Feature Alternative Lending

Embedded finance and open banking are driving alternative lending across Europe

Two trends are helping to drive still-nascent alternative lending in many markets.

a body of water with buildings along it

Alex Vasey/Unsplash.

This is an excerpt from AltFi’s Alternative Lending State of the Market Report 2022, which is available for free here.

Emerging out of Covid, the omens looked good for the alternative lending sector across Europe in 2022. Fintechs had burnished their reputation in European markets during the pandemic, offering life support for thousands of businesses, as incumbent banks struggled to cope with the vast swathes of SMEs needing urgent funding.

Furthermore, the outlook for the EU economy looked set for a strong expansionary phase, aided by an improving labour market and favourable financial conditions.  

Key alternative lending markets like the UK and France are set to grow substantially this year while alternative lenders continue to be a powerhouse force in the Baltic countries. 

While Russia’s invasion of Ukraine may have dampened that optimism, causing supply chain disruption, the picture still looks largely positive, helped by customer fatigue with incumbent banks and fintechs embracing new technology like open banking and embedded finance.

“We believe that embedded finance is the future of SME lending across Europe,” Colin Goldstein, commercial growth director at Iwoca, said. 

“Data and technology now make it possible to deliver finance to SMEs quickly and seamlessly within the services and platforms they use to run their businesses day to day, whether that’s their bookkeeping software, eCommerce platform, or digital bank account. SMEs will increasingly over time expect and demand this ease and speed of access. Embedded finance is set to entirely transform how SME loans are distributed.” 

Traditional Lenders Are Still Dominant In Germany 

Europe is a disparate patchwork of countries, varying in the financial landscape and cultural customs. In some markets, incumbent banks hold sway in alternative lending while in other markets there is a thirst for pureplay digital loans.  

Germany, for example, might be home to high-profile fintechs N26 and Raisin, but according to Martins Sulte, CEO of Europe’s largest marketplace Mintos, there is “inherently less need for fintech solution when it comes to lending because most of the lending is already solved by the banks”. 

The latest annual figures from Germany Trade & Investment show that it’s other fintech sectors which are attracting investment, with payments (102 investment rounds), and insurtech (70 investment rounds), topping alternative lending (just 20 investment rounds).

Despite this, the alternative lending sector in German is set to reach $303.50m in 2022 and jump to $325m by 2026, according to industry figures. Daniel Drummer, CFO of peer-to-peer German digital lending platform Auxmoney, says a shift is underway, not only in Germany but also across Europe.  

He said: “We see tremendous momentum for digital lending in the market. Covid-19 has sustainably accelerated digital transformation in the finance industry in favour of fintechs as technology leaders. With loyalty to banks further declining, consumers increasingly prefer truly digital loans. Thus, we see high demand from borrowers across the credit spectrum.”  

“As an asset class, digital lending has continued to grow in maturity and confidence. Our robust loan performance also in the pandemic years has attracted institutional investors to invest significantly in our loans and contributed to the successful issuance of Social Bonds.” 

The Nordics And Baltics 

As rapid inflation takes hold in some European markets—with Sweden, for example, in April experiencing its highest inflation levels in 30 years—alternative lending can provide speedy, bureaucracy-free financing, which might be a pull to some businesses.  

Sweden is home to over 70 alternative lenders, with the likes of Klarna, Northmill and Lunar flag-bearers for the alternative lending scene. 

Last year, Klarna teamed up with embedded finance firm Liberis to offer merchants revenue-based loans. Like Klarna, Northmill and Lunar want to become one-stop shops for financial services. In the Baltics, meanwhile, alternative lending is on a tear, aided by progressive financial policy and a positive investment environment. Estonia, Lithuania and Latvia have long been known as fintech hotbeds, with lending playing a key role.  

According to Rolands Mesters, CEO of open banking provider Nordigen, “the Baltics have also seen a considerable increase in alternative lending since 2015, with crowdfunding and P2P lending, in particular, seeing substantial growth…”

Want to keep going? Read the full feature in AltFi’s Alternative Lending State of the Market Report 2022, out now!

Companies In This Article

a white logo with a purple logo
logo, company name
logo, company name

People In This Article

a man wearing glasses

Daniel Drummer

CFO and Managing Director

a man smiling for the picture

Martins Sulte

Co-Founder and CEO

a man in a suit

Rolands Mesters

CEO and Co-founder


More Like This