Overview to FinTech Consulting in Spain

General overview

Even though the Spanish Fintech ecosystem is less mature than leading countries, it is still amongst the top 5 European markets. It has recently gained much traction and visibility, both at an institutional level and in consumers’ minds, while increasingly leveraging its cultural and historic links with Latin America.

In its origins, the industry probably did not get all the entrepreneurial focus, investment and institutional support it received in other markets, which led to a slight delay in its development. However, the trend has changed in recent years from all perspectives. The market and its main stakeholders, public and private, are opening up to all these innovative solutions developed by new players who are smaller but by definition much more dynamic than traditional financial institutions. The number of new businesses is growing fast, but most importantly it is widening in terms of verticals and diversity of business models.

We anticipate a lot of dynamism and innovation moving forward, with a mix of local and international startups innovating and competing in our market. It will be a breeding ground of opportunities for all: entrepreneurs, innovation-oriented incumbents and investors, as well as for all the service companies that provide support throughout this transformation.

Market size: an increasing number of rather young and small-sized startups

By the end of 2019, the number of Spanish Fintechs was estimated to get very close to 400, up by 16% compared to 2018, which in the big picture makes one Fintech per 120k citizens. This figure is 3 times lower than the European (and probably global) leader, the UK, with c.1,600 Fintechs or one per 42k citizens. Still, it is very much in line with the rest of the advanced European economies (1/103k in Germany, 1/112k in France) and higher than comparable economies (1/160k in Italy).

It is in terms of investment where the gap gets bigger. In 2019, Spanish Fintechs have raised €245 million, a fraction of the €3,942m, €2,322m or €503m invested in UK, Germany and France respectively, but still the fifth largest figure in Europe. Our biggest operations include an online lender that raised c.€65m in early 2019 and a challenger bank with c.€25m between institutional and crowd funding in Q4. It’s obviously lagging behind the macro-operations that were announced in other markets and reveals that, even if we have a dynamic ecosystem in terms of number of companies, most are still in early stages of development, and none of our local champions seem in a position to become one of the 15 European unicorns any time soon.

Data shows that Spanish Fintechs are on average three to four years younger than their European peers, when comparing the year of incorporation of the most funded companies. This is an important competitive gap in a tremendously dynamic market and has resulted in a number of more mature foreign Fintechs entering our market to try to seize the opportunity. Our local ventures, on their side, are trying to learn from the existing best-practices, go beyond them, adapt them to our local needs and/or cover unattended niches.

Another increasing trend that limits the size of our startups is their acquisition by larger companies (typically incumbent financial institutions, consolidated technology providers or international Fintechs) before getting scale, instead of raising financing rounds to remain independent.

Verticals: a move from core financial services (lending and payments) towards a more diversified ecosystem

New solutions in traditional banking verticals, such as lending, payments or financial management, have been historically the most populated verticals in terms of initiatives. Those reflected the most obvious opportunities: a very active consumer debt market since the recovery from the last financial crisis (with double digit growth for the last 4 years), evolving B2C and P2P payment behaviours (from a still cash intensive society towards digital alternatives) and a large gap in terms of investment and financial management tools offered by incumbents to retail customers.

However, recent years reflect an immense diversification of verticals and business models, especially in terms of B2B services, Proptech (29% year-on-year increase in terms of startups) and Insurtech, where our market was either digitally underserved or lacked the level of personalization that all these initiatives address.

In parallel, a universe of infrastructure or value-added services have emerged to help new and incumbent players reduce friction along the value chain and improve customers’ satisfaction and loyalty, ranging from regulatory facilitation solutions (e.g. KYC, Risks, etc) to new technologies (e.g. Blockchain).

The challenger bank is an interesting case study in our country. A very limited number of local neobanks have emerged recently (last 2 to 4 years). With client bases in the hundreds of thousands (as opposed to the millions of European leaders) they face the irruption of European peers, the development of incumbent funded initiatives (e.g. Openbank or Orange Bank) but also the rise of other national Fintechs that are evolving from related verticals (e.g. PFM or P2P payments) towards a banking-like value proposition (typically accounts and cards). This will create a very interesting competitive landscape where each will play its cards in terms of value proposition, marketing and UX to gain volume and search for profitability. All this in a context where traditional banks are also evolving at their fastest pace to adapt and retain their customer base.

Market profile: traditional challenges vs. transformational forces

The Fintech environment in Spain was traditionally not as favourable as in other countries. The reasons for this ranged over market demand, entrepreneurial culture, venture capital structure and administrative/regulatory reasons. Things are quickly changing though, which has put Spain in a virtuous circle towards a very dynamic financial innovation market.

Spain is a medium-size financial services market, and a very competitive one, with incumbents historically very responsive in adapting to new trends, including digital. There is obviously plenty of space for innovation and new/improved propositions, though the gap and size of the opportunity were probably less obvious than in other markets. In terms of opportunity, we have a very relevant advantage though, and that is our close cultural and business relationship with Latin America. This places our country as the perfect “base camp” for European companies before entering South & Central America in their races for internationalization.

The Spanish talent pool, globally recognized for being very well-trained and competitive, was traditionally not especially entrepreneurial. Several factors have changed this mindset though. First, the financial sector restructuring since 2008 left many banking professionals looking for new opportunities, and a general sensation that financial services could (should) be delivered in a different way. Second, the success stories both at local and European levels have encouraged both financial and technological specialists to switch towards entrepreneurial ventures. A revealing sign of this changing mentality is the increasing amount of available startup-oriented or even Fintech-specific executive programs.

