Britain’s fintech sector has had a whirlwind year so far, shaking off the pandemic blues and managing to exceed expectations.
Statistics published by Innovate Finance showed £4.1 billion flowed into the fintech sector across the first half of 2021 alone, marking a 34% increase on the total amount across 2020.
Over a six-month period, the sector saw 13 firms’ close deals exceeding $100 million, beating a previous record set in 2019. This continued flow of investment is enabling Britain to retain its position as one of the world’s leading fintech hubs, ranking it second behind the United States in terms of funds raised.
John Doran, General Partner at TCV believes much of the current fintech appeal can be attributed to the flexibility and convenience of services offered by organisations such as Revolut, of which TCV was an early backer.
Indeed, these variables are pushing more customers toward challenger banks as the status-quo gradually shifts away from incumbents.
Revolut’s 2020 financial results show its customer base increased from 10 million in 2019 to 14.5 million at the end of 2020. Monzo now boasts more than four million customers while Starling surpassed two million accounts earlier this year.
“Everyone is used to a seamless experience in their daily life now. We’re using a lot of apps on our phones which offer us services, products instantaneously,” he says.
“That’s created this expectation in finance. Why can’t it be convenient as well? When people compare what they get from fintechs – especially from a transparency, speed or cost perspective – with incumbents, it’s night and day,” Doran adds.
Mass market appeal isn’t the only factor which sets challengers apart, Doran insists. Increasingly, challenger banks are appealing to another key constituent, SMEs.
The bank’s 2020 financial results also show it boasts more than half-a-million SME business customers while Starling’s own statistics show it had upward of 300,000 business accounts.
Once again, flexibility of services is a key differentiator, Doran says. “Incumbents have typically cared about two key constituents – high-net worth customers and the big corporates.”
“That’s how they make their money. Mass market customers and SMEs have been totally underserved over the years.”
Incumbents do have a number of significant advantages in this lengthy tug-of-war. They’re established brands which many consumers associate with authority. And while consumer opinions may have fluctuated over the last decade, they’re still often viewed as a safe bet.
When it comes to delivery of services and products, however, incumbents carry more than just legacy branding.
Many are weighed down by legacy infrastructure, making it difficult to keep pace with fintechs in terms of innovation. The inherent organisational agility boasted by younger brands is a major advantage in terms of product offering, he says.
“It’s very hard to compete on a functional layer, on a product layer, when your tech is decades old. A lot of incumbents are essentially just building skins on top of legacy infrastructure now,” he explains.
“But that’s a band-aid. It’s a temporary solution. Revolut is a great example of the innovation we’re seeing from fintechs. The amount of product that they’re able to release to customers over and over again is remarkable.”
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Revolut made headlines in July after raising a staggering £578 million, prompting a valuation of more than £24bn. The funding success means the firm is now one of the most valuable fintechs ever launched.
Starling Bank closed a £272 million Series D round in March this year, surging its valuation to £1.3bn.
Meanwhile up-and-coming neobanks such as Kroo are beginning to attract attention. The London-based firm closed a £17.7m Series A in July and recently received a banking license – making it one of just two to have been authorised so far this year.
There certainly is no shortage of activity in the British fintech sector, Doran says, which is a promising sign in light of the challenges experienced by many over the last 18-months.
Globally, the fintech investment market has also performed well. According to the KPMG Pulse of Fintech report, investments in the first half of 2021 reached £70 billion across 2,456 deals.
In Europe, where investment reached $39bn over the first half of the year, Britain attracted $26bn of total funding. So, what is it that’s separating Britain from the rest of the pack?
Doran believes a key factor behind this ongoing excitement has been an industry landscape which actively encourages and facilitates innovation.
Other ecosystems across Europe, in Germany or France, are also innovating, producing great companies and making waves. In Britain though, several key ingredients have combined perfectly to create a recipe for success.
“The UK has always been at the forefront in emerging technologies, especially around things like consumer tech,” he says.
“That’s not to suggest that there’s other countries in Europe that are not seeing the same trends. – I just think it’s more pronounced in the UK.”
