It’s easy to get swept up in the hype and hyperbole around European fintech hubs like London right now, but for Credit Suisse analyst Charlie Brennan it wasn’t until 2015 that the region had a sector worth talking about. Speaking at the Fintech Investor Forum at the London Stock Exchange last week, he cited the IPO of payments giant Worldpay at the end of last year as a “game changer” for Europe, “forcing investors to take notice”. He also pointed to rising valuations for home-grown financial tech companies like Funding Circle as evidence the region is stepping out of the US’ shadow.
“I’m glad we’ve finally got a fintech sector to talk about in Europe. In 15 years analysing the sector, fintech in Europe has been largely anonymous and non-existent for the vast majority of that time,” said Brennan, a technology equity research analyst. “I don’t want to be critical but if I think about the space, it’s lacked critical mass to give it a fintech ‘sector’ label until now.”
“Payments are the heart of the fintech story”
He’s bullish on payments specifically, saying the prevalence of transactions in everyday life means investors can get a grip on how they work. But the main attraction is the business models and growing appetite from investors to back companies in this space is helping drive the growth of fintech in the region. “For me and based on my discussions with investors, payments are very much the heart of the fintech story,” says Brennan. “So much of finance is shrouded in complexity but payments is something that touches our everyday lives – every time you use a card you’re interacting with companies like Ingenico and Worldpay.”
He says the fundamental reason investors are attracted to payments companies is that there is clear structural growth as businesses harness the transition away from cash.
“When I think about profits, there are some clear business model benefits helping drive margins. Payments are platform businesses, there is a significant investment stage at the start but once that’s built there should be high margins,” he says. “At scale, payments businesses are high margin. They depend on millions of small transactions, this effectively makes them a quasi-recurring revenue stream of low risk revenues that are not dependent on volatile licence sales.
“This gives you the combination of structural growth, operations geared toward margins and recurring revenues that will makes payments a strong investment case.”
Who’s making money?
His comments are borne out by companies like Klarna, a Swedish firm that powers check-out services and processes payments for merchants online. Launched in 2005, it claims to have been profitable “since day one” and at USD2.25m it’s one of Europe’s most highly-valued fintech companies, indeed one of the region’s most highly-valued tech companies overall. It currently handles payments for 60,000 merchants and employs 1,400 people across 18 countries. The firm has a UK office and moved into the US last year as it targets big e-commerce markets to drive growth outside the Nordics.
“Historically we did a lot of investing to get new business,” said Klarna’s UK country manager Jens Saltin, speaking at the same event on an alternate finance panel. “Every new business comes on back of some kind of investment in account management or a new sales role. In the last few years what we’ve done to cut acquisition costs to small pieces – we are trying to go through partners a lot more and incentivise people to work with us through reselling our product.”
Another flagship payments business in Europe is Adyen in Amsterdam, valued at $2.3 billion. The firm processed $50 billion in transaction volume last year, doubling the amount from 2014, while revenues climbed 100% to $350m. The firm says it has been profitable since 2011.
Of course it’s not plain sailing across the board as highlighted by a notable absence from the conference: Dan Wagner, CEO of Powa Technologies had been due to speak on the same panel as Klarna. Powa, once valued at USD2.7bn and hailed as UK fintech and e-commerce unicorn went bust last month.
Meanwhile Eileen Burbidge, partner at gocardless backer Passion Capital and the UK government’s special envoy for fintech, sounded a note of caution at the event, warning that “fintech is the UK’s game to lose”. While upbeat on the UK’s credentials as a fertile breeding ground for financial tech companies, she said that while a recent study from Ernst & Young became just the latest to call UK the global fintech capital, New York, China and Israel are right behind it.
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