In London, Nimble Start-Ups Offer Alternatives to Stodgy Banks LONDON - When Hiroki Takeuchi joined McKinsey & Company in 2008, he had a front-row seat to the upheaval in finance. After the collapse of Lehman Brothers, Mr. Takeuchi, a 26-year-old Oxford graduate, worked with some of the world's biggest banks trying to figure out how to adjust to new regulations and a changed market. Then he quit. For Mr. Takeuchi, memories of friends building successful start-ups at college outweighed the lucrative rewards offered by the blue-chip consulting firm. He joined forces with two McKinsey consultants, feverishly writing code out of his parents' house on a minimal budget to create his own technology start-up. The result was GoCardless, a London-based company that allows small businesses to set up monthly payments to suppliers at a fraction of the cost that banks charge. The business has secured $1.5 million in seed capital from a number of well-known investors, including the American early-stage venture capital firm Y Combinator. "The whole idea of bank payments is broken," said Mr. Takeuchi at the start-up's office in a dilapidated building on the outskirts of London's financial district. There's an opportunity here, and we're looking to grab it. London's fast-growing start-up scene is trying to disrupt the financial status quo. As consumers' trust in banks deteriorates because of a series of recent scandals, young companies are pressing their newcomer advantage. Firms are offering services like low-cost foreign currency exchange and new ways for small business to borrow cash. Backed by venture capital firms like Index Ventures, the financial start-ups are taking on entrenched incumbents by using technology to pare back costs and improve the customer experience. Local authorities do not directly regulate many of the firms, but the young companies often use traditional banks and other financial firms for their back-office functions, like processing payments, which are monitored by British regulators. "Start-ups are taking advantage of London's position as a global financial center," said Adam Valkin, a partner at the European venture capital firm Accel Partners. They are innovating in ways that banks just can't do. The growth of finance entrepreneurs comes as London's start-up community continues to flourish. Many parts of East London have transformed into a mini version of Silicon Valley, with the likes of Google opening shared office space to support fledgling companies. Finance, technology and fashion start-ups have been able to tap into the large talent pool of young, multilingual professionals eager to work for the firms. Many companies are following the lead of Wonga.com, an online lender founded in 2006 that has sought to fill a void left by banks by offering short-term, high-interest loans to consumers and small businesses. The company has been criticized for charging high interest rates to vulnerable consumers. The typical annual percentage rate on the company's loans is more than 4,000 percent, though Wonga.com says it only offers lending for a maximum of 30 days. To cut down on costs, the start-up relies on publicly available online data to determine whether an applicant is creditworthy. Loans can take as little as 15 minutes to arrange, and the company has branched out from consumer lending into the small-business market as individuals look for alternatives to banks. The tactics are paying off. Last year, the online lender reported a 269 percent rise in its net profit, to £45.8 million, or $73 million, after its loans increased fourfold compared with the previous year. Now, Wonga is now contemplating a multibillion-dollar initial public offering on Nasdaq, profiting from lending to consumers that are perceived as too risky for banks. For many workers in London's financial services sector, successes like Wonga have turned the idea of starting a business into an increasingly attractive option. With investment banking activities on the wane, job prospects in the industry have remained poor since the beginning of the financial crisis, and the financial sector here is expected to lose 25,000 jobs this year. Anil Stocker has seen the layoffs up close. Mr. Stocker, a 28-year-old Cambridge graduate, left Lehman Brothers a few months before it collapsed in 2008. A year later, he resigned from the American investment bank Cogent Partners to co-found MarketInvoice with two friends who worked at JPMorgan Chase and Goldman Sachs. The start-up helps small businesses gain access to capital by selling their supplier invoices to investors at a discount. "The finance industry will have to completely change, and we are just at the beginning," Mr. Stocker said. MarketInvoice wants to exploit an underserved market in the banking sector. As firms have pulled back on lending, small business have been denied credit because they are deemed too much of a financial risk. To help these companies access cash, Mr. Stocker and his partners began an online marketplace where small businesses can auction their long-term supply contracts to money managers for the highest price. Many of these invoices can take up to 90 days to pay out, so companies are willing to sell them at a discount to get hold of short-term capital. Starting the business has not been easy. It took MarketInvoice's founders - who were still working for banks - almost a year to devise the business plan, and a further six months to raise $1.4 million from investors. The start-up auctioned its first supplier contract for £40,000, or $64,000, in early 2011, but only hit the £1 million mark nine months later. "No one wanted to be the first company to use our system," Mr. Stocker said. At the beginning, you live or die by your reputation. London's finance start-ups also are attracting entrepreneurs with a technology background. Taavet Hinrikus, a 31-year-old Estonian who was Skype's first employee, dreamed up his business while still working for the Internet calling service. In 2006, the company moved him to London from Tallinn, Estonia, where he rose to become Skype's director of strategy. But Mr. Hinrikus grew frustrated after losing 5 percent of his salary to bank charges every time he moved money from Estonia to Britain. After meeting fellow compatriots in London who wanted to transfer cash back Estonia, Mr. Hinrikus created a system in which individuals could move money to each other's accounts. By agreeing to swap currencies at a set rate, Mr. Hinrikus said he saved thousands of dollars in bank fees. "We had to find our own way to avoid the charges," he said. With his business partner, Kristo Kaarmann, a former management consultant, Mr. Hinrikus built a Web site that connects people looking to exchange British pounds with euros. Their start-up, called TransferWise, acts as an intermediary for the money transfers and has expanded into other European currencies. Not everything has gone to plan. The start-up had to wait 18 months to receive its license to operate from British regulators. Yet in its first 12 months, Mr. Hinrikus said TransferWise has helped people to exchange around $10 million of foreign currencies that has avoided costly bank charges. The start-up also has raised $1.3 million in seed capital from investors, including PayPal's co-founder Max Levchin. "Banks aren't doing a good job at innovating for consumers," said Robert Dighero, a partner in the London-based venture capital firm Passion Capital. Start-ups are nibbling away at some of their most profitable businesses.