The popularity of consumer startups flourished during the zero-interest-rate era, a period between 2008 and 2021 when many central banks worldwide kept interest rates near zero to stimulate economic growth following the 2008 financial crisis. During this period, capital from investors was more abundant, as it was cheaper for them to access funds.
“Consumer startups” provide products or services sold to individual consumers. These companies typically rely on strong branding and marketing to attract and retain large user bases. Founders and investors embraced a “growth-at-all-costs” mentality, where revenue and monetisation were often secondary, while expansion and scale were prioritised. Most consumer startups poured their cash flow into customer acquisition, including costly spending on paid social media advertisements that were hyper-targeted to the right consumers and typically coupled with aggressive signup incentives. However, the macroeconomic environment has shifted in recent years, leading to a decline in the growth and funding of consumer startups.
In Europe, fintech consumer startups have emerged as some of the most transformative consumer ventures. These companies have revolutionised access to financial services and reinvented how consumers engage with money, improving financial access and inclusion. In this article, we will explore the rise of consumer fintechs in Europe, examine the challenges they have faced in recent years, and highlight the potential opportunities available for consumer fintech founders and startups in Europe.
The rise of European consumer fintech
In Europe, some of the most notable consumer startup success stories are fintechs. The first generation of consumer fintech startups democratised access to financial services, gaining significant traction from the early 2010s until the early 2020s. Consumers didn’t particularly trust incumbent financial services products offered by banks. A survey from 2018 (a decade after the 2008 global financial crisis and around the time when neobanks were launched and becoming more widely adopted) revealed that 66% of British adults don’t trust banks to work in the best interest of society. User experiences from banks were clunky and with poor customer service. Neobanks like Monzo, N26, and Revolut were a breath of fresh air for consumers as they changed how consumers engaged and managed their day-to-day banking. These digital-first banks challenged traditional financial institutions; providing user-friendly apps, minimal fees, and a renewed approach to personal finance.
Beyond neobanks, other consumer fintechs also opened up access to services that were once exclusive to financial services professionals. Free trade made investing in stocks and shares accessible to retail investors. Wise simplified foreign exchange, unlocking consumers’ ability to transfer money globally at low fees. Fintechs leveraged open financial service regulation to create compelling products. In the UK, it was a favourable regulatory environment which encouraged financial innovation experimentation. The Financial Conduct Authority (FCA), the financial services regulator in the UK, is world renowned for launching a regulatory sandbox which allowed businesses to test new products and services without incurring regulatory overhead. The FCA launched this concept in 2016; since then the concept has been adopted globally across 60 jurisdictions.
Headwinds that consumer fintech’s experience
Challenges in user acquisition
Following circa 2021 as interest rates rose and economic prosperity fizzled, investors changed their tune around “growth at all costs” and shifted their focus on monetisation and profitability. At the same time, the reliance on paid customer acquisition became more challenging. Not only did the cost of paid social ads rise dramatically, but technological changes to Apple iOS 14 made it harder to target and track consumers. As customer acquisition became more complicated, this ignited the cooling of consumer startups. Many declared the downfall of consumer startups. Andrew Chen, General Partner at a16z who previously led Growth at Uber and Author of “The Cold Start Problem”, voiced “the end of fast-growing horizontal consumer apps” and cited “a lack of innovation and high cost of user acquisition”.
Changes in investor appetite
Consumer fintechs face steeper challenges in the European context. Typically European investors investing in fintech have a bias towards B2B propositions as they are viewed as “safer” bets. Nevertheless, 20% of the share of fintech investments globally go to B2C businesses according to Dealroom. As investors focus on evaluating startups based on their monetisation strategies, one of the biggest challenges consumer startups face is user acquisition and monetisation; in particular converting users to becoming paid customers. Offering services for free often means that the consumer is the product where businesses are selling user data or selling advertisements.
Monetisation woes
Fintechs are relatively costly businesses to operate as they incur significant overhead as they are subject to complex technological challenges, risk management, and regulatory compliance.
- As with any consumer startup, marketing and branding needs to be executed well to gain the trust of users. In the context of fintech, it’s a daunting task when reputational stakes are high and consumer trust is fragile particularly when fintechs are trying to convince consumers to trust them with their finances.
- Charging consumers directly is equally challenging: consumers seek out fintech apps to help them save money rather than spend money. Making subscription or fee-based model fintechs a much harder sell to consumers. An alternative route has emerged in the form of B2B2C propositions, where fintech companies sell their services to employers who, in turn, provide them to employees as part of a wellbeing package.
For example, Bippit offers employees professional financial coaching services as an employee benefit – their service is used by Boeing, Sony, and the NHS in the UK. Swile digitises employee rewards and benefits and allows employees to claim vouchers and rewards through a card issued by Swile.
A new dawn for consumer fintech?
In the next few years or even sooner, we expect that many of the early consumer fintech success stories will be eyeing an exit as the first generation of consumer fintech startups approach the end of their startup lifecycle. Klarna recently announced its filing to IPO; while rumours of other consumer fintech unicorns, including Revolut, Monzo, Starling Bank, and Zilch, looking to IPO soon. Despite macroeconomic pressures globally, early-stage fintech investment has been relatively robust. In 2024, early-stage fintech deals dominated globally, with Seed and Series A rounds accounting for 81% of all deals. This is a testament to investors’ continued interest in fintech’s potential – giving rise to the new generation of fintech startups.
We certainly don’t expect to see much innovation to continue with challenger banking, so don’t expect more neobanks cropping up. But we do see other areas where there is opportunity and appetite for new fintech offerings.
What’s on the horizon for consumer fintech?
Despite the challenges with the current economic climate, there is still the opportunity to be seized for new consumer fintech startups. The next generation of consumer startups are creating products for specific niches. Including providing consumers access to financial products in overlooked circumstances. For example, Gaia offers financing and insurance to alleviate the financial burden of families going through IVF. Startups focusing on specific demographic segments including Yonder target young professionals living in cosmopolitan urban areas such as London with a lifestyle credit card offering rewards points that can be exchanged for experiences with lifestyle businesses in hospitality, D2C brands (Direct-to-Consumer), and travel.
Consumer startups are also finding success with a focus on winning GenZ, which is a segment with distinct values and preferences and resonates with branding that is culturally relevant and playful. Fintech startups that have well-executed targeting GenZ include London-based, Cleo, an AI-powered financial assistant. Cleo’s branding is bold and irreverent. If you go to their website, you will encounter vibrant, energetic colours, a pizza-emoji mouse cursor, and loads of memes and culturally relevant references. This tone of voice and branding also come through in their product that offers features like a “Roast Mode” that grills users and provides insights on their more frivolous spending choices, and “Hype Mode” offering the opposite type of recognition where they praise users for their wiser spending choices. Tallinn-based, Cino, is another fintech focused on GenZ; helping consumers split payments automatically with a virtual card issued for formed groups.
In response to the increasing cost of user acquisition, these startups are finding success in more cost-effective acquisition strategies, rather than relying on traditional paid advertisements. Many companies are now focusing on content creation and aiming to go viral on social media. Cino claims a key contributing factor to their growth is their multi-engine growth approach – which is highly dependent on social media. They have hired a social media expert in-house to create content to share their story and narrative on a minimal budget. Cino has discovered that their GenZ audience has resonated with the concept of money being a taboo topic.
Read the orginal article: https://www.eu-startups.com/2024/11/is-consumer-fintech-heating-up-again/
