Investors and entrepreneurs everywhere are getting excited about fintech – and the UK is at the very centre of it all
Fintech is undoubtedly booming. And the UK is providing the gunpowder. According to Accenture’s report, The Future of Fintech and Banking, released in March, investment in the UK fintech sector has grown by 136% in the last year alone, whilst in Silicon Valley it has grown just 117%. “When you think about it, fintech is the only sector where we can legitimately say that we’re growing at a faster rate than Silicon Valley,” says Eric Van der Kleij, head of Level39, the fintech accelerator. “The UK’s been really charging ahead – and London in particular.”
The massive disruption that the financial sector has seen might have been unimaginable just a decade ago. “You had an oligopolistic market, in the sense that you had only five or six banks, very few entrants in the last 50 years and not much innovation,” says Anil Stocker, CEO and co-founder of MarketInvoice, the online invoice finance platform. And whilst at one time there may have been something reassuring about the stability this provided, the financial crash in 2008 and the subsequent recession broke the spell. “There was a loss of trust after the last credit crisis; some people became disillusioned and wanted to change things,” says Stocker.
This presented a golden opportunity for disruption, as the failings of the financial sector had never been more apparent. “A generation of people who went through the economic crash saw that the banking model was very inefficient and actually didn’t serve the needs of its customers,” says David de Koning, head of communications at Funding Circle, the peer-to-peer lending service. The explosion in fintech startups has inevitably sprung from this, with a newer generation of businesses turning to tech to address some of the financial sector’s endemic problems. “What you’re seeing are companies that are sidestepping the traditional to create something much better and much more efficient for customers,” de Koning says.
And although the explosion we’ve seen in fintech startups is most definitely a global phenomenon, certain factors have made London a crucible for financial innovation. “In London, we have this massive concentration of every conceivable kind of financial firm in the City and a tremendous, technology-orientated startup culture,” says Mike Laven, CEO of Currency Cloud, the cross-border payments platform. With these communities operating in such close proximity, it was perhaps inevitable that the two worlds would eventually collide and begin to produce a new breed of startup.
But location is not the only thing that has helped secure the UK’s place in the global fintech market. “London has an incredible amount of talent in financial services,” says de Koning. And whilst the UK doesn’t quite have as strong a trade in developers as Silicon Valley, it does have an increasing stock of technical talent looking to flex its coding skills. “You’ve got a very talented group of entrepreneurs who understand financial services, have good experience and great ideas and you’re marrying that with a strong developer base,” he adds.
One only need look at the huge funding rounds secured by TransferWise and Funding Circle this year to see just how excited investors are by the fintech sector. Part of the reason for this is that, for the first time, fintech is opening up opportunities that were once monopolised by the banks. “What you had previously was this monolithic service provider,” says Laven. “Suddenly what you’re getting is a cloud-based, API-based, customer-facing series of services that is helping to disaggregate what the bank owns.” Rather than services like payments, FX or investment being locked away in a bank’s portfolio, they are being exposed to both rapid innovation and investment for the first time. “The investment community is betting on that and betting it’s going to be big,” Laven says.
This is evidenced by the fact that both TransferWise and Funding Circle have secured valuations of over $1bn this year. So while it may have once been claimed that creating true unicorns was beyond the UK’s reach, fintech seems to have resolutely changed this perception. “Big companies can be built here,” says Laven. “They don’t have to be built in the US.”
As the investment market has become increasingly globalised, certain regions are finding it easier to capitalise on their competitive advantages. “You used to have to be in a certain geography to access the money to build businesses,” de Koning says. “But that’s not the case anymore.” This means it is now far easier for the UK to build disruptive fintech startups into global businesses. “Fintech is one of the largest industries in the world so it’s always going to be one of the sectors we’re best placed to take advantage of,” he continues.
Despite this, some have questioned whether the high valuations that fintech is seeing are a sign that a bubble is forming, akin to that of the late 1990s. But Stocker feels that the UK is now looking at a radically different picture, in part because its fintech startups have much more concrete fundamentals than their dotcom predecessors. “Previously there were a lot of companies about with no revenue models and loads of hype surrounding them,” he explains. “A lot of the businesses that we see now are making revenue and it’s much easier to understand their unit economics.”
Whilst many tech startups are breaking new ground and creating products and services for which no clear revenue strategy exists, fintech is serving the needs of a very mature market. “We’re not coming up with a new algorithm or search engine; what we’re doing is using technology to solve very clear problems,” says Stocker. The fact that fintech startups are each fulfilling a specific use case and meeting the demands of such a huge market means there isn’t a glut of pre-revenue startups that are yet to monetise. “We’re really delivering lifeblood to businesses, so having a revenue model is much easier,” Stocker adds.
