27 August, 2019
Just a few years ago, it was difficult to imagine that anything could disturb the monopoly of banks when it came to financial services. However, now we’re witnessing a kind of revolution in the financial market. Resulting from the huge demand for innovative solutions and supported by EU legislators, the rise of fintech in Europe brings positive changes for customers. Sounds like great conditions for developing a fintech company?
Success stories of such European fintech companies as Revolut, Transferwise and Klarna, news about successful funding rounds and millions of acquired users – they all act on our imagination. It seems that the fintech sector in Europe is growing fast and has huge potential. What’s more, it looks like that’s a steady trend and things won’t change in the near future. Nikolay Storonsky, the CEO of Revolut, describes the situation in Europe like this:
“We are three/four years more advanced compared to US companies in terms of product, in terms of regulation, in terms of size. US companies should learn from Europe.”
Storonsky seems to be pretty confident – but what is the hard data? Should you really think about developing your fintech company in Europe? Let’s find out.
Growth of fintech companies: Work hard and take our money!
As of April 2019, Fintech companies in Europe have raised over 3 billion dollars. And the numbers are still rising. In 2018, thanks to some stunning merges, acquisitions and buyout deals, it was over 34 billion dollars and it’s not unlikely that such a situation will occur once again in the future. Does that mean that every fintech founder in Europe can launch his product and then just wait for his pot of gold from investors? Of course not. But European fintech companies have certainly become more and more attractive to investors for a number of good reasons:
- Over the years, and thanks to several companies that paved the way, the fintech market has gained a reputation of the one with the highest safety standards, reliable and responding to the customers’ needs.
- Such directives as PSD2 (we’ll talk about it in a minute) prove that the potential of fintech companies is taken very seriously by the European Union. It’s hard to get better credibility for investors.
- Finally, the rapidly growing number of users shows that there is a high demand for such solutions and both the fintech products targeted at local markets, as well as those going global, can adapt well.
Users of fintech software: There’s an app for that!
There would be no success and great development perspectives for European fintech companies if the fintech solutions weren’t so quickly and positively accepted by users. Yes, Captain Obvious, it always works that way. But the fact is that fintech startups, with all their innovative plans to turn the financial service market upside down, have landed on very fertile ground:
- The customer-centric approach allows fintech companies to deliver to their users an experience they never met before. And they love it! They do not have to visit banks or other institutions to create an account, they can confirm and verify their identity in many different ways, etc. Everything they need, both in terms of core functionalities and additional options, is usually available right away, in one, beautifully-designed app.
- Fintech companies usually do not have extensive structures, so they can offer more attractive rates and commissions to their customers. And, as we know, at the end of the day, costs are the most important factor in most cases.
- The availability and diversity of solutions encourage users to try and build a set of services that fit their lifestyle and needs. They’re no longer obligated to use one provider (with both its pros and cons) but they’re free to choose. And the choice is huge. From solutions operating locally – expenses sharing WieBetaaltWat apps in the Netherlands or BLIK in Poland – to international services as Revolut or Klarna.
- The current range of fintech companies’ services is actually comparable with the offer of traditional banks. Payments, loans, mortgages, retail investment, consumer banking, remittance, Forex trading, equity financing, insurance services, etc. Therefore, users more and more often treat them as a serious, viable alternative.
Banks and fintech startups: Enemies or allies?
One of the most frequently asked questions when it comes to fintech companies is: are they able to share the market and compete with traditional banks? It seems natural that the appearance of something that may upset the hundreds-of-years-old order will result in fierce competition. Well, it is not that clear. Nikolay Storonsky, when comparing his startup Revolut to big banks, explains that the latter don’t really fear fintech startups (at least at the moment):
“I mean we are so small compared to them, right? So I think they might be a bit worried, but they still don’t feel it. They might be starting departments and assembling big teams and building some of the products that we build. But in terms of revenue, in terms of management, they are [still] not really paying attention.”
We should start by explaining what makes fintech startups and traditional financial companies different, and at the same time, makes them able to exist together with benefits for both sides (for now).
Banks are institutions that, over the years, have developed a number of procedures and unique corporate culture. They have always been seen as somehow conservative, stable, skeptical about innovations. And they haven’t denied it, because such an approach was fundamental for their most important and valuable assets – reputation and trust. Even now they are aware that it is impossible to completely change their approach and become 100% digital and customer-centric, just like their younger brothers.
On the other hand, fintech startups, these new kids on the block, are just cool. They are customer-centric, they are agile, they’ve got nice apps and they simply solve customers’ problems in an innovative way. But the thing that bothers them most is… a lack of trust and reputation.
Both parties know about it, they don’t deny it and, as we can see, they may coexist with the benefit of both sides and complement each other’s deficiencies:
- The unquestionable position of European banks allows them to calmly watch all innovations and ideas that fintech companies bring to market.
- Top European banks – such as Santander, Credit Suisse, BBVA, Barclays, HSBC or ING – saw the potential of the fintech market a few years ago and already have a lot of different fintech companies in their portfolio. What’s more, those companies often provide services that overlap with bank services (loans, wealth management, personal finance, etc.).
