In a bid to stave off increasingly stiff competition from the United States, Europe has introduced pan-EU licenses for financial technology companies. Good news then, for international private equity firms like Finstar Financial Group, who are eying up the billion euro fintech sector, with chairman and founder Oleg Boyko at the helm. The new license will allow companies like Adyen to bypass the banks and process cross-border payments directly to its merchant customers. One of the primary barriers to entry in the fintech banking space is the necessity to acquire an official license to conduct business directly with customers. The European Central Bank can now decide whether a bank can operate as an ‘acquiring bank’ regardless of whether they intend on becoming a full-service outfit.
The meteoric evolution of fintech has left traditional banks in a malaise. The old players in the banking industry are scratching their heads reminiscing about the days when banking was an immovable object, resistant to change and greater market forces. The financial crisis gave us the first inclination that banks were perhaps just as vulnerable as other businesses. We are now in a situation where technology is driving rapid change, and banks that fail to respond to the new banking environment will fall and fall faster than anyone can expect.
Indeed, it is customers that have the power in banking after centuries where bankers were our overlords. Now, with new entrants to the market propelled by progressive European regulation, more established banks can no longer rest on their laurels. Modern banking customers expect—like in other areas of their lives—their needs to be met instantly. A delayed service is no longer acceptable. And, as the bigger banks are aware, many of their processes are cumbersome, resulting in a slower than acceptable service speed for their customers.
In an era where retails products can be purchased and received on the same day, people expect financial transactions to occur in real time. Expecting a customer to wait three days, for example, to send money overseas is naive, given the plethora of alternative banking options. According to a KPMG Top of Mind Survey in 2017, 29 percent of respondents answered that increasing personalisation is likely to be the most disruptive consumer behaviour trend over the next couple of years. And, it’s important to realise that fintech companies or companies that operate with the latest fintech technology, stand to overtake any competition that is reluctant to adapt.
Fresh Capital Fuels Fintech Growth
According to a recent article in Fortune, venture capital investments in financial services startups are showing a geographical split. While funding for fintech companies in the United States is cooling, Europe is sizzling with new money. In contrast to the United States, innovation in Europe is on an upward trajectory, with new startups shaking up the market. The number of fintech deals in Europe jumped 74% from the previous quarter to 73, and the average deal size clicked northwards. The European Union has spotted the potential in the fintech market, and with an increase in digital banks, regulations that encourage startups, and the popularity of online payments, Europe will be primed to take pole position.
Venture capitalists in the United States are retreating. That is in tune with a general startup investment pullback, as investors are less inclined to accept the risk involved in backing a young business in a nascent market. In contrast, European investment houses have taken a different path, pouring record-breaking capital into fintech companies.
Germany has established its credentials in the global fintech space, and for analysts, the country will soon overtake the UK. Capital Investment in German fintech startups soared to US$421 million in 2016, a tick up to 118% from 2015’s US$193 million, illuminating the seismic growth of the industry. Companies like N26, a German direct bank allows its customers to bank via their smartphones. Headquartered in the country’s capital, Berlin, N26 offers services throughout the Eurozone.
N26 has raised over US$52 million in funding from the Axel Springer Plug and Play Accelerator, Early Bird Venture Capital, and Horizons Ventures. Spotting a gap in the market, online banks can compete on price, service, and user experience, in a way that older banks struggle to manage. That being said, established banks are in a scramble to modernise in the face of new competition.
International private equity firms like Finstar Financial Group, founded by well-known investor Oleg Boyko, identify fintech as a core component of their five-year investment plan. They have earmarked US$150 million to put towards the fintech space in a bid to provide funds to broaden their international presence in mobile-first consumer finance. Oleg Boyko aims to fortify the Group’s holdings in innovative consumer technologies and to spread its portfolio exposure to fast-growing emerging markets across Europe, Asia-Pacific and Latin America. A year before the announcement, Mr. Boyko made investments in several European fintech enterprises. In 2016, Finstar collaborated with Holtzbrinck Ventures on a EUR 31.5 million investment in Spotcap, a German service that specializes in lending for small and medium-sized businesses. Finstar also invested in a P2P online-lending platform, Viventor and online marketing services provided by Rocket10.
When the chairman of Finstar Financial Group, Oleg Boyko, was asked what areas he sees the capital going to, he revealed that Finstar will focus on transformational financial services platforms and businesses. And, the group will focus on fintech and insurtech, along with fintech-enabling models in AI, data science, adtech, and martech. Martech combines the terms marketing and technology. Any social media marketing, or indeed, any marketing that takes place digitally, is an example of martech—and it’s a high-growth area at the moment. So what do private equity firms actually do and do startups really need them?
The main idea is that of a strategically valuable partnership. Finstar, for instance, provides expert advice helping their portfolio companies to gain the benefit of a strong network and synergies from collaboration with other businesses in their portfolio.
Finstar’s philosophy of partnership brings strategic value and insight to growth investments, allowing its companies to succeed in complex developing markets. They nurture the businesses they invest in, providing them with expert advice of the highest calibre. They also offer fintech companies the freedom to continue innovating and to grow at a pace that they dictate themselves. They have highly developed expertise at the HQ level, which allows it to serve as a centre of excellence.