A run for their money?
As with any industry feeling the effects of disruption, it’s fair to say that many of the traditional financial institutions’ first reaction to the boom in fintech was denial. “There was an element of ‘if I close my eyes and put my fingers in my ears, it might go away’,” says Matt Cooper, head of business development at Crowdcube, the equity crowdfunding platform. “But it’s definitely not going away.”
Fortunately, as fintech has increased in profile, the relationship between startups and the old guard has become much less adversarial. “The disruption has occasionally taken one or two people by surprise but you can now find a whole suite of accelerators and incubators around London,” says Steve Perry, founder and co-creator of Visa Europe Collab, Visa Europe’s international innovation hub. Taking in Barclays Accelerator, Santander’s and Monitise’s joint fintech investment fund and indeed Visa Europe Collab itself, there are no shortage of major financial brands getting involved in supporting the ecosystem. “For every bank I speak to, whether it’s from the Nordics, Ireland or the UK, it’s all about change, innovation and disruption,” adds Perry.
However, it’s not just traditional financial institutions that are going out of their way to support fintech startups – regulators and politicians alike are eager to smooth the way for those looking to create new financial solutions. For example, the Financial Conduct Authority has set up Project Innovate, which allows innovators in the financial sector to seek regulatory advice, whilst in July David Cameron announced he was backing fintech membership body Innovate Finance’s FinTech 2020 manifesto that calls for $8bn of technology investment and the creation of 100,000 jobs in fintech by 2020.
The message this conveys to the world is clear, claims Van der Kleij. “On a global scale, it shows we’re really taking the lead as a country and sends a signal that we’re serious about fintech.”
Cornering the market
The idea for MarketInvoice first came about when co-founders Anil Stocker, Ilya Kondrashov and Charles Delingpole realised there was a paucity of online lending that catered to growing businesses. “Fixing what was broken around banks seemed to focus on helping the bigger companies and not the smaller ones,” says Stocker. “We spent a lot of time with small businesses and realised there was a huge opportunity.”
To begin with, gaining traction in the fintech space was hard going. “Peer-to-peer was nowhere near as well known,” says Stocker. “Companies were a little bit unwilling to be guinea pigs for new platforms.” But as MarketInvoice started to build up a portfolio of customers, this helped the startup shift perspectives of the nascent industry. “One way we built credibility is by doing thoughtful partnerships, whether that be with the British Business Bank, KPMG or Sage,” he says. “That’s been good for us in terms of building awareness and trust.”
MarketInvoice has since been seeing some impressive growth. It is now providing £500m of funding annually and has issued more than 7,500 loans to over 1,000 companies. In August, the business made headlines when it secured £6m of funding from existing investors Northzone and Paul Foster, before making a splash again just last month when it secured an additional £5m from the British Business Bank. This is allowing MarketInvoice to expand its product range and begin to look at allowing retail investors to use the platform. “It’s an exciting time for our business,” says Stocker.
Level39, the fintech accelerator and incubator, naturally came about as a fusion of the City and Shoreditch. “Canary Wharf was interested to know if it held a strong proposition for tech companies,” says Eric Van der Kleij, head of the accelerator. Obviously given tech firms’ propensity for being attracted to heart of a community, the Level39 team thought there could be no better place to base the new accelerator than at the epicentre of the UK’s financial sector: Canary Wharf’s One Canada Square. “It was playing to the natural strengths of the area,” Van der Kleij says.
Eponymously taking its name from its new home on the 39th floor, Level39 soon started to act as the lynchpin between the finance and tech sectors. “Most western banks come here for access to innovation days; they bring their teams here for meeting fintech companies and to learn about the latest thing,” Van der Kleij says. It also accrued a roster of mentors from many of the financial institutions around it to provide guidance to its startups. “That helped create an ecosystem,” he adds.
Level39 has gone on to become one of the largest incubators for fintech companies in Europe. More than 1,500 startups have applied for its programme and 178 have passed through its doors. It has now spread onto other floors within One Canada Square, picking up two ‘high-growth spaces’ on floors 24 and 42 that have been utilised by projects such as UBS’s innovation lab, IBM’s BlueMix Garage and Innovate Finance. “It’s really exciting for us because it gives us a terrific cross-section of companies across the fintech industry,” says Van der Kleij.