UK fintech feels the force

The UK financial technology scene appears to be taking off far quicker than sectors like mediatech, adtech, traveltech and foodtech.

By
Sam Shead
| Jul 21, 2015

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There’s rarely a week that goes by without a press release landing in my inbox informing me that yet another young fintech (financial technology) startup has been backed by new investors with millions of pounds.

Much of this money is coming from venture capital corporations like Index Ventures and Balderton Capital. Index, one of the largest venture capitalists in Europe, has made 12 fintech investments in the past 12 months, while rival Balderton Capital has also been on a fintech spending spree of its own lately, backing Credit Benchmarck and Revolut within the last two weeks. But they’re far from the only ones. Camilla Dolan, an investment director at MMC Ventures, told me today that professional footballers and other high net worth individuals are entrusting her and her firm to make calculated risks with their millions on everything from fintech to foodtech.

In a nutshell, money seems to be pouring into fintech from all angles. Supporting this is a report published earlier this year by IT outsourcing and consultancy firm Accenture showing global investment in fintech firms tripled from $4.05 billion (£2.6 billion) in 2013 to $12.2 billion (£7.8 billion) in 2014, with Europe the fastest growing region in the world.

Investors are optimistic that the shares they buy in fintech companies today will be worth considerably more down the line, with some hoping to cash in quickly when one of the companies they back opts for a public listing on a stock market or gets aquired by a larger firm.

The same investors are spoilt for choice and often overwhelmed by the number of fintech companies out there, particularly in London where there’s already a very well established financial services industry.

The sheer variety of fintech firms has boomed as the sector has matured to the stage it’s at today. The first innovations came in the form of business to consumer (B2C) services like peer-to-peer lending, remittance and foreign exchange but today there’s innovation occurring everywhere, with clever cofounders with experience working for the likes of Goldman Sachs and Morgan Stanley developing services around fraud detection, cybersecurity/threat detection, back end financial services and exchange platforms.

TransferWise, Nutmeg, Crowdcube and Funding Circle are just a few of the big name UK fintech firms that have been on the receiving end of large investments over the last couple of years; their disruptive platforms going head-to-head with some of the world’s biggest banks, forcing them to innovate or go into decline, possibly even die.

Personal banking is ripe for disruption and companies like Starling and Mondo are doing their best to revolutionise the way we bank by digitising the entire experience. Mondo is now in talks with the Bank of England after applying for a licence earlier this year. It has also received £2 million from investors to get the business up and running, according to reports, and will be seeking further investment to meet capital requirements.

But why are angel investors, venture capitalists and Westminster so keen to get behind these digital businesses looking to change the way we pay for things, exchange currency and send money to one another?

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Osborne’s fintech friend

Venture capitalist Eileen Burbidge is arguably the most qualified person to answer this question, having been appointed the UK’s “special envoy for fintech” earlier this month by chancellor George Osborne.

I asked Burbidge an 11-word question: “Why is fintech such a good place to invest right now?” She replied the same day with 1,234 words of her own, painting a very clear picture on the UK fintech scene and, at the same time, illustrating why Osborne is entrusting her with making the UK the fintech capital of the world.

First and foremost, the fintech sector has a huge market opportunity which ties in directly with the amount of money that flows into financial services from consumers, enterprises and financial institutions themselves.

Add to that the fact that banks spend more than £10 billion per year on their technology (with Barclays having disclosed that it spends £3 billion per year alone) and you quickly see why it’s big business. “Supplying these existing incumbent institutions is a massive market opportunity in itself,” said Burbidge. “Trying then to also displace their services grows the market by multiple orders of magnitude.

“Unlike e-commerce, music or publishing sectors, the financial services sector has yet to really feel the impact of digital and technology innovation of the last 10 years so the opportunity and massive value-creation lies ahead of us.”

The simplicity of fintech business models also helps investors to get on board, as does the fact that most fintech firms generate revenue from the off. “Fintech business models tend to be straightforward and cash generative from day one, whether they are commission-based or otherwise,” said Burbidge, who worked in Silicon Valley for several years and was head of product at Skype at the time it was sold to eBay for $2.6 billion (£1.67 billion).

