UK fintech companies continue to lead the way

The UK fintech industry has been at the forefront of the financial services revolution and become a hub for new firms looking to take a different approach to the age-old model operated by big banks and financial institutions. But why has UK fintech been successful and can it keep up the momentum?

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Source: Bloomberg

‘You have to, to serve these markets, reimagine how money can be managed and moved because there’s going to be more change in the next five years in financial services than what has happened in the past 30,’ – PayPal chief executive, Dan Schulman.

Financial services form the backbone of the global economy. They facilitate the billions of payments sent around the world every day, provide the vital capital needed for economies to grow, manage our increasingly complicated assets and supply the comfort-giving insurance we need to protect it all.

These are just some of the crucial services that the industry provides and the international nature of the market has meant financial services has long been dominated by big traditional banks and financial institutions that over centuries had cemented themselves as the money managers of the world.

But rapidly developing technology is turning the sector on its head and dragging financial services into the digital age as a flood of new entrants try their hand at taking a different approach to how financial services work and offer us all a much needed alternative to the long-standing monopolies.

Depending on what stance you take, fintech represents the biggest opportunity or threat to the global financial services market. With new rivals entering apace, incumbents have been trying to snap them up to get ahead in the digital game and data shows fintech has become invaluable. A report by PwC last year showed eight out of ten financial services firms felt vulnerable to the rise of fintech, with a similar amount intending to strike partnerships and other deals over the next three-to-five years to help mitigate the threat. The majority of the sector now has disruption at the heart of their strategy.

Fintech represents the natural course of development for financial services and its importance will only grow going forward. Major investment in fintech has broken beyond the traditional hubs in the likes of the US, UK, China and India, with other nations such as France, South Korea and Japan all seeing an uptick in fintech deals.

London has long been a finance centre of the world but the expansion and divergence of its banking industry has allowed the UK to carve out a leading position in fintech. There are almost three times as many UK banking and payments companies now than there were in 2005 while the rest of the world has seen theirs fall by around one-fifth on average. UK Chancellor Philip Hammond has previously described fintech as the country’s key to the ‘fourth industrial revolution’.

The momentum behind fintech is only building and the UK is leading the charge. So how is UK fintech performing and what is on the horizon?

What is fintech and how is it disrupting financial services?

There is no universal definition of classification of fintech but it is widely regarded as technology applied to financial services. Fintech is all about innovation that disrupts and transforms the existing market, birthing new companies that test the traditional models used by banks and other financial institutions such as Transferwise or online challenger banks like OneSavings, and building entirely new infrastructure to bypass the current financial system like blockchain and cryptocurrencies.

Read more: what is blockchain technology?

Others have fed off the increased demand this all gives for better cyber security, software and data, such as Fiserv, IT service provider Infosys or credit card processor FirstData.

There are four common themes occurring within the financial services industry that is driving the fintech sector, which are:

Fintech trends: replacing infrastructure

Building new infrastructure for financial services is nothing new. Companies like Visa, Mastercard and PayPal all revolutionised the payments industry by using technology and new infrastructure to become leaders of their industry but even they now find themselves exposed to the emergence of new innovative rivals, demonstrating how much development has picked up in the fintech space.

Read more about where’s next for PayPal

At the centre of new digital infrastructure is blockchain technology, the digital ledgers which are known for facilitating bitcoin and other cryptocurrency payments but in fact have a multitude of other uses.

Fintech trends: introducing new business models

With the rapid change in the industry presenting new opportunities many have taken an entirely different approach and adopted different business models to the existing players, demonstrated by the rise of firms such as Funding Circle, the peer-to-peer lender capitalising on the high street bank’s retreat from small and medium-sized enterprises (SME) lending which is joining the London Stock Exchange (LSE).

Find out more about the Funding Circle IPO

Fintech trends: monetising data and improving analytics

Heightened competition, the digital transition and a change in revenue models has created an increased need for quality data. More consumers are securing financial services for free, meaning companies are having to source more revenue from selling advertising and flogging the consumer data needed to attract new custom.

Read more about the challenges WPP and the wider advertising industry are facing

Data is becoming better in quality and larger in size, and the ability to understand this data is of equal importance.

Fintech trends: technology requires better security and governance

All of these trends place more weight on the digital sides of business, creating a need for better cybersecurity and fraud prevention software. The emergence of regulation technology (or ‘RegTech’) demonstrates how big the opportunity in this area has become as firms are thriving off supplying the tech businesses that need to handle the swathe of new regulatory and compliance laws.

