Read Arma’s view on how Covid-19 has posed challenges for the European market and how US assets are a major focus for European challenger banks, an inversion of key trends in technology investment over the past five years, on Forbes here.
Challenges posed by Covid-19 have triggered a restructuring process within the European challenger banking market.
Europe has seen a rise in platforms offering mobile-native banking services, with their growth both fuelled by and serving to attract increased private financing. But the challenges posed by Covid-19 have triggered a restructuring process within the European challenger banking market.
Though the pandemic forced high-street banks to close their physical branches, it accelerated the adoption of online and mobile banking. This rise in technology adoption furthered progress already made on Open Banking in the wake of the UK’s Open Banking Directive and EU’s Payment Services Directive 2 regulations coming into force.
These challenges have led to more subdued rounds of fundraising for challenger banks, with investors demanding a clear route to profitability. Venture capital firms are increasingly likely to favour only those companies they consider most capable of establishing themselves as European or global leaders.
Meanwhile, challenger banks faced problems of customer acquisition. Restricted travel also meant that their offering of zero-fee exchange rates was less attractive than pre-pandemic. Falling customer acquisition rates compounded the pre-existing problem of how to turn scale into profit.
These challenges have led to more subdued rounds of fundraising for challenger banks, with investors demanding a clear route to profitability. Venture capital firms are increasingly likely to favour only those companies they consider most capable of establishing themselves as European or global leaders.
Challenger banks are therefore using M&A to gain market share and improve their offering.
Challenger banks are therefore using M&A to gain market share and improve their offering. The creation of a joint venture between Fabrick, an open banking subsidiary of Italy’s Sella Group, and illimity Bank, on which Arma advised, illustrated some of these dynamics. The deal produced a new fintech platform in Italy that combined HYPE, a challenger bank with 1.3 million customers, with other banking services, including SME lending.
In the future, European players may turn their attention towards the US market, which has been slower to move away from cash, thus offering new, exciting opportunities. This would mark a reversal of the typical transatlantic flow of capital, a sign of the monumental transformation in the European digital banking scene.