- Thanks to such investments, fintech companies not only receive funds for business and product development but, what is even more important, credibility and trust.
- Even smaller, locally-operating banks are trying to jump on the fintech hype train by running some acceleration programs for fintech projects, organizing hackathons and hackdays for young fintech entrepreneurs, etc.
- The customer-centric approach of fintech startups reflects the expectations of customers and shows how financial services should look like in today’s world. It’s a kind of a challenge and huge motivation for traditional banks to try to keep up.
- The PSD2 directive (yup, we’re going there, just a minute) will bring even greater opportunities for cooperation and will significantly reduce the potential for unfair practices.
So, does this mean that they will always stay on the same side? Opinions are divided and according to some analysts fintech companies will eventually try to become more independent and the friendly symbiosis can gradually transform into a market competition. According to Betsy Graseck, an analyst at Morgan Stanley, the banks are aware of such a possibility:
“Pressure is mounting for banks to innovate and disrupt themselves fast before someone else ‘eats their lunch’.”
PSD2: Game changer for fintech companies?
In simple words: yes, it is. PSD2 – the Revised Payment Service Directive issued by the European Commission – is about creating and implementing open banking standards in the European Economic Area. What does it mean in practice?
Fintech companies and third-party services will receive legal rights and proper technology tools. They will be allowed to build their solutions and products based on banks’ data and services. By using special APIs (application programming interfaces), they will be able to access some banks’ information and launch their products like fast payments, etc. to customers. There is, of course, a lot of technical issues and regulations to make this kind of cooperation safe and fair for both sides but that’s pretty obvious. What’s most important, as for today, is that the introduction of PSD2 has a profound effect on the financial market in Europe:
- It is a clear sign that fintech companies in Europe have already proved themselves as reliable and secure companies. They already gained the trust of millions of users and will gradually become a more and more important part of the European financial market.
- PSD2 is beneficial for both banks and fintech companies. They do not have to compete but can complement and extend each other’s services.
- The directive provides customers with access to a much broader range of services and tools.
- It also makes the whole European fintech sector much more reliable for investors.
Fintech software development: Turning finance into code
Founders of the biggest fintech companies in Europe agree that one of the most important factors that made their businesses successful were people. Well-educated, well-qualified, creative and involved people – among them, of course, software developers.
According to Stack Overflow, in 2018, there were about 5.5 million software engineers in Europe and, by the end of 2019, it will increase by another 0.5 million. It is well known that European developers are considered among world leaders in terms of skills, education and English proficiency. That is why many European cities (especially form Eastern and Central Europe) have recently become thriving outsourcing centres. But what does that mean in practice?
- For many entrepreneurs, the above-mentioned skillset of European developers, combined with relatively low labour costs in the Central and Eastern Europe, makes fintech software development outsourcing a natural choice. Due to the location and size of the European continent, it’s hard to imagine a better place to benefit from the nearshoring model with all its advantages. It’s a common practice that London- or Berlin-based companies outsource their software development to Central or Eastern Europe countries.
- More and more software development companies claim to specialize in delivering solutions for fintech companies. For sure, some of them really do, but a huge heading on somebody’s website is not what you should look for. Try to find out more about their process, approach and tech stack they use. It’s worth to pay attention to those that have some proven experience and have already delivered some (working!) fintech projects.
- Specialization and experience in developing fintech products for the European market make engineers familiar with rules and regulations such as GDPR or PSD2. It’s crucial to understand and implement them correctly at the early stage of development. Just to give you an example, our developers took a step forward and created a special GDPR-compliant data masking tool.
- Let’s be honest: no one likes to develop boring projects. And most fintech projects aren’t. Due to their diversity, technical advancement and specific requirements, they seem to be a considerable challenge for programmers. And that is a perfect match for ambitious devs. They don’t get bored, they have the opportunity to develop their skills and they don’t want to leave the project. Fintech development is just cool. A great treat for everyone involved.
Summary: The state of the fintech market in Europe
Each of the topics covered in this article could easily evolve into a separate, very comprehensive publication – but that wasn’t my goal. I just wanted to point out a few key factors that make the future of fintech companies in Europe look bright and promising. That’s my deeply held belief and I hope that I’ve also managed to convince you that’s true. To sum up:
- The number of transactions and the amount of money invested in fintech companies in recent years clearly shows the strength and prospectiveness of this sector in Europe.
- The growing number of users is the best proof of the high demand for innovative, customer-centric financial services.
- European banks aren’t afraid of innovations and understand the changing needs of consumers.
- The introduction of such directives as PSD2 is a strong proof that the fintech sector is not a fad, but a more and more important part of European financial reality.
- Fintech software development in Europe, due to the number, skills and experience of developers, as well as reasonable rates, has the most favourable price-quality ratio.
At The Software House, we’ve already had an opportunity (and true satisfaction!) to work with successful European fintech companies. Let us know if you want to find out more about those projects and solutions or maybe discuss your idea for the next fintech product. The initial call with our business managers and technical consultants is always free of charge.