Automation is also playing its part too, with artificial intelligence and software being increasingly used in all types of firms from brokers and trading houses to insurers and payment processors.

UK helps push global fintech investment to record highs

Fintech is attracting growing amounts of investment. The total value of all the venture capital, private equity and mergers and acquisition (M&A) deals within the global fintech sector during the first half of 2018 has already exceeded the total for the whole of 2017 and this year is expected to surpass peak investment levels seen in 2015, according to KMPG.

The UK plays an overweight role in the global fintech space – with investment of $16 billion in the first six months of this year surpassing the $15 billion figure for China and $14 billion for the US, and accounting for well over half of Europe’s total.

There have been major deals, however, that skew both first-half investment figures for the global market and that of the UK. Ant Financial, the affiliate of Chinese conglomerate Alibaba that primarily offers mobile payments through its app Alipay, raised $14 billion in venture capital to boast a staggering value of $150 billion and payment technology firms Vantiv and Worldpay completed their $12.9 billion merger in what is one of the largest fintech deals of all time. The impact of the deal, with Worldpay dual-listed in London and the US, is evident looking at UK fintech investment data:

How much is the UK fintech market worth?

The UK government estimates the UK fintech market generates about £20 billion in annual revenue. Those fintech firms providing support services to existing financial service networks, like security or software, dominate by accounting for more than 80% of that value, but with more experimental and disruptive fintech firms taking the other fifth there is evidence that the UK is a hotspot for new innovative start-ups.

Payments has been one of the most transformed services in the fintech age and accounts for half of UK fintech revenue. Online payments are still dominated by larger incumbents because success in the sector comes down to economies of scale and the ability to expand internationally, and fast. Most have stepped up their game through acquiring smaller players with something to offer. The other end of the scale is payment infrastructure, where the market is much more fragmented and spearheaded by blockchain and cryptocurrencies which, although attracting interest, are still at a very early stage.

Learn more about investing in blockchain technology

The UK’s second largest fintech market is in software, worth £4.2 billion annually, primarily selling the likes of cybersecurity, core banking infrastructure, asset management, insurance and risk management software to the financial services industry and accountants.

Data and analytics generates about £3.8 billion for the UK fintech market as those able to handle so-called ‘Big Data’ and portray what it all means finding success supplying information on consumer credit and capital markets. Supplying trade data on capital markets has emerged as the biggest area accounting for £2.2 billion of total revenue while the swathe of credit reference companies that have surfaced in recent years are thought to collectively generate about £1 billion. Data is also proving increasingly important for insurance companies, which are thought to spend about £600 million acquiring information from UK fintech firms each year.

Last but not least are the new platforms that have spawned out of the UK fintech sector, generating about £2 billion in annual revenue. This comprises aggregators like price comparison websites that are becoming increasingly important for financial services firms to attract new customers (£500 million), trading platforms like BUX (£800 million), wealth management platforms including MoneyLion (£700 million) and P2P lenders like Funding Circle (which is small, below £50 million, but the fastest growing).

Read more: are price comparison websites still fit for purpose?

UK dominates European fintech mergers and acquisitions

The UK fintech sector is the unrivalled and dominant leader in Europe, drawing considerably more investment and activity compared to counterparts like Germany or France. As well as attracting well over half of all investment in European fintech in the first half of 2018 the UK was also the host of five of the ten biggest deals during the period.

Top ten European fintech deals in the first half of 2018

Company Sector HQ Type of deal Value
Worldpay Payments UK M&A $12.9 billion
Nets Payments Denmark Buyout $5.5 billion
iZettle Payments Sweden M&A $2.2 billion
IRIS Software Institutional UK Buyout $1.8 billion
Nordax Institutional Sweden Buyout $788 million
ETF Securities Wealth management UK M&A $611 million
Yandex.Market Payments Russia M&A $496 million
Revolut Payments UK Private raise $250 million
Atom Bank Consumer finance UK PE growth $208 million
N26 Consumer finance Germany Private raise $160 million

Why is the UK a hub for fintech?

London has the highest concentration of financial institutions in the world and is renowned for its strong banking, asset management and insurance sectors, with its capital markets also well ahead of the rest of Europe. Many international companies currently see the UK as the European destination of choice as well as the Launchpad to enter the Middle East or Africa. The UK is home to 251 non-domestic banks and there are almost 600 foreign companies listed in London.

