Over  the  past  year,  while  the  total  amount  of  scaleups  decreased,  the  number  of  Dutch  fast-growing   companies   in   the   financial   services   sector   surprisingly   increased.   A   significant   part   of  this  growth  is  accounted  for  by  the  so-called  FinTechs.  These  are  companies  that  are  active  in  the financial services and that try to gain a position in  a  traditionally  closed  sector  through  smart  use  of  technology.  Why  did  FinTechs  experience  such  growth in the last year? There are several reasons to account for that.

First,  technological  advancements  in  recent  years  have enabled companies to offer financial services at a lower cost and/or with better user experience. Think,  for  instance,  of  digital  financial  advice  (e.g.  Evi  van  Lanschot),  digital  services  in  mortgage  arrangements  (e.g.  Ikbenfrits.nl  or  Viisi),  or  flash  trading (e.g. FlowTraders). This trend, already going on for some time, accelerated in the past year.

On  top  of  that,  the  COVID-19  crisis  also  played  a  significant  role.  Several  FinTechs  managed  to  leverage on the crisis to increase their competitive advantage  through  the  smart  use  of  technology.  For  example,  the  COVID-19  crisis  accelerated  the  growth of e-commerce; as a result of that, the so-called  payment  providers  (i.e.  parties  that  ensure  proper  payment  integration  in  webshops,  such  as  Adyen  or  Mollie)  have  seen  their  volumes  grow  enormously. This was however not the only direct effect the COVID-19 crisis had on the financial sector. For example, since less money was being spent on vacations and eating out, but more on investments, online brokers such as DeGiro experienced a boost. Moreover,  the  turbulence  in  the  financial  markets  also  contributed  to  higher  volumes  and  profits  for  some  FinTech  scaleups,  such  as  Flowtraders  in  high-speed trading.

Finally, the growth of FinTechs can also be explained by   regulatory   changes   and   their   subsequent   effect  on  the  ecosystem.  In  2015,  the  European  Parliament passed the PSD2 regulation, which went into  force  in  the  Netherlands  in  2019.  As  a  result,  banks now have to make customer data available to third parties at the request of their customers via a secure Application Programming Interface (API), i.e. a standard for digital communication. This led to a more open banking system and to the emergence of  new  players  in  the  ecosystem.  For  example,  at  Floryn, you can now obtain a new credit card within a  day  thanks  to  the  new  integration  with  external  bank details made available through PSD2. Because FinTech  scaleups  often  focus  on  a  specific  niche  within  the  financial  sector,  they  often  outsource  related   services   too.   The   use   of   APIs   makes   this  possible,  while  also  creating  new  business  opportunities   for   the   providers   of   supporting   financial products. For example, Fourthline provides Know Your Client (KYC) services. These supporting parties, in turn, make it easier for relatively new (full-fledged) banks such as bunq or Knab to scale up fast. As  a  result,  the  latest  technological  developments  are  immediately  put  in  use  in  this  process,  which  add up to a virtuous circle.

In  conclusion,  the  combination  of  technological  progress, the COVID-19 crisis, and a partly regulatory shake-up of the European banking sector all resulted in a fertile ground for the growth of FinTechs. At the same  time,  the  flexible  monetary  policy  and  the  large  amount  of  venture  capital  available  ensures  that financing is not an obstacle to scaling up. With a FinTech ecosystem that is slowly maturing and a more open European playing field, there are plenty of  opportunities  for  FinTechs  to  continue  their  growth in the coming years.

Dr. Dion Bongaerts Professor Finance, Rotterdam School of Management, Academic Director Fintech, Erasmus Center for Data Analytics