Early access to capital probably remains one of the biggest challenges. Spain’s venture capital structure is rich in terms of individual or small business angels and seed-investors, though it’s a pretty disseminated network with few relevant players, and none remotely specialized in Fintech. This is less of a problem in later stages, where international funds and/or corporate VCs tend to move in, as shown by the latest and biggest operations in our country.

Spanish institutions have not been the most supportive or flexible so far, and even though some winds of change have begun to blow, it will probably not be our biggest strength any time soon. Complex administrative procedures and inflexible tax regulation in certain domains do not incentivize startup creation enough. The gradual digitalization of our public institutions is helping though.

On the positive side, multiple facilitation initiatives have surged, mostly private but some with public support. Industry associations (e.g. “Asociación Española de Fintech e Insurtech”), regional hub initiatives (“Madrid Capital Fintech”, “Barcelona Tech City”, among others) and corporate programs (probably worth mentioning Mastercard’s efforts to find win-win strategies between Fintechs and traditional players) are helping create connections and accelerate the development of pilots and collaborations.

Specific financial regulatory and supervisory context: slow but progressing

As in most of the Eurozone, Spanish financial regulation is mostly based on European rules, with some local specificities that need to be considered whenever entering our market. In the big picture, rules are product or services oriented, and neutral from technology or type of player points of view. Therefore, the same rules apply to both Fintechs and traditional players, whether banks, insurers, payment institutions, etc.

In the last few years, Spanish regulators have not been amongst the most agile in adopting new legal developments that foster innovation and competition. For instance, we were amongst the last jurisdictions to pass the laws that transpose PSD2, increasing for months the uncertainty in the market.

From a supervisory point of view, several Fintechs have also complained about the difficulty of access to financial licences (typically e-money or payment institutions) and some have even decided to process their applications in other jurisdictions and then passport it to our country.

Beyond discussions about the causes of the slow regulatory and supervisory processes, the fact is that it has created a competitive disadvantage versus European peers that have been able to move their projects forward easier and faster, and have been able to concentrate more efforts and resources in their value proposition and growth strategies.

The latest developments seem to show a changing trend. In addition to public declarations of intentions about optimizing supervisory processes, the approval of a legislative project that would enable regulatory Sandboxes has been very welcomed by the whole industry. Even if suffering from delays, it would put our country amongst a minority of European jurisdictions that offer this kind of tool to foster innovation in a safe environment.

Incumbent banks strategy: collaboration, incubation and strategic CVC

In Spain (as everywhere else), Fintechs represent different levels of threat or opportunity for incumbent institutions. According to a study from KPMG and Funcas, it is estimated that 20% of Spanish Fintechs compete directly with banks, while 32% provide collaborative solutions that help them deliver improved services and 48% offer complementary value propositions. Virtually all Spanish banks have acknowledged an opportunity to collaborate with or invest in Fintechs, and each is developing partnerships, incubation or investment strategies in accordance with their vision and capabilities.

In terms of Corporate Venture Capital, strategies range from the likes of BBVA and Santander, very much internationally focused with most investments targeting bigger international players, to Sabadell InnoCells, with a more balanced national-international mix of strategic investments.

In terms of incubation, it is probably worth mentioning Bankia, which is currently calling for its fifth edition of its acceleration program, where they support a variety of Fintechs (47 up to now, selected from 300+ applicants) while analysing the potential strategic fit with the bank’s products and services.

In terms of partnerships, virtually all institutions are establishing collaboration programs within their innovation areas, which have more and more an open innovation mindset.

External factors moving forward: Brexit, Bigtechs and the coronavirus crisis

Some very relevant external factors will highly impact the evolution of our burgeoning Fintech ecosystem in the short and medium term.

Up to the beginning of 2020, a common question in the industry regarded the potential influence of Brexit. Implications for Fintechs using UK-based service providers, and potential acquisitions of Spanish companies by UK players to facilitate European expansion, were amongst some resonating questions.

However, priorities have changed since COVID-19 erupted. The effects of this global crisis will vary greatly depending on the vertical, the business model and the level of maturity of each project. General impacts include a relevant economic slowdown, liquidity constraints and an accelerated evolution of demand towards digitalization. Most startups are combining “survival mode” strategies (with cost-optimizations and backup plans in case investment rounds are cancelled or delayed) with “opportunity chasing” initiatives to leverage their strengths (digital UX, transparency and personalization) in these times of crisis. Banks, on their side, are taking their chance to recover from the reputational issues they have suffered since 2008. Time will tell which players have been more flexible in adapting their strategies to gain consumers’ trust and loyalty.

In terms of structural effects (and on a very different dimension, obviously) the biggest disruption potential is represented by Bigtechs, due to their global reach, gigantic and loyal user bases, and their technological capabilities. Fintechs and banks will need to keep their moves very much on the radar, since they can disrupt whole verticals. Just take, for example, the Spanish P2P payments industry. What will happen when WhatsApp Pay is launched in our market, where the messaging app has a penetration of 93% amongst smartphone users? Disruption will be profound and WhatsApp’s (Facebook) choice of partners and technology (Card? Account-to-Account?) will undoubtedly be a market changer for any player (new or traditional) in that industry.