This has provided the foundation to build a hub for fintech activity in the UK and is the culmination of numerous factors, some of which are unique to the country:

UK fintech driven by country’s leading role in financial services

The UK is the world’s largest market for banking and cross-border lending and it is also a centre for trading activity, particularly in foreign exchange and over-the-counter (OTC) derivatives.

The UK handles 18-19% of the world’s loans and cross-border bank lending, well ahead of the US at 11% and France and Germany closer to 8%. It also attracts over 40% of global revenue generated through foreign exchange (ahead of the US at 19%) and accounts for almost half of interest rate OTC derivatives traded internationally, more than double the amount of the US in second place.

UK fintech builds around country’s leading role in asset management and insurance

The US is the biggest asset manager in the world accounting for about 15% of the total assets under management worldwide, driven by hedge funds and private equity. The UK is the second largest asset manager with about 8% of the world’s asset under management, versus Germany’s paltry 2% and France’s 3%. The international stage that the London market represents is demonstrated by the fact over 40% of assets under management in the UK are held on behalf of foreign clients.

The insurance market is more competitive and evenly spread out between its neighbours on the other side of the Atlantic and the Channel. UK insurers snap up about 7% of all the premium income generated worldwide, well behind the US at 26% and not holding a comfortable lead over Germany at 5% nor France at 6%. However, the UK does perform particularly well in several niche areas of insurance, such as for the marine industry where it has over one-fifth of the total market – more than the US, Germany and France combined.

UK fintech aided by digital connectivity and higher e-commerce spend

The UK’s digital transformation has been instrumental in shaping the fintech market and consumers were among the quickest to move online and has one of the highest rates of mobile adoption in the world. For example, each UK consumer on average spent €874 online last year compared to €647 in Germany and €470 in France.

Following years of growth in the amount European consumers were spending online the average spend per capita has been in decline for at least the last three years. The UK has seen consumer online spending decline 15% between 2015 and 2017, faster than the 13% drop in France and the much slower 3.7% slowdown in Germany.

Still, UK spending is considerably higher than its European counterparts with the average consumer spending €874 online last year (dropping back to levels last seen in around 2010) compared to €647 in Germany and €470 in France. However, Europe has been gaining ground on the UK throughout this decade - UK spending was two to three times higher than its European neighbours back in 2010.

UK fintech encouraged after financial crash

The financial crash in 2008 encouraged the rise of fintech and other companies with some specifically launched to provide an alternative to the financial institutions that caused the collapse. Consumer trust in the big traditional banks and others was knocked around the world but was particularly dented in the UK.

In 2008 only 47% of UK consumers held confidence in the traditional banks, higher than both Germany and France, but the fallout caused a much more severe drop in trust, with confidence falling to just 23% by 2013 to rank amongst the lowest in Europe. US consumers held much more belief in the system after the financial crisis, with confidence falling from 68% to 49% over the five-year period, according to Ernst & Young.

The displeasure with existing players has provided ample opportunity for new entrants to emerge and offer an alternative. The challenger banks in the UK have been able to compete on cost by offering purely online offerings and, noting the poor service currently on offer, make customer service a priority. The new customer service rankings that all banks will have to display to potential consumers in the UK has online bank First Direct and Metro Bank, which was the first new high street bank to be launched in over a century back in 2010, as the top two firms.

There are now thought to be around 1600 fintech companies in the UK, most of which have only surfaced in the wake of the financial crash. The amount of fintech start-ups emerging in the UK remains high but firmly on a downward trend from peaking in 2014.

A census of UK firms carried out last year showed the average age of fintech firms is just over five years, which combined with the peak in start-ups and rising M&A deals implies the industry is starting to become more mature and entering a new era of consolidation to scale-up fintech to handle the global market.

UK fintech regulation offers ‘competitive advantage’

Ernst & Young states the UK has offered fintech a competitive advantage with more favourable regulation versus European counterparts and allowing industry to help mould what is still relatively new regulation. Nearly half of all UK fintech firms are governed by the Financial Conduct Authority (FCA) and/or the Prudential Regulation Authority (PRA), showing acceptance of new entrants.

UK fintech outlook gets brighter as opportunities continue to grow

Fintech has been a transformational blend of consumer finance with new infrastructure, data and software powered by the likes of artificial intelligence but its applications currently look endless and the opportunities are only growing as technology develops.

