in Europe, fintech is thriving in other global areas. For instance, the fintech industry in the Association of Southeast Asian Nations (ASEAN) attracted $4.3 billion in investments during the initial three quarters of 2022. This figure surpasses the total capital funneled into the sector from 2018 to 2020.

Sectoral Trends and Market Health

The report also delves into three core areas affecting the European FinTech landscape: investment environment, key European countries, and thematic trends. It predicts that the next 12 months will be crucial for the ecosystem's health, with a focus on building profitable businesses at sustainable valuations.

Mergers and acquisitions (M&A) activity has remained relatively stable, declining only 5%. However, the size of these transactions has plummeted 84%. Despite this, there is optimism for 2024, as public markets and valuations show signs of stabilization.

"Last year's shake up with valuations coming down, fundraising slowing down and the exit window closing up, was painful yet necessary," Vlaar added. "Consolidation and more competitive investment flows, combined with still significant levels of undeployed capital, will bring maturity to the FinTech sector. This new normal level of activity demonstrates the refocus of the FinTech ecosystem on long term sustainability versus short term gain."

The industry has seen more than 3,000 layoffs, but the 10 fastest-growing FinTech companies have hired over 1,050 people in the past year. Countries like France and the UK, with an active Series A-B investor base, have managed to maintain modest increases in post-money valuations.