Forget neobanks: In 2022, it’s B2B fintech that investors find “sexy”

Shiny coral debit cards and busy investment apps stole all the limelight when the European fintech scene came of age from around 2015.

But this year, it’s been the fintechs giving their pipes that have been all the rage.

Fintechs selling to businesses (B2B) in Europe have attracted $14.1 billion in investment so far in 2022 across 819 financing rounds — more than four times the $3.2 billion raised 230 B2C (business to consumer) rounds, according to Dealroom. It has been buoyant despite European fintech funding as a whole falling 25% from last year – with the number of consumer fintech rounds at its lowest since 2015.

As macroeconomic headwinds weigh on consumer-facing business models, some VCs believe B2B fintech is more shielded from market volatility. Others say the transition to B2B is an inevitable part of the European fintech scene’s maturation.

New B2B sub-sectors have dominated funding announcements. CFO tools, capital markets fintechs, B2B buy now, pay later (BNPL) and payment rails is what investors apparently find sexy now.

But much of B2B’s brilliance has to do with B2C’s challenges. So what are they?

B2C is more vulnerable to macroeconomic weakness

Compared to B2B, B2C business models are much more vulnerable to rising inflation, interest rates and macroeconomic fluctuations.

In the short term, Europe’s new banks and lenders benefit from higher interest rates. But investors expect the overall slowdown in spending to eventually hurt consumer-facing business models as loan demand falls and defaults rise.

Take BNPL suppliers. They thrive in a low interest rate environment, but their margins start to narrow when central banks raise interest rates. This combined with falling consumptionhas prompted several investors to tell Sifted that they wouldn’t touch the sector with a barge pole right now.

Retail investing – and the fintech apps that made it possible – exploded underneath the pandemic, when people found themselves with more time and money on their hands. But now they are much less likely to part with cash – even while savings rates are higher.

“For many savers who became investors for the first time over the past few years, it’s really difficult emotionally to see your portfolio fall 20%+ and continue to make regular investments,” says Tara Reeves, CEO of Eurazeo.

“While B2B fintech companies are also subject to recessionary pressures, they are less exposed than these B2C companies.”

There are many B2C fintechs, so it is difficult to convert new customers

In addition to these macroeconomic factors, the simple fact that there are more B2C and more B2C fintech offerings out there every year makes scoring customers even more difficult. New fintechs need to gain the critical mass needed for their business model to work in a world where Revolut grabs customers and more super app offer every week.

“The customer acquisition model for B2C fintech is pretty much broken,” says Pär-Jörgen Pärson, partner at Northzone VC, who argues that big tech companies are stealing the marginal value of consumers from startups.

“I think there was some hope in the emergence of new Web3-related fintechs because they could engage and monetize a new audience. But now with the extreme volatility in that space, they also face an uphill battle,” he says.

More and more B2C fintechs have also built out a B2B software side of their business to diversify their revenue streams, in the face of customer acquisition challenges.

Starling Bank CEO Anne Boden has decided that she will only offer consumer neobank in the UK, and will instead scale internationally through a banking software offering, Engine by Starling.

“It’s pretty easy to build market share as a startup and founder if you have some market momentum,” Boden said at the Web Summit conference in Lisbon. “But when you decide to go international, the chemistry might not work.”

Another of Europe’s fintech giants, Klarna, is also looking for safe B2B havens to shelter in. In March it was launched Klarna Kosma, a new B2B open banking software unit, and last October collaborated with its B2B counterpart Billie to give merchants in the network the ability to pay for items later.

Investors believe there are more B2B customers out there

A final reason why investors have fled from B2C BNPL to B2B recently is because of the size of the addressable market. Berlin-based B2B BNPL startup Mondu recently told Sifted it expects the market to grow to $200 billion in Europe and the US over the next couple of years, while London’s Hokodo has set the potential for a colossal $12 tn.

More and more business transactions take place online, catalyzed by Covidwhich provides a huge upside for market growth unmatched by the consumer market.

In Billie and Mondu’s home market of Germany, for example, B2B e-commerce transactions worth 200 billion euros were processed in 2021, compared to around 86.7 billion euros in B2C e-commerce revenue, according to Statistics.

“The market size opportunity also goes hand in hand with the fact that many of the B2B fintechs actually need fewer customers. Each one is much bigger and brings them much more revenue,” said Khalil Hefaf, a chief investment officer at Target Global.

“While on the B2C side you have to waste a lot of money on marketing, on the B2B side there is often a network effect where every client you bring on board has a network of partner companies you can use.”

New fintech needs new infrastructure

B2B fintech funding has surpassed B2C in Europe for yearsbut the gap between the two segments’ growth has suddenly widened.

Some investors say this is a natural development as the European fintech ecosystem grows larger – and a hangover effect from record amount of funding poured into all sorts of new fintech business models in 2021.

Magda Posluszny, a fintech investor at Lakestar, divides fintechs into two clubs: an application layer (i.e. these consumer apps) and an infrastructure layer (i.e. the banking software that powers them).

“There is always a backlog while the infrastructure is being built, but when so many new fintech applications and business models emerged, it became really clear that interacting with banks is very difficult – they are not designed for these higher volumes.”

Two of the most high-profile fintech seed rounds this year focused on these payment processing issues. Business invoicing software API Sequence raised a $19 million seed round led by US VC giant Andreessen Horowitz (a16z) in September, and Berlin-based payments infrastructure startup Payrails also won a16z’s backing for its $6.4 million round in March.

And no matter how much or how little people spend, they’ll always trade money — which Posluszny says means B2B payment infrastructure will never lose its luster.

“Payments will always be sexy – there’s still a massive problem to solve everywhere in Europe around B2B payments, so we’ll always be looking for the next solution there.”

Amy O’Brien is Sifted’s fintech reporter. She writes Sifted’s fintech newsletter and tweets from @Amy_EOBrien.