For the immediate future, likely trends within the UK and wider fintech space include:

Fintech mergers and acquisitions to remain rife

The international nature of financial services means one crucial element behind the success of fintech firms is their ability to scale up and handle a global operation. As firms fail to expand fast enough and others look to team up to grow at a quicker rate, M&A in the fintech space will remain high. UK firms have already proven their ability to attract European investment and the fact overseas investors from outside the EU consider the UK as the perfect launchpad into the European banking and financial services market suggests UK fintech will be centre stage of any bidding battles.

The larger players, including the big banks, payment providers and insurers, will also look to fend off the fintech threat by buying smaller players to improve their offering.

More fintech IPOs expected

The Ernst & Young census of UK firms revealed almost one-third of fintech companies expect to launch an initial public offering (IPO) to join the stock market within the next five years, with a slightly higher amount ‘unsure’. Funding Circle’s imminent IPO is one of the most anticipated of the year and will see the peer-to-peer (P2P) lender valued up to £1.8 billion. However, data shows there is a gap in funding for UK fintech firms that find themselves too big to attract angel or start-up capital but too small to conduct an IPO, possibly preventing the amount of UK businesses that will make it to market before they get bought up or fail.

Funding Circle IPO

Learn more about the Funding Circle IPO.


Financial services firms to increase partnerships with fintech

Almost eight out of ten financial service firms expect to start striking more partnerships with fintech firms over the next three to five years as banks, insurers and others look to bolster their offerings and defend against the threat of new competition. With a lot of new technology and ideas on offer it is likely many partnerships will form precursors to M&A activity to allow companies to test out new concepts.

Blockchain to prove a blockbuster for fintech firms

The possibilities of blockchain technology are only just starting to be realised and it has garnered considerably more widespread support than the cryptocurrencies that are used to oil the system. Blockchain is automating the transfer of assets and facilitating trust without the need for the intermediaries that have long dominated financial services, and on its way to helping automate deals through smart contracts that are pioneered using Ethereum.

Learn how to trade ethereum

The development of blockchain is the most ambitious response to the perceived failings of the financial system to date, with its decentralised nature all about taking the power over money and assets away from the corporations and into the hands of the people. But the banks and others have already seen the opportunity and are increasingly using blockchain to their own advantage, mostly centralising it.

Read more: how will blockchain change banking?

Blockchain is arguably the biggest driver of change within the fintech space at present and is being used for everything from helping to provide trustworthy online identities to prevent fraud to streamlining supply chains and auditing the transfer of goods at each stage of what can be complex journeys involving large numbers of businesses.

Read more about the founder of Ethereum, Vitalik Buterin

A group of energy and banking giants including Shell, Societe Generale, Citigroup and ABN AMRO have all recently announced investment into blockchain platforms that aim to digitise contracts, letters of credit and invoices through the Ethereum platform with the hope of speeding up trading and improving security. Many of the world’s biggest companies and industries have formed consortiums to discover how blockchain can revolutionise their markets – it’s all about cooperation. According to PwC, 77% of financial services firms expect to have implemented blockchain into their business one way or another by 2020.

RegTech to grow as more countries adopt open banking and other fintech

Open banking – allowing third parties to build financial services and products around the existing institutions – is being increasingly adopted by countries around the world and more mature markets, including the UK, have introduced legislation to facilitate the rise of fintech businesses. Canada, as one example, is expected to include open banking when it updates its banking regulations in 2019, which has drawn attention from foreign players looking for new markets.

In addition to the UK, Germany is the other major European hotspot for challenger banks where N26 raised $160 million earlier this year and sourced investment from Chinese giant Tencent. Both countries have seen increases in the amount of fintech firms applying for banking licenses, and they are getting them.

Read more: are UK challenger banks failing to challenge the big banks?

Europe has introduced legislation such as the Payment Services Directive 2 (PSD2), General Data Protection Regulation (GDPR) and, of course, the Markets in Financial Instruments Directive II which has swamped financial services with more regulation as a consequence of their poor handling of the economy ten years ago. This has fuelled the need for RegTech, which tries to help automate and simplify the growing regulatory burden that financial services face. Global investment in RegTech in the first half of this year has already exceeded the annual total for every single other year on record apart from 2016, implying this year should easily prove to be a record high.

Read more: what’s the effect of GDPR and how is big tech responding?

How could Brexit affect UK fintech?

The strength of UK financial services and its outsized role in European markets is often cited as a key argument as to why the UK and the EU can’t afford a clean break from one another and why a trade deal is needed. There is no doubt that Europe needs the UK to keep financial markets going after Brexit, but there are plenty of signals that European leaders are looking to change that.

