Fintech Battlegrounds: Europe vs the Rest of the World

If you asked a stranger on the street where they keep their money, the most common answer would most likely be a bank. That’s where you go to store your money and hopefully see it grow over time. But that is now changing all around the world.

If you asked a stranger on the street where they keep their money, the most common answer would most likely be a bank. That’s where you go to store your money and hopefully see it grow over time. But that is now changing all around the world. A new wave of so-called ‘fintechs’ merge the world of technology and finance, providing easy access to mobile internet with the safety and security of traditional banking. These mobile apps like Revolut, N26 and Monzo, just to name a few, have hundreds of millions of euros in investor funding and are starting to chip away at the facade of traditional banking giants.

Leading the fintech scene

Europe has been a hotbed of fintech activity over the last decade and for many, is now considered to be the most developed of all fintech ecosystems, globally. Product advancements and a focus on regulation has made fintechs like Revolut, N26 and Monzo attractive to investors – whose large funding amounts have helped keep fintech activity alive in Europe, beating the US and Asia to the top investment spot.

While much of the prominent and hyped-up fintech activity stems from the UK – which represents more than half of all mega deals in Europe over the past five years – others countries are driving fintech too and creating their own centres of activity, particularly in Lithuania, Estonia, Germany, Sweden and the Netherlands. 

Regulation and proximity to traditional financial services are the two main factors that influence the UK’s fintech dominance. London is home to many of the big banks and financial organisations, meaning that they’re only a quick tube ride away from the startup areas of the city. 

The UK’s FCA leads the way in terms of regulatory frameworks that appeal to startups, adding to the attractiveness of the UK for young companies. However, once you add Brexit into the mix, we may see the tides turning and the European fintech landscape changing dramatically. Research from think tank New Financial said that more than 275 firms in banking and finance have already moved to the EU away from the UK, with Dublin, Luxembourg, Paris and Frankfurt gaining the most so far. As the tale of Brexit continues, it opens the door to other parts of Europe, who are stepping up their game to make a welcoming home for fintechs. 

More than just payments

You’d be forgiven for mistaking that European fintech is just about mobile payments. While most (successful) European fintech companies operate in the payment sector – including the big players like Revolut, N26 and Monzo, that we’ve mentioned, as well as TransferWise, Funding Circle and Klarna – the development of technology in Europe also supports the growth of niche markets, such as automated loans, robo-advisers and automated investment management.

The European Payment Services Directive (PSD2) – which regulates payment services and payment service providers throughout the EU and European Economic Area – has helped to define a stable regulatory environment and sparked the introduction of Open Banking. The use of open APIs will enable third-party access to data held by the traditional banking giants, meaning that fintech businesses can use the data to develop new products and services. Will this mean that we continue to see European fintech innovate in areas currently unavailable in the US?

Fintech in the US

Fintech in the United States looks different to Europe partly due to its sheer size and scale. Once you add the diversity of financial institutions into the mix – from global banks to local, community banks – plus the added complication of the interaction between state and federal law; the US fintech scene is unique. If something is regulated at the state level, for example, this can lead to 50 different interpretations or sets of requirements for businesses to get their heads around.

As we’ve seen, the European fintech scene is dominated by innovative payments businesses. Comparatively, the American mobile-payments industry is more than 50 times smaller than China’s.

Many Americans still favour paying with physical dollar bills, as 30% of all consumer transactions are paid for in cash, according to The Economist. It’s also surprising that the average American writes 38 cheques a year, given that the cheque is almost obsolete across Europe – this figure is nearly five times the number of the average Brit. This dependency on cash is reflected in the US fintech landscape and the products on offer – historically the US has dominated insurtech investment: the top five insurtech investment rounds in the US in 2019 average $405m; compared to $98m in Europe.

Some European startup founders have gone so far as to suggest that US companies could learn from Europe. But that hasn’t stopped European neobanks for example, turning to the US, hoping to crack the retail banking market that is still dominated by traditional players. 

Revolut, Monzo and N26 are all trying to break into the US market but have so far received a mixed response, citing issues such as regulation, apparent lack of demand and competition from existing banks. The difference in interchange fees in the UK compared to Europe is also a likely impact: banks/neobanks can make money on interchange in the US but cannot in Europe.  Although things might be at a critical turning point, as N26 reported in January 2020 that they had attracted 250,000 users in the US and new customers are shifting funds from Chase and Citibank.

It’s clear that European fintech innovation is influencing the way that financial institutions around the world are operating and will continue to do so. The current digital lag within the industry, due to the popularity of traditional payment methods, presents the ideal opportunity for European fintech players to get ahead of the curve. 

fintech in the usa

How about East?

The state of fintech in Asia Pacific is somewhat different from the US and Europe. According to data from CB Insights, Australia, Japan and Singapore have contributed more to the growth of fintech since 2018, while China continues to be at the forefront of APAC fintech development.

