European fintech startups with overseas ambitions fill war coffers at record clip

Helsinki-based Holvi left the UK market in October, citing the pandemic and a volatile post-Brexit landscape. (Courtesy of Holvi)

Earlier this month, a British fintech startup Curve launched a crowdfunding round to build on the £ 72.5million (roughly $ 102million) Series C it closed in January, to fund its expansion into Europe and the United States.

The payment card provider is just one of many fintech startups supported by VC in Europe aiming to enter overseas markets at a record investment pace. European fintech companies have raised € 7 billion (roughly $ 8.5 billion) in venture capital funding this year as of May 26, according to PitchBook data, putting the industry on track to far exceed the record of 7.1 billion euros raised last year.

A UK-based mobile first bank Revolution– which lifts another round at a valuation of more than $ 10 billion, according to an April report from Sky News – has also banked on international growth with an announced target of one million US users this year. His rival Starling bank raised £ 272million in March as part of continental Europe launch plans. Others have doubled their ambitions abroad, including digital banking Monzo, who in February appointed a new US CEO to lead his expansion plans and reportedly revealed plans for a £ 50million extension to his Series G.

Entering new markets can be particularly difficult and costly for startups operating in regulated industries such as banking, insurance and brokerage services. Global expansion is already a formidable challenge in terms of logistics, talent acquisition and facing local competition from other disruptors and incumbents in the industry. On top of that, fintech startups often face a patchwork of regulations for each jurisdiction they plan to operate in.

“It’s a huge Groundhog Day and a recovery when moving from country to country,” said Logan Allin, managing partner and founder of the San Francisco-based company. Financial venture capital, which invests in American and European startups. “You need to put in place a new regulatory infrastructure, build brand equity, acquire customers, effectively create an identical business in another country. We have no leverage on what we have already built. ”

Particularly acute challenges await startups entering the U.S. market, Allin said, due to state and federal regulations.

In contrast, European Union member states benefit from a so-called passport system, which allows financial companies to trade freely across borders with few additional permissions required. The difficulty of the transatlantic route is not lost on European investors either.

“The United States is not a walk in the park,” said Barbod Namini, partner of the Munich-based company Capital HT, who has worked with several European fintech companies. “It’s a lot easier for other business models to say, ‘It doesn’t matter where I’m based,’ but that doesn’t hold true with fintech. “

But even just expanding into new markets in Europe comes with its own set of challenges, one of them being cultural differences. Namini said that while the United States may be more culturally homogeneous, the financial behavior of customers differs from country to country across Europe.

For example, transactions in the Nordic countries are increasingly cashless. German consumers, on the other hand, tend to be very cash-hungry and much less comfortable with credit products than their neighbors.

Financial products must also be packaged differently. Christian Wiens from Protect yourself, a digital insurance broker based in Germany, said that unlike banking, insurance can differ significantly from country to country.

“For example, in the UK we have a content insurance product with extensions like tenant liability and accidental damage coverage, but in Germany these are all separate policies,” Wiens explained. “So that makes things trickier than for the challenger banks. ”

Fintech startups growing in Europe have also had to deal with Brexit. When the UK left the EU, UK businesses lost passport rights that allowed them to operate within the bloc the same way they would in London, and vice versa.

Berlin-based mobile banking provider N26 blamed Brexit for leaving the UK market in February last year. The company has since announced plans to expand its presence in the United States. Then in October, Holvi, a Finnish startup offering professional accounts for the self-employed, left the UK in response to the pandemic and the post-Brexit ‘uncertain regulatory landscape’ in the UK.

In the UK alone, fintech startups have raised 3.43 billion euros in venture capital this year, which is almost half of the 7 billion euros in total fundraising in Europe for the sector. , according to data from PitchBook.

Namini of HV Capital said that although the UK remains the main hub for FinTech investments, startups are more likely to be continent-based first and then to open an office in London. after securing late stage funding.

“It’s still orders of magnitude simpler than having a US license,” Namini said. “Yes, it is no longer a passport but it still has a similar regulatory framework and is in the same time zone.”

However, Namini also said that these were issues for fintech companies offering products and services in regulated industries. He added that there are many European fintech startups, such as B2B software companies, that provide third-party services to companies operating in regulated industries but are not directly regulated themselves. As such, they will find it easier to expand into new markets.

This point was echoed by Allin of Fin VC, who prefers to invest in B2B fintech companies for this reason. One example he cites is the Fin VC portfolio investment Onfido, a London-based startup that provides identity verification solutions to companies like Revolut. He added, “B2B SaaS businesses are just going to be a lot more portable, have more global growth opportunities, and be better companies in the long run.