The Telegraph recently reported that the French government has launched a project to help bring fintech firms to market, and is offering ‘relocation packages’ to overseas firms in what is seen as an attempt to entice UK start-ups concerned about losing access to Europe. French President Emmanuel Macron has already initiated a wider strategy aimed at making France a nation for new businesses.

Read more on the potential economic impact of Brexit

With so many unknowns about future UK-EU relations fintech firms are currently concerned with the obvious hurdles that Brexit presents, and at the top of the list is talent. Eight of ten UK fintech firms already cite securing talent – particularly for coders and other tech-folk – as one of their top three biggest problems and Brexit is likely to exacerbate that, at least in the short term. Although, some would argue the ability to source talent from outside of the EU post-Brexit presents worthwhile opportunity. Ernst & Young's government-commissioned report concedes the UK fintech market is 'dependent on importing technical talent'.

The UK is already leading the international fintech space in several areas, including P2P lending, aggregation sites and in data and analytics. That, combined with the financial hub that is London, means fintech and financial services are arguably the UK’s biggest potential export weapons post-Brexit, not just with the EU but the rest of the world. The UK has already beaten the EU in implementing fintech-friendly laws and in March this was demonstrated by the publication of its first Fintech Sector strategy that openly outlines its plans on how it will remain dominant in Europe.

The outlook is looking steady if not rosy. The potential of a ‘hard Brexit’ (a clean-break from the EU with no deal) has never been greater but investment in UK fintech is breaking new records and forecast to continue to do so. Ernst & Young said 207 of the UK’s 1600 fintech firms expect to raise a collective £2.5 billion in their next round of funding – many of which could involve M&A or IPOs.

Brexit is of course the biggest threat that could hit home early next year but, regardless of the outcome of negotiations, there is no denying the UK is the undisputed rival of fintech in Europe – 28 of Europe’s top 50 fintech firms are from the UK, more than triple the amount of any other European nation, according to independent publication of the FinTech 50, FinTechCity:

The FinTech50: the top 50 European fintech firms

Company name HQ Founded Sector
AID:Tech Ireland 2016 Banking
AQmetrics Ireland 2012

Capital markets/RegTech

Azimo UK 2012 Money transfer
Billion UK/Poland 2012 Blockchain
Bud UK 2015 Open banking
Bunq Netherlands 2013 Banking
BUX Netherlands 2013

Trading

Clark Germany 2015

Insurance

ClauseMatch UK 2012 RegTech/Smart documents
Clear.Bank UK 2016 Banking
Comply Advantage UK 2014 AML compliance/RegTech
Curve UK 2015 Mobile payments
Duco UK 2012 Big data
Ethereum N/A 2014 Cryptocurrencies/blockchain
Everledger UK 2015 Blockchain
Featurespace UK 2012 Adaptive behavioural analytics
Fenergo Ireland 2009 Big data
Figo Germany 2012 Banking API
Friss Netherlands 2006 Insurance fraud, risk, compliance
Governance.com Luxembourg 2014 Corporate structures
Habito UK 2015 Lending/mortgages
IDnow Germany 2014 Identity management
Ledger France 2014 Blockchain security
Leveris Ireland 2014 Core banking
Mash Finland/Luxembourg 2013 Lending
Monese UK 2013 Banking
Monzo UK 2015 Banking
Mosaic Smart Data UK 2014 Data analytics
N26 Germany 2013 Banking
NetGuardians Switzerland 2011 Compliance/cyber security
Neyber UK 2014 Financial wellbeing
OakNorth UK 2015 Lending/Debt finance
Onfido UK 2012 Compliance, risk, regulation
PayFit France 2015

Payments/Employee benefits

PensionBee UK 2015 Pensions
Previse UK 2016 Payments/Trade finance
Privitar UK 2014 Privacy software
Raisin Germany 2013 Savings
Railsbank UK 2016 Open banking and compliance
Revolut UK 2014 Foreign exchange
RiskMethods Germany 2013 Risk in supply chain
Seedrs UK 2009 Equity crowdfunding
SETL.io UK 2015 Payments/Blockchain
SolarisBank Germany 2016 Banking
Starling Bank UK 2014 Banking
Suade UK 2014 Finance, compliance, risk
Tink Sweden 2012 Open banking
TrueLayer UK 2016 Open banking
Trussle UK 2015 Mortgages
WeFox Switzerland/Germany 2014 Insurance

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