Europes fintechs received a taste of their own medicine last week, when management consultants at mckinsey published a report arguing that the sector is facing an existential threat.

An existential threat, is of course, precisely what fintechs have been hoping to incite among the insurers, banks and asset managers who have long dominated the world of money.

Now with the covid-19 crisis sapping their funding, mckinsey argued that some fintechs would have to retrench or shift their business models, while others should look to m&a or partnerships.

The fintech twitterverse was aghast at the scepticism, which came just as klarna was announcing a big funding round. some said mckinsey was writing for an audience of big banks rather than small fintechs.

Rob moffat, a partner at venture capital firm balderton capital, told fintechft that mckinsey had it wrong on funding. i look across the space and i see a lot of interest and good funding rounds, he said. the funding market seems really strong to me.

Some hefty funding rounds for european fintechs in the past few months support his claim. the foreign exchange platform revolut has raised money at a $5bn-plus valuation this year, while the dutch payments group mollie raised 90m earlier this month.

But two swallows dont make a summer. at least not for mckinsey.

Some of the conditions around funding and some of the broader conditions affecting financial services...just make it difficult for lots of companies, said tunde olanrewaju, a senior partner at mckinsey told fintechft. if youre pre-profit then having a revenue hit is very difficult to navigate.

The report points to data showing that vc investment in european fintechs dropped from 5.6bn in the first half of last year to 3.8bn in the same period of 2020. investment in july and august fell more sharply than that, almost halving.

Mr olanrewaju and his colleagues think the european fintech sector will need 5.7bn of funding to see it through to the second half of next year when some sort of economic normality might return. they say that its not clear where those funds will come from.

Not all fintechs suffer equally. companies that have recently secured funding or are already profitable will be better placed to withstand any slowdown in the fundraising market, the report argues.

Tara reeves, a london-based partner at the vc firm omers ventures, agreed: the funding environment for any business that is long-term lossmaking is very tough right now...theres always a flight to quality at times like this.

She thinks that the most at-risk group of european fintechs are those that have passed the first stages of equity fundraising and are now chasing so-called series b or c rounds from us-based funds. americans arent coming over [to europe] to do b and c financing, she said, adding that omers ventures had seen less competition from us-based funds over the past few months.

Sub-sectors within fintech are also likely to be affected differently by the crisis. the mckinsey analysts say that regtech, digital payments and digital investments should do well, while peer-to-peer lenders and digital banks could suffer as interest rates and loan volumes fall. mckinsey estimates that european digital banks loss per customer will widen from 10-60 before the crisis to 20-75.

Even before the covid-19 crisis, their challenges in getting to profitable scale were non-trivial, the report argues. given the contracted funding environment, many digital banks cannot sustain a cash consumptive business model in the medium term.

In response, they will have to shift their attitude to growth. many fintechs were really trying to chase growth, said mr olanrewaju. our concern is if you dont have enough cash flow to support continued [customer] acquisition in the short-term you might need to focus more on trying to make money out of the customers youve got. we think that balance might shift.

Company name: duality technologies

When founded: 2016

Where based: newark, new jersey

Chief executive: alon kaufman

What do you sell, and who do you sell it to: our privacy-preserving data collaboration solutions enable financial institutions to share data securely to enhance their financial crime investigations.

How did you get started: our co-founders, including shafi goldwasser, a winner of the turing award, developed ways to analyse encrypted data to protect privacy in ai processes.

Amount of money raised so far: $19m

Valuation at latest fundraising: n/a

Major shareholders: intel capital, hearst ventures, team8

There are lots of fintechs out there what makes you so special: our information sharing solutions enable a broad range of collaborations, from financial crime investigations to open banking.

Follow the money: sebastian siemiatkowski, chief executive of swedens klarna, told the financial times that he wanted to wreak havoc on the payments and banking industries after the company raised $650m in a funding round. but there could be clouds on the horizon the times reported that buy now pay later companies such as klarna are facing a crackdown from uk regulators. meanwhile, sifted asked if klarna is really worth $11bn.

Follow the money (2): india-based insurtech acko has raised $60m in a series d funding round that values the company at $500m, according to techcrunch. the round was led by munich re ventures but amazon, which is already a shareholder, also participated. digital insurance, meanwhile, reports on data from deloitte showing that insurtech funding in the first half of the year slipped just 2 per cent from last years level, to $2.19bn.

New frontiers: blackstone has backed the digital revolution in the lloyds of london insurance market, putting money into a $500m investment round in ki, a digital-only syndicate, reports insurance insider. ki uses an algorithm designed by university college london on a platform designed in collaboration with google cloud.

Aob: uk-based start-up allica bank is planning to raise 100m to break into the business lending market, reports the financial times; lemonade, the new york-based insurtech, is planning to expand into france, says yahoo finance; tink, the open banking platform, has acquired an aggregation business from uk-based openwrks, reports finextra.