Advances in other areas of technology are also helping fintech companies to thrive. Big data, machine learning, cloud-based computing, algorithmic-based decision making, real-time data ingest and analyses, mobile systems, security, blockchain. These are all technologies that have matured significantly in the last few years, and fintech entrepreneurs are harnessing many of them in their products and platforms today.

Why so many fintech companies?

Advances in the aforementioned fields of technology have set things up nicely for entrepreneurs but there’s more to it than that.

Many of the bankers that lost their jobs during the financial crisis of 2007-2008 decided to become entrepreneurs.

“We saw entrepreneurs emerge from the financial sector with less job security and therefore a greater willingness to take risks and start their own companies,” said Burbidge. “These same entrepreneurs had witnessed years and years of inefficiencies at larger institutions and were poised to exploit those vulnerabilities. The regulatory environment understood that the economy shouldn't be so dependent on just a small number of financial institutions - and therefore sought to encourage new competition and be generally more progressive in catalysing new innovators.”

What’s more, these same entrepreneurs were able to receive mentoring and advice through dedicated fintech accelerators like Level39 in Canary Wharf - a space headed up by former Tech City UK CEO Eric Van der Kleij. Banks like Barclays and RBS have also established their own accelerator programmes with help from the likes of startup accelerators TechStars and Entrepreneurial Spark respectively.

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London loves fintech

London is arguably at the front of the global fintech race, beating the likes of New York, San Francisco, Singapore, Hong Kong and Tokyo.

Last month, a survey conducted with the global fintech community by accelerator Startupbootcamp FinTech found that 63 percent of entrepreneurs perceive London to be the world’s leading fintech city, up from 51 percent in 2014. And they’d be right to do so.

A separate study carried out by London & Partners, the Mayor’s promotional company for London, found that in the year leading up to last November, fintech companies in London attracted more than $539 million – triple the amount raised in 2013 – and an amount representing more than half of all fintech investment across Europe.

There’s good reason London’s fintech companies are doing well when it comes to fundraising, according to Burbidge. “I genuinely believe true disruption is going to come from London and the UK,” she said. “There are inherent advantages here for entrepreneurs and investors.”

Advantages Burbidge refers to include the GMT time zone that allows the UK to transact with the Americas and Asia in the same business day, something no other financial hub can do. There are also 100,000 “knowledge workers” in London’s financial services sector and the headquarters of 300 world banks.

In addition, Burbidge believes the UK Government and UK banking regulators are keen to encourage competition, open up banking data and call for reviews of new technologies such as digital currencies.

Supporting these statements is the fact that the Treasury has announced “The FinTech benchmarking exercise” in a bid to identify emerging areas of fintech opportunity, consider the UK’s performance against other countries, and identify best practice from around the world that might be applicable to the UK. The results of the exercise will be published in the Autumn.

There are still areas where the UK government can do more to support fintech though in Burbidge’s eyes. Namely, she wants the government to: continue pushing forward regulation around crypto or digital currencies, boost transparency in banking fees; and accelerate the delivery of banking APIs and access to bank data across the industry.

Levelling the playing field

When these steps are taken, new platforms will flourish that fundamentally change the way we do things.

Fintech investor and Index partner Jan Hammer claims the founders behind many of these new fintech startups are creating opportunities for the public that weren’t there before. “Fintech companies often open up financial services to individuals and businesses who were previously locked out,” he said, before going on to tout several of the fintech firms that sit alongside Facebook, Dropbox and last.fm in the star-studded Index portfolio. “Funding Circle allows you and I to lend money to small businesses who can access financing not available through banks, Property Partner provides access to the property market from as little as £50, so even those who can't afford to buy a flat or a house can participate; and Adyen makes it easy to expand internationally by accepting 250 payment methods, something that would keep businesses busy for months.”

Fintech firms are ultimately out to make consumer banking easier, cheaper and more transparent. They're helping businesses to gain insights that weren't previously possible and they're opening up doors and opportunities for people that were once locked out. As a result, I expect the press releases from fast-growing UK fintech startups will continue coming.