Can European fintechs go global?

Achieving global scale in an era of competition and uncertainty.

 This is a contributed article by Fawn Hudgens, VP of Global Content at Money20/20.

 

Winning away from home is hard. Familiar regulators, cultural connections and support for home-grown companies are all advantages at home, but none of them travel well. Mastering the process of expanding overseas has been hard for all manner of companies, whether it's Facebook in China, TikTok in India or Google in Europe. For Europe's growth-stage fintechs, international expansion is key to their goals, but it won't be easy.

The biggest challenges for European fintechs expanding outside the union are regulatory headaches, defensive incumbents and a lack of brand recognition. However, the motivation to go abroad remains strong. Intense competition, strict data regulations and customers who are less open to digital financial services all spur European fintechs to seek growth elsewhere.

Although the external factors are similar, it's worth noting the internal factors heavily influence strategies for international expansion. On one hand, many fintechs are only profitable when they have a large user base. Where true, it means the search for new customers to amortise the cost of the platform is often relentless. On the other hand, fintechs with more sustainable unit economics see new markets as profit drivers for proven products. In each case, the challenges are nuanced.

Regulatory headaches

Licensing outside of Europe is inherently piecemeal, which increases cost and delays market entry. Revolut initially announced plans to secure a banking license for its US launch in 2018, but after years of regulatory wrangling, it partnered with Metropolitan Commercial Bank to leverage its national banking license. When N26, the challenger bank from Berlin, expanded into the US in 2019 it learned from Revolut's experience and partnered with Axos Bank. Monzo has applied for a bank license, but the process is expected to take a minimum of 18 months. For context, US-based Square applied for a license in 2017, withdrew the application, re-applied in 2018 and finally received a conditional banking license in 2020.

Beyond licensure, European fintechs face divergent regulatory regimes for data and cloud computing. For B2B fintechs, such as the UK's Rapyd or Iceland's Meniga, expanding to Asia meant adapting to cloud usage guidelines in each of the markets they entered. In Asia specifically, cloud computing rules vary widely. India requires on-shore processing, while Singapore actively supports the use of cloud outsourcing. In each case, core services run on the cloud must be reconfigured to adhere to local data rules for protection, segregation and processing.

Defensive incumbents

While European fintechs are accustomed to competing with established players, incumbents in new markets carry additional advantages when compared to a newly arrived fintech. Not all regulators take as supportive a view of fintech challengers as their European counterparts. This can manifest itself in potential financial clients feeling reluctant to switch to a new B2B fintech service if they are uncertain how their regulator will view it.

Local relationships are also hard to displace. Local banks, an attractive customer segment for Europe's B2B fintechs, inherently operate in clusters of vendors, partly chosen because all their other counterparties use the same vendor. These network effects, and the personal relationships that underpin them, are not easily disrupted by better efficiency or pricing. To the extent that Europe's fintechs follow the somewhat more transactional business culture of Silicon Valley, they may struggle in markets where deep-rooted relationships are a primary factor in business decisions.

Beyond this, European fintechs may hope to bring the latest developments to emerging markets, however, the window of opportunity has already begun to close in some. Chinese techfin behemoths Ant Group and Tencent have spread internationally through investments, partnerships and in some cases, direct market entry. In each case, they bring mature technology and deep pockets, all of which make for fearsome competitors to Europeans just arriving.

Lack of brand recognition

Like all startups, CAC (Customer Acquisition Cost) is a major success factor. Fintech startups and scaleups have invested heavily in direct marketing, advertising and sponsorship to create brand awareness and build a positive reputation. When entering a new market, this costly exercise needs to be repeated. In the midst of a pandemic-induced recession and renewed investor scrutiny around profitability, investing in expensive brand-building campaigns requires a higher degree of certainty that it will result in new business.

Taken together, these factors create a challenging matrix for Europe's fintechs to navigate as they scale globally. Fortunately, best practices are already starting to emerge.

  1. Partner. Regulatory hurdles can often be overcome via a partner. Where possible, Europe's fintechs should focus on getting to revenue and building customer relationships, rather than investing in regulatory exercises.
  2. Start with one. Building credibility with regulators and clients in a new region takes presence and time, so fintechs should focus on one market in each region they enter. This will allow the organisation time to acclimatise, but also give a local proof point for clients and regulators in nearby markets.
  3. Prove it at home. Europe's fintechs should be wary of expanding internationally if they haven't achieved sustainable unit economics in Europe. Given the unexpected nature of international expansion in a pandemic and a recession, it is vital to prove the model financially before you take the show on the road.

Scaling globally is an important step for many of Europe's fintechs to achieve their ambitions, and despite the challenges, there are examples and lessons to guide new travellers on the journey. The international journeys of Europe's brave fintechs have been exciting to watch thus far and it will no doubt be fascinating to see how they develop the future of money around the world.

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