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European fintech recent rises and falls show way forward for the sector

The Covid-19 crisis has caused a global economic slowdown, but it has also sped up the digitalization process. Since the virus has forced government to put in place social distancing policies, companies across sectors have had to react quickly by developing their online businesses. This situation has allowed tech companies, which were already internet-based, to capitalize on the surge of well-established companies going online. Among them, fintech is in a unique position to benefit both from the shift to digital and the need from financial services that emerge from the economic crisis. While those dedicated to digital lending or trading may see a direct increase in their activity, payment fintech may find growth in offering solutions to promote the retail sector recovery.

In fact, “buy now, pay later” fintechs have seen a marked upturn in revenue since the start of the pandemic. Given that Covid-19 has brought a significant decrease in household purchasing power, big retailers have found the services of fintech like Klarna appealing. In fact, the Swedish payment company has seen its valuation jump to over $11bn due to recent investment from private equity and venture capital groups. Klarna shows promise to become a viable challenger to PayPal, as it prepares to expand its business in the US and explore new streams of revenue in digital financial services. Also Tencent-backed rival Afterpay is making the most of the current situation to expand to different markets.

However, this may not be an idyllic moment for digital banking, especially after the recent Wirecard scandal. Financial authorities are considering the toughening up of regulations on digital banking products and services, to avoid further fraudulent activities going unnoticed in the fintech sector. The implantation of new regulation could affect the efficiency of fintech operations, as well as damaging public confidence in these companies.

Additionally, since fintech is quite a fragmented sector, most of these companies lack the financial muscle to go years without private external funding and new streams of revenue. European neobanks, will need to explore new digital financial services to survive the global economic slowdown of lending. The pandemic crisis may trigger the long-awaited and much-needed consolidation process of the European fintech sector.