With €2.27 billion raised in 2021, the French fintech sector is booming. Its players are now respected, mature and key partners in the traditional financial and banking ecosystem, which has plenty to gain from these young and agile industry entrants.
As fundraising accelerates and the fintech sector continues to grow (2021 marked a new record in the sector’s expansion) it seems that French fintechs and legacy players will have to work hand in hand. The Palmarès Fintech 100, released in March 2022, indicates that the revenues of the country’s top 100 fintechs grew 102% over the year to a total of over €1 billion. More than half of these companies also expect to grow by more than 50% in 2022.
Given that 8 out of 10 fintechs have already set up commercial or technological partnerships, forward-thinking, legacy players in the financial system must position themselves to take advantage. And the current context of falling valuations of startups in general does not change anything. In fact, it could even support the fintech sector.
Below, we take a look at some of the main benefits that fintechs can bring to a partnership.
Fintechs are companies that develop digital technologies applied to financial services. Fintechs devote an average of 29% of their budget to R&D, and between 50 and 75% of them claim that more than half of their R&D employees work in tech rather than finance. This technological focus allows fintechs to capitalize on innovation capabilities that traditional players have difficulty integrating quickly.
Specialized in corporate financial services, insurance (Assurtech) and payment services (Paytech), as well as in savings and investments, fintech objectives are similar to those of traditional players, but they are often highly targeted, creating an effective culture of innovation.
Moreover, the technologies they develop respond to specific challenges facing the financial system, some of which I’ve listed below:
- Operational efficiency, such automation with artificial intelligence
- Shortening the life cycle of software technologies
- Managing and leveraging customer data in a hyper-evolving regulatory framework
- Opening up systems and data thanks to cutting-edge API concepts that contribute to a more fluid customer experience
- And cybersecurity, which because of digitization presents many opportunities but also represents a host of new dangers.
Added value of fintechs and startups
The drastic corrections in the valuation of fintechs and startups in general demonstrate the need to focus on the value they provide. In this respect, the Fintech 100 barometer unveiled in mid-March was a precursor: beyond the fundraising indicators, on which the “unicorn” label depends, it offers a balanced reading of the performance of fintechs on various levels, including the efficiency of capital invested and job creation.
The figures also show that fintechs’ revenues represent more than 10% of the entire software sector: over €5 billion in funding. Furthermore, fintechs’ average recurring revenue share is 73% of their total revenue. Traditional players can therefore engage in value co-creation, both by integrating partners and by taking part in an innovation ecosystem.
By and large, fintechs operate on an opportunistic basis and can, more so than traditional players, respond to crisis situations and rapid changes in the financial system. The health crisis is a recent example of this and shows how quickly fintech has managed to develop and bounce back, despite market uncertainties. According to data from the Fintech 100 ranking, the health crisis had a neutral or positive impact on 79% of French fintechs. What’s more, by March 2022, 72% of these companies said their business was already unaffected by the health crisis. Far from slowing down their development, the pandemic has accelerated the transition to a digital economy and the development of innovative solutions.
This adaptability is promising, as it will allow fintechs to integrate the future regulations that will govern their activity. It will also allow them to be responsive to the development of new technologies and changes in consumer behavior.
Are banks and fintechs in competition, or can they work together?
In recent years, fintechs (notably paytech and challenger banks) have encroached on the activities of retail banks. Moreover, with open banking, customer data is becoming exploitable by third parties, as banking and financial groups no longer have a monopoly on this information. New, more modern players are taking advantage of this.
But this competition should be seen as an opportunity rather than an existential threat. Fintechs also allow banks to adapt to the needs of certain segments of their customers. They develop APIs to improve applications, individualize services and enhance the customer experience – the latter being the priority of financial system players.
The digital revolution can therefore be achieved hand in hand, by integrating the technical innovations that high-performance fintechs specializing in technologies offer to traditional players in the banking system.
At a time of open banking, open finance and changing consumer habits, fintechs could (and likely will) play a major role in the future of the financial services industry. Moreover, fintechs have no difficulty in forging partnerships: 86% of them have already set up commercial and technological partnerships with banking groups or startups.
The conditions are therefore right for fintechs and the traditional financial system to work together, with one providing the expertise, experience and network, and the other the fluidity, responsiveness and technological skills needed in a world that is becoming increasingly digital. The integration of fintechs into the financial system will allow it to reach its full maturity. And the current context of revaluation of fintechs should also accelerate this movement.