Spain, boasting the 14th largest economy globally and ranking fourth in the European Union (EU) following Brexit, has a thriving and highly developed financial sector, primarily centred in Madrid. The capital city, already a significant financial hub in Western Europe, has gained even greater influence after the United Kingdom's departure from the EU. This transition has made Madrid a popular destination for financial companies relocating due to Brexit.
Spain's financial sector, encompassing banking, insurance, and investment services, plays a significant but relatively modest role in the national economy. In 2021, the financial and insurance activities sector accounted for approximately 3.8 percent of Spain's GDP, a slight decrease from 4.1 percent in the previous year. This contribution reflects the sector's importance, yet also highlights the diversified nature of Spain's economy, where other sectors like services, industry, and agriculture contribute substantially to its economy.
The country's banking sector
Holding over EUR3.5 trillion in assets, Spain's banking sector has been facing challenges such as lagging profitability amid low interest rates and legacy technology. These challenges have been further complicated by the emergence of non-bank competitors in segments like mortgages, holding around EUR40 billion in loans versus over EUR500 billion at traditional banks.
However, due to the recent increase in interest rates imposed by the ECB, Spanish banks, including medium-sized institutions such as Unicaja Banco, S.A, ABANCA Corporación Bancaria, S.A, Ibercaja Banco, S.A, and Kutxabank, S.A, are poised for strengthened profitability in 2023. Fitch Ratings and Scope's banking team highlight their readiness to handle market volatility, economic slowdown, and potential asset quality weakening, with impaired loans ratios at a decade low and capital ratios in line with targets.
Revenue growth is anticipated due to balance-sheet repricing, and asset quality pressures are expected to be manageable, with impaired loans ratios likely to increase to 2.5% by the end of 2023. The banks' stable funding and liquidity profiles, manageable central bank funding repayments, and projected improvement in operating profit to about 2.1% of risk-weighted assets in 2023 underscore the positive outlook. The benefits of higher interest rates are expected to more than offset challenges, reflecting a positive alignment with rising rates and strategic financial management.
Under the same light, Spanish banks, including large institutions, already posted a significant domestic aggregated profit of EUR 7.7 billion in 2022, up from EUR 4.0 billion in 2021, with all banks reporting annual growth. This solid performance is attributed to lower cost of risk (CoR), contained operating costs, and higher net interest income (NII), with the repricing of banks' loan books and limited rise in deposit costs contributing to the NII increase.
DBRS Morningstar's Vice President, Pablo Manzano, emphasises that Spanish banks are well-positioned to continue benefiting from higher rates in 2023 as the full repricing of their loan books is still underway, evidenced by the 381 basis points (bps) increase in the 12-month Euribor rate in 2022, compared to the average loan yield increase of just 63 bps. While new business volumes may reduce in 2023 due to supply and demand factors, a collapse of new credit is not expected.
Likewise, other potential risks include the evolution of CoR, expected to deteriorate in 2023, and deposit costs. Overall, the outlook for Spanish banks remains positive, with profitability expected to further benefit from higher interest rates in 2023, reflecting a strategic alignment with rising rates and robust financial management.
The Fintech revolution in Spain
The fintech industry, characterised by the seamless integration of finance and technology, has substantially disrupted the global financial system. Spain, with its robust economy, having a GDP of EUR1.4 trillion, has not been immune to this digital transformation.
The fintech revolution in Spain is marked by a rich diversity of financing solutions that cater to various needs and market segments. From peer-to-peer (P2P) lending and crowdfunding to more specialised services like online car financing and lease-to-own options, the industry is thriving with innovation. Digital dealership financing, title loans with online platforms, and refinancing solutions are reshaping traditional financing models. The B2B sector is equally dynamic, offering solutions such as invoice financing, merchant cash advances, and asset-backed lending. The integration of Buyer's Purchase Line (BPL) with supplier financing and digital purchase order platforms is enhancing efficiency in business transactions. Factoring services, including reverse factoring (or supply chain financing), export and import factoring, and spot factoring, are facilitated through advanced integrated platforms. These diverse offerings reflect the fintech industry's adaptability and responsiveness to market demands, positioning Spain as a hub for financial innovation and growth.
In this context, it becomes critical to examine the various fintech business models taking hold in Spain, assess their growth potential given current market conditions, and highlight the opportunities for foreign investment to propel further expansion. The Spanish government's support for innovation, coupled with a strong entrepreneurial culture, has fostered a conducive environment for fintech startups. This has led to the emergence of various fintech hubs across the country, further enhancing Spain's position as a leading player in the global fintech landscape.
