The financial sector in Ireland has changed dramatically in recent years. The departure of Ulster Bank and KBC this year took much of the attention, leaving just three pillar banks remaining, notably Bank of Ireland, AIB and Permanent TSB. This is not a first, with other banks retiring over the past decade, notably Bank of Scotland/Halifax, Danske Bank (National Irish Bank) and Rabobank. And, of course, the collapse of Anglo-Irish Bank and Irish Nationwide Building Society during the financial crash.
The changes in the banking landscape have also been magnified by the growth of payment companies and neo-banks in Ireland. The growth of this sector has given rise to a host of companies not known before, including online payments, cross-border transactions, payment gateways, digital banking, open banking, digital remittances, regtech, blockchain and digital assets.
Ireland is now home to many global payment players shaping the industry, including Mastercard, PayPal, Elavon, Stripe, Fiserv, Coinbase and Block, as well as neo-banks such as Revolut, N26 and Monzo.
However, the competitive threat of financial technology companies to big banks diminished over the past year as rising interest rates constricted funding, a new report from Moody’s Investor Service found.
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A decline in venture capital funding in 2022 particularly hurt fintech firms that rely on outside capital to fund their operations and acquire clients, Moody’s analysts wrote in a recent report on VCs.
The report cited figures from CB Insights that showed global fintech funding fell 46 per cent from 2021 to 2022.
James Toomey, partner with Deloitte where he heads up the M&A advisory group, points to the age discrepancy between the traditional banking sector and the neo-banks and fintechs, with the former being typically 90 years in existence versus 12 years or less for the new companies.
He sees M&A as the fastest way to closing this gap. “Banks have two options. They can either develop the technology and services in house or they can acquire technology that is established and running already, meaning the banks can build directly on to the platform without any of the risks of building their own software.
“This age discrepancy points to a massive difference between culture and innovation in the legacy financial services and the newer fintechs. This is being addressed as banks increasingly look for offer banking as a service, employing digitisation and moving services online.”
In addition, this sector has been one of the hottest for equity investment, in particular in companies like Wayflyer, TransferMate and Fanoa raising $262 million between them.
“It’s been important for Ireland with our strong economic growth and we now find external investors looking to get into our up-and-coming businesses.”
2020 and 2021 were really strong years for investment into fintech, with the overall investment tailing off somewhat at the end of 2022 and into 2023, with total fintech funding in 2022 down 46 per cent year-on-year. Global fintech funding reached $75.2 billion in 2022, and while that is down on 2021 it is still up 52 per cent when compared with 2020. Deal volume itself only fell by 8 per cent year-on-year.
For the total year of 2022 the Irish fintech sector performed the best with 23 per cent of total VC investment, followed by life sciences at 21 per cent and wider software at 19 per cent.
Toomey also points out that while deal flow may have reduced from 2021, there is still a lot of money out there.
“The market is dynamic at the moment with what we sometimes call dry powder, which is capital available to investors to invest in businesses. There are also corporate cash reserves. So trade players and financial institutions are looking to invest across the board. In fact, there is more capital chasing a smaller number of businesses. A lot of this interest is focused on Ireland as we are one of the faster growing, if not the fastest growing, economies in Europe.
In addition, the existence of so many tech multinationals in Ireland has helped create a talent pool of technically-enabled entrepreneurs who are now creating their own start-ups. Combined with a national focus on the STEM industries (science, technologies, engineering and maths) it means that Ireland is producing many new fintechs at scale, which also is helping the economic growth.