The UK has increased its dominant role in Europe’s fintech sector, accounting for two-thirds of the total volume of deals reached across the continent in the first half of this year, according to a new annual report analysing the sector, with investment and M&A anticipated to grow this year and into 2025. 

The annual State of European Fintech report for 2024 found that the UK is strengthening its position at the forefront of the European fintech sector, despite an overall decline in funding across the continent. 

The report highlights the ongoing challenges faced by the sector, noting that higher interest rates, a focus on cost efficiency, and increased scrutiny on the sustainability of business models have driven the UK to account for around 65% of fintech deals in Europe.

Funding in the UK fintech sector rose 3% YoY to £2.2bn compared with £1.9bn in H1 of last year. The largest deal done in Europe in H1 was UK’s Monzo, which raised £500m in equity. 

European picture

Overall, the 9th edition of the annual report,  authored and compiled by leading fintech growth capital firm Finch Capital, found that although it remains a challenging environment for European fintechs, there are clear signs of brighter prospects ahead.  

While the UK leads the way, the Netherlands showed resilience, with investment volumes holding steady. Meanwhile, Ireland, Germany, and France all saw major government-backed initiatives aimed at fostering growth through 2025, signalling strong long-term commitment to the local technology ecosystems. 

Despite a notable contraction in funding across Europe, some key sub-sectors helped by higher interest levels, such as challenger banks like Revolut and Monzo, are beginning to show profitable growth. 

Higher rates and boosted profit 

The report revealed that total capital invested in European fintechs in the first half of 2024 fell by 25% YoY, from £3.2 billion in H1 2023 to £2.4 billion in H1 2024. 

However, profitability in sub-sectors like banking is driving larger funding rounds, with the top challenger banks generating close to £600m in profit in 2024 compared to a £125m loss in  2023. 

As these banks emerge as success stories, the UK has become a hub for profitable growth, while other European nations work to adapt, the report found. 

Mid-market fintech M&A thrives

The report also highlighted the increasing activity in the mid-market M&A space across Europe, particularly in the UK, which is benefiting from consolidation in the sector. 

Funding rounds for fintech unicorns have slowed, the findings show, with investors prioritising companies with solid financial fundamentals and avoiding overly ambitious valuations based on hypergrowth and unproven profitability.

European exits under £500 million now account for 32% of global M&A activity, although the market remains 2-3x smaller than the US for larger deals, according to the report.  

AI creating efficiency 

The report also found that, as a leader in fintech innovation, the UK is expected to benefit significantly from the adoption of AI technologies in the coming years, particularly in the insurance sector.

According to research, 4 out of 5 actuaries are now using AI to improve risk analysis and pricing models and 65% of executives say they will invest more than $10 million in AI in the next 3 years, making the industry more efficient. 

Commenting on the findings, Aman Ghei, Partner at Finch Capital, said: “The challenges that fintech faced in 2023 were necessary for the sector to mature and become more sustainable. While funding may be down overall, and unicorn chasing has  slowed, there is plenty of opportunity for companies that are capital efficient and have a  clear path to profit.”

“With AI transforming the industry and significant dry powder still available, the next 12-18 months will mark a turning point for fintech in Europe. The next wave of fintech success stories will likely be built on sound financials rather than rapid revenue growth alone.”