Spain's financial services sector: A hub of opportunity and growth
Spain's financial services sector is robust, well-regulated, and marked by a diverse array of domains, including banking, insurance, investments, and more. This intricate regulatory framework, while demanding close examination by foreign firms, offers a stability and predictability that is highly attractive to investors. It's a landscape that not only reflects the country's strong economic growth but also presents a myriad of opportunities for investment.
The Spanish financial services sector stands as a promising field for investors aiming to capitalise on the country's well-developed financial infrastructure. Whether it's banking, insurance, asset management, or alternative lending, the sector is ripe with options for exploration and investment.
Already back in 2017, the weight of the financial system in Spain's overall economy was slightly lower than the eurozone averages (3.9% of GVA and 1.8% of total employment, compared to 4.5% and 2.5% in the eurozone), and the sector demonstrated significant upside potential.
Spanish banking services, contributing 2.7% to the country's GVA and 1.1% to its employment, may be below the eurozone averages, but the landscape is far from stagnant. Despite a decline in the banking sector's contribution post-crisis, banks remain at the core of the Spanish financial system, accounting for 70% of its GVA and 61% of employment. The growing prominence of auxiliary activities, such as fund management (contributing 12% of income and 24% of employment in 2017), signals a dynamic and adaptable sector.
Driven by low interest rates, this adaptability is opening doors to innovative financial solutions, even as it makes traditional bank deposits less appealing. Spain's continued reliance on bank credit, along with intense private sector deleveraging, has brought the credit to GDP ratio closer to the rest of Europe (101% in Spain versus 98% in the eurozone).
This alignment, coupled with the robustness and adaptability of the financial services sector, highlights Spain's attractiveness as an investment destination. The evolving landscape of the Spanish financial market is not just a reflection of the present but a promise of future growth and innovation. Spain is positioning itself as a promising hub for investors, a place where the potential of a dynamic and resilient financial ecosystem can be fully realised.
At iBerotech, we bring over a decade of hands-on expertise in partnering with financial services organizations. Through strategic insights and a deep understanding of the landscape, we have effectively navigated the intricacies of the Spanish market, establishing a strong foothold in the Spanish fintech ecosystem.
Alternative lending growth
Spain's resilience and innovation in the financial landscape are evident in its thriving alternative lending market. As the fourth-largest economy in the Eurozone, Spain has emerged from global crises with a stronger, more digitally adept economy. The nation's GDP rebounded by 5.5% in 2021-2022, with diverse sectors leading the economy. Notably, Spain's financial sector has embraced the transformative potential of fintech, capturing 46% of global fintech investment and ranking 7th in Europe.
The fintech landscape in Spain is not just growing but evolving, with cities like Madrid, Barcelona, and Valencia emerging as hotspots. Approximately 69% of Spaniards have engaged with e-banking and e-commerce services, reflecting a shift in consumer trust towards digital platforms. According to a report by ID Finance, the total volume of alternative lending (personal loans) in Spain is valued at over EUR600 million, indicative of a broader shift towards non-traditional lending avenues. However, as means of comparison, it's worth noticing that non-bank competitors in segments like mortgages, holding around EUR40 billion in loans versus over EUR500 billion at traditional banks, highlight the upside potential of the alternative lending space.
One standout example in alternative lending is ID Finance Spain, operating under the Money Man brand offering payday loans, has shown resilience and steady growth in this expanding sector. With a net portfolio increase of 8% to EUR51 million in the first half of 2023 and over 70,000 applications processed per month, Money Man highlights the strong demand for alternative lending solutions in Spain.
Spain's alternative lending boom, led by companies like Vivus (4finance) and Money Man (ID Finance), present a new frontier in the financial ecosystem. The robust growth and investment fervor in Spain's alternative lending sector underscore the nation's appeal as an investment hub, positioning Spain as a critical player in the European fintech arena.
Forecasts suggest that by 2024, the average funding per loan in the crowdlending sector will soar to EUR70,000, attributed to Spain's blossoming entrepreneurial spirit.
Alternative finance represents a diverse and innovative spectrum of financial channels and instruments that operate outside the traditional banking and capital market systems. This burgeoning sector includes Peer-to-Peer (P2P) lending, crowdfunding, invoice financing, microloans, merchant cash advances, online asset-backed lending such as car financing and car title loans, home equity loans, cryptocurrency-based financing, equity crowdfunding, robo-advisors, and marketplace lending.