With flourishing investment and a loosening of regulation, Singapore is swiftly emerging as a Southeast Asian hub for fintech. There continues to be confidence in Singapore’s fintech startup scene, despite trade tensions and global economic headwinds. Investment was up a massive 70% in 2019 from 2019, according to Accenture, crossing the SD$1 billion market. 

We’ve noted the rise of Challenger or Neobanks in Europe, but activity is also ramping up in Asian markets like South Korea, China and Southeast Asia. In Hong Kong especially, regulatory and infrastructure change is driving this activity; Singapore is also shaking up the banking sector. The Monetary Authority of Singapore (MAS) announced in 2019 that virtual bank licenses would be issued as part of ‘Singapore’s liberalisation journey.’

These new players in digital payments are naturally setting their sights beyond Singapore. The city-state is often used as the landing pad to launch businesses looking to expand into the regional ASEAN member states, where there is little in the way of traditional banking infrastructure such as ATMs and branches – almost three-quarters of the population does not have a bank account). They’ll manage all the legal bits – getting their entity and intellectual property set up – from Singapore, before expanding their horizons. And with good reason, as the market for digital lending in ASEAN is fertile. The market is expected to more than quadruple to US$110 billion by 2025. Opportunities are abundant for many digital payments businesses.

One country ripe with opportunity is Indonesia – the largest internet economy in the region – which has more than quadrupled in size since 2015. Startups are capitalising on this opportunity. Some are following in the footsteps of China’s “super-apps” – like WeChat and Alipay, both of which first found market success in verticals that have nothing to do with financial services (social media and e-commerce, respectively) – and have expanded to provide financial services to consumers and businesses. 

Indonesia’s ride-hailing giant Go-Jek started out as a transportation and delivery company (think Uber), and has since expanded into payments. Its mobile wallet, Go-Pay, saw transaction volumes of $6.3 billion in 2018 and is used by over 240,000 online and offline merchants across Indonesia, according to research from CB Insights.

This competition in APAC has largely been welcomed as it would create the motivation for traditional banks to do more with technology and provide better services.

Strong investment in LatAm

Fintech isn’t just specific to the hotspots in the US, Europe and APAC; there is activity across the rest of the world too. There are several emerging leading startups in Latin America, with Mexico in particular is a hotbed for fintech investment and activity. Many fintech startups in LatAm are focused on lending to underserved consumers and SMBs, with some countries in the region lacking developed financial infrastructure and facing political unrest.

For example, Brazil-based Creditas is a digital lending platform for consumers, that funds customer loans through both investors and financial institutions. Core products include a version of home equity and auto loans, in which borrowers offer residences or vehicles as collateral for first-lien lending products.

Regulations across the region are fragmented, with variation and different stances taken in each country – often making it difficult for startups to base themselves in one country, and expand their business from there, like many are doing from Singapore to extend into the rest of APAC. Yet there is progress. For instance, Mexico has been proactive in its regulatory standing and guidelines for FinTech companies, along with launching a regulatory sandbox in March 2018. Brazil is also making moves, establishing regulations in April 2018 to allow fintech firms to provide P2P services.

Regulators on the whole may have been slow to respond in Latin America, but investment is strong. Looking forward, there is no reason why startups across Latin America wouldn’t continue to flourish, in spite of instability and spare regulatory guidance. 

fintech latin america

No pushback in Africa

In Africa, many startups are leapfrogging legacy architecture, building mobile-first payment applications for parts of the population that don’t have access to traditional financial services. M-PESA, the mobile payments platform, has been operating in Africa since 2007 and is considered as one of the original fintech innovations. It is perhaps the most striking example of leveraging vast and growing mobile penetration in the region.

Payments has long been a trend to watch in African fintech, and continues to be so. Startups, such as Nigeria-based OPay – a one-stop mobile-based platform for payment, transportation, food and grocery delivery – are increasingly building out mobile wallets and payment processing platforms, testing whether mobile money can serve as a catalyst for financial inclusion. 

If we look at regulation in Africa and compared to the rest of the world, startups are largely able to work without much pushback. CB Insights’ 2020 Trends Report suggests that this is predominantly because African fintech startups are bringing hundreds of millions of people into the financial system, while legacy banks primarily continue to cater to the continent’s wealthiest. 

fintech battlegrounds

What will the next decade look like? 

Fintech will look very different in the next 10 years. Regions will continue watching and learning from each other, and businesses will always want to expand their reach to become a part of everyday life for as many consumers as possible. Development will emulate the evolution of the internet and as consumers become more accustomed to financial services being part of other products, fintech will become more embedded in everyday services; impacting how we manage and shape our finances.

Marcel Klimo, Chief Marketing Officer, Vacuumlabs


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