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Startups are playing in underserved financial service markets and winning

on Thursday, 24 August 2017. Posted in Growth, Finance

The UK’s fintech startups are not only challenging old financial institutions but are also aiming to improve the lives of people everywhere

Startups are playing in underserved financial service markets and winning

The fintech sector is one of the crown jewels of the UK tech scene. However, it has long been mired in disappointing achievements in the field of diversity and equality, especially at CEO and board levels. It seems that the financial sector’s younger successor is very much a chip off the old block. Stalwarts of the sector argue that this has been a hindrance. After all, fintech startups have to be disruptive and different from the older institutions: they cannot be carbon copies of traditional incumbents.

Many early players were protected by both the healthy appetite of investors interested in fintech, as well as targeting the golden demographic of millennials. UK startups have found success in serving those mysterious creatures that ignore brand trust and legacy – a clientele that is happy to direct its large and expandable finances to whomever offers convenience, great customer service and  attractive returns. As James Titcomb at The Telegraph wrote in April: “The UK dominates the European financial technology industry, with figures showing it boasts more billion-dollar fintech companies than the rest of the continent put together. Britain houses four fintech ‘unicorns’ - companies valued at $1bn (£780m) or more - with a combined valuation of $18.5bn.” This was according to a report by the technology investment bank GP Bullhound.

The suites of products these unicorns offer sit squarely in the traditional financial services space. For instance, Markit offers financial information for loan management, Transferwise is a money transfer firm and Funding Circle is a peer-to-peer lender firm. So far it’s very recognisable. These companies are not reinventing the wheel: their success lies in improving and streamlining access to financial services, something which customers will pay for.

However, there is a view in the financial world that startups could be working towards nobler goals and solving challenges faced by the financially under- or unserved in the UK and further afield. Konstantin Peric, deputy director of financial services for the poor at the Bill & Melinda Gates Foundation in the US feels strongly that “the future of fintech is about ideas that can create real impact for economies that benefit everyone. Innovations and companies will spark progress toward interoperable and pervasive services that can connect people across the planet”. This certainly wouldn’t be a global first: M-Pesa, the Kenyan mobile-phone-based money transfer and microfinancing service, has been a golden child for a decade now, showing that early fintech helped the very poorest in the world to access financial services in a life-changing way.

The very poorest and cash-reliant in the UK have arguably not been a target demographic for many established banks nor fintech unicorns. That is all about to change though. Simple online accounts catering specifically for those that have never held a current account are emerging thanks to startups like Pockit. Aiming to become the world’s most inclusive bank, offering total transparency, avoiding monthly fees and ensuring a 100% approval rate for applicants, the company is removing many of the barriers that cash-reliant people in the UK face when considering mainstream financial products. Pockit now have 28,000 cash deposit locations across the UK, 185,000 customers and on average 10,000 to 11,000 new accounts are being opened each month. This is undeniably fast growth for a three-year-old business and investors include well-known former Manchester United manager Sir Alex Ferguson. However, Pockit is easily overshadowed by the combined number of customers served by its fintech peers – Tandem, Atom and Monzo – all of whom are targeting millennials and customers that already bank with traditional providers.

But current accounts are not the final destination either. Pockit’s CEO, Virraj Jatania, told The Telegraph Future of Fintech conference team recently, that “having already launched faster payments and international transfers, we’re now focused on making all core financial services –  including lending, insurance and savings products  –  available to our customers by utilising alternative measurements of risk and creditworthiness. We’re committed to creating a platform from which everyone in society can make the most of life’s opportunities.”

It won’t be plain sailing though: there remain significant obstacles to the improvement of financial inclusion rates in the UK. “It will take significant regulatory changes, particularly around KYC requirements,” Virraj says. “Currently, a large proportion of people are left marginalised by the mainstream financial services system because, for example, they can’t afford to have a driver’s license or passport. It’s an unacceptable hindrance for companies like Pockit who are trying to address the issue of financial exclusion. There also needs to be a general effort made by other financial players in areas like lending, credit and insurance to better use technology to incorporate smarter signals of consumer behaviour, new models of assessing risk and more flexible pricing models that allow greater participation of those who are financially excluded.”

Clearly startups are beginning to target less well-represented demographics. The UK’s underserved consumers have proven a fruitful jumping off point but watch the fintech space for more products boosting equality and fairness of access for other markets. No doubt they’ll be winning business ideas too.

This article comes to you courtesy of The Telegraph Future of Fintech conference, which will be addressing equal access to fintech services alongside other critical issues facing the industry today.

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