Actionable insights for executives and founders
For C-level executives and startup founders interested in entering the Spanish market, several actionable takeaways must be considered. Understanding the regulatory environment in Spain is crucial, as it offers stability and predictability. Researching and evaluating the risks and potential rewards of any investment opportunity is vital before making a decision. Additionally, understanding the competitive landscape in each sector of the financial services industry in Spain will provide insight into the opportunities available for investors.
Spain's alternative lending sector is experiencing rapid expansion, presenting a lucrative opportunity for executives and founders. However, entering this market necessitates meticulous planning and research. A comprehensive understanding of the regulatory environment, including frameworks like PSD2 governing fintech activities, is essential. Conducting competitive analysis to pinpoint market gaps and opportunities in areas such as P2P lending, invoice financing, and crowdfunding will be beneficial. Tailoring products to Spain's burgeoning middle class and their preference for digital financial services can create a competitive edge.
Partnerships should be approached with discernment, evaluating potential collaborators for alignment with long-term strategic goals, local market expertise, regulatory relationships, and technological prowess. A phased expansion strategy, starting with a pilot project to gauge product-market fit, can mitigate risks. Investment in marketing, branding, and public relations is crucial for building trust and visibility, and a blend of traditional and digital channels can effectively reach Spanish consumers. Emphasising customer service and transparent communication will further enhance reliability and security.
The Spanish market also demands an understanding and appreciation of cultural nuances. Building personal connections and trust, respecting work-life balance, recognising regional diversity, and allowing time for careful decision-making can foster goodwill and successful ventures. An open, patient, and culturally sensitive approach is key.
Spain's alternative lending sector indeed offers immense potential, but it requires prudent planning, research, and calculated execution to navigate its complexities. By taking the time to listen, learn, and craft offerings tailored for local success, executives and founders can position themselves to capitalise on the opportunities within this dynamic market.
With over a decade of hands-on expertise in business etiquette and cultural nuances, iBerotech leverages insights in the Spanish business ecosystem and built partnerships to empower foreign firms in skilfully navigating Spain's cultural intricacies while establishing long-lasting robust partnerships.
Factors enhancing investment attractiveness
Several factors make the financial services sector in Spain an attractive investment opportunity:
Skilled Workforce: Spain has a highly skilled and well-educated workforce at a reasonable cost level. The country's high percentage of university graduates and strong tradition of vocational training ensures a ready supply of talented individuals suited for the financial services sector.
Growing Middle Class: Spain's large and growing middle class is becoming increasingly important in the financial services sector. This demographic trend has led to growing demand for various financial products, presenting an opportunity for financial services firms to tap into this market.
Strong Regional and International Connections: Spain's membership in the European Union and strong economic ties with other Eurozone countries provide financial services firms with access to a large and well-connected market. Spain's presence in Latin America also allows for reasonable scalability.
Culture of Entrepreneurship and Innovation: Spain's strong culture of entrepreneurship and innovation has led to the emergence of numerous startups and small businesses working to disrupt the financial services sector. This environment presents opportunities for investors to partner with these innovative companies.
Stable Economy: Spain's strong and stable economy, which has weathered global financial crises relatively well, creates a predictable business environment. Government policies promoting investment and entrepreneurship further drive growth in the financial services sector.
In conclusion, Spain's financial services sector offers diverse opportunities for B2B, B2C, and B2B2C business models. Whether through banking, alternative lending, insurance, asset management, invoice financing, or other areas, there are many ways to invest in this dynamic and rapidly growing market.
Spain's skilled workforce, growing middle class, strong economic ties with other countries, culture of entrepreneurship and innovation, and stable economy all contribute to its attractiveness as an investment destination. As with any investment opportunity, careful research and evaluation of risks and potential rewards are essential.
The Spanish financial landscape, with its unique blend of traditional financial institutions and innovative fintech startups, presents a rich tapestry of opportunities for domestic and international investors alike. Its resilience, adaptability, and forward-looking approach make it a compelling market for those seeking to explore new frontiers in the global financial ecosystem.
At iBerotech, we bring over 12 years of expertise in partnering with financial services organizations. Through strategic insights and a clear understanding of the landscape, we have effectively navigated the intricacies of the Spanish market, establishing a strong foothold in the Spanish fintech ecosystem.