Pound, Euro Instability Signals Stress Ahead for Europe’s FinTech Ecosystem

How a currency trades on the world stage is a form of shorthand for how traders and investors view the prospects and the perils facing various nations.

And in Europe, the status of the British pound and euro signal turbulence ahead for several sectors in the region — including the FinTech sector.

After all, access to capital is all-important for all manner of nascent firms as they seek to launch or broaden the reach of financial services innovations.

For the venture capital and equity firms that fund the FinTechs, the squeeze is on — and will be. The capital that is typically extended by banks and by investors to those institutional investors in turn makes its way to FinTech coffers will be harder to come by and certainly will be more expensive.

Record Lows and Volatility for Currencies

At this writing, the British pound has nosedived to a record low against the U.S. dollar, and the euro is roughly a 20-year low against the greenback. Currency markets are being rattled by the news, in recent days, that the U.K. government will be embracing a huge round to tax cuts, which in turn are paid for by government borrowing, which in turn stokes worries over inflation and higher debts over the long run.

And as the Bank of England seems poised to push through a significant emergency rate hike to help boost the currency (and its attractiveness for investors seeking yield), borrowing becomes more expensive.

No surprise then, as KPMG has estimated, U.K. FinTech investment in the first of 2022 dropped by 65% year on year to $9.6 billion.

As borrowing and funding get more expensive, we might see even more pressure on the pace of private equity investment, which means that fewer companies will get the “oxygen” they need to make the leap to launch operations or grow them.

The ripple effects will be far-reaching. For FinTechs founders, various exit strategies wind up getting closed off — such as the hopes/dreams of listing on public markets, which can monetize the sweat equity built up over the years (and also rewards early-stage, institutional investors).

But even that strategy offers no real reward in the current environment.  If we use our FinTech IPO stock index as a litmus test, investor sentiment is overwhelmingly negative. Every single one of those holdings is trading as a “busted” initial public offering — i.e., below its offering price — with the exception of Bill.com Holdings (which is up triple digits).

No easy times ahead, and the age of easy money lies well behind us.