Crucially, the UK has a number of natural advantages, he explains. One of these is the level of experience the country has with regard to financial services. London, in particular, is a global financial hub and boasts the relevant infrastructure needed for the burgeoning fintech sector.
“There’s a lot of experience. Decades of it – especially in the city,” Doran says. “There’s a tonne of knowledge here, and when that is combined with the talent that’s available to companies, you have great potential.”
Notably, Doran highlights the traditionally progressive and “forward leaning” regulatory environment that fintechs are able to operate within – enabling them to innovate and experiment.
“I think the regulatory sandbox-type environment that these banks have been able to operate in, for a sustained period, is another big positive,” Doran says.
“They’re able to learn, adapt, make some small mistakes,” he adds. “So, I think that’s a very favourable environment for any company.”
Shifting the focus
While the stars are aligning for British fintech, across the broader British tech sector there have been calls to shift the focus away from London. Earlier this year, the annual Tech Nation Report raised concerns over the spread of venture capital investment in the sector.
Naturally, investment continue to gravitate largely toward London despite strong performances from regional and national hubs, and the gap is growing.
Tech Nation called for additional support for tech ecosystems outside of London. Similarly, it recommended the creation of “more targeted” regional investment funds that could help level the playing field.
Looking at the United States, however, Doran notes that there has been a natural proliferation of startups outside of Silicon Valley in recent years. In part, this has been because the traditional barriers to launching a business have eroded.
Moving forward, he expects to see a similar, natural evolution of regional clusters that will benefit the broader UK sector.
“Twenty years ago, a lot of the big tech companies were coming out of Silicon Valley. But now you have companies like Spotify, Revolut and others that have come out of Europe,” he says.
“A part of this has been that the barriers to starting a company have become far lower. The cost of starting a company is lower and people are doing it all around the world.
“Looking forward, that’s why I think it won’t just be about London. You’ll see this kind of proliferation across the UK more broadly,” Doran adds.
A key factor in this, he believes, has been the coronavirus pandemic, which has given time for many to consider how and where they operate.
“Over time we’ll see that Covid will have an impact on this, I think. While it’s been a difficult 18 months, I think one of the silver linings of that has been that people have reassessed their situation,” he says.
“People are thinking about where they need to be now. So, you might not just see entrepreneurs or founders operating in Edinburgh, or Glasgow, but perhaps we’ll start to see a far more distributed workforce and sector.”
Scotland is well-positioned to capitalise
Looking ahead, Doran believes Scotland is “well-positioned” to capitalise on the ongoing fintech revolution. The ingredients which make Britain an attractive proposition are all available in Scotland.
It has the talent, the financial services experience, and the tech sector success stories. Indeed, the Kalifa Review highlighted Scotland as the country’s second biggest fintech cluster.
Simply put, the prospect of starting a company in Scotland is one that should excite entrepreneurs.
“Skyscanner is a great example of a Scottish success story,” he says. “It’s a company that we [TCV] really wish we’d invested in.”
“I’d say watch this space in Scotland. I wouldn’t be surprised if, in a few years, we’ve seen a lot more interest and a lot more companies coming out of Scotland at scale. These things take time.”
Looking to the tech sector in his native Ireland, Doran says there are parables with regard to maturity and the pace of growth.
In recent years, Scotland’s tech sector has dealt with a recurring theme – access to funding. While blessed with a myriad of exciting tech startups, this hasn’t quite been reflected in the flow of investment capital.
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Indeed, it’s an issue the Logan Review highlighted as a key hurdle to the future success of the Scottish tech ecosystem.
Pre-seed funding remains nominal, and if there’s one thing our tech sector gets right, it’s angel investment. But this will only take Scotland’s startup scene so far, the Logan Review notes.
There are very positive signs on the horizon for Scotland’s tech sector. Research from KPMG – using Pitchbook data – shows that more than £258m was invested in fast-growing Scottish tech firms during Q2, bringing the total to more than £322m so far this year.
This increase in later-stage deals does suggest a growing confidence in Scottish tech. Crucially, however, Pitchbook data shows that interest in earlier stage deals also grew as more firms close Series A rounds and smaller fundraises.
This growing activity is worth watching, Doran believes. In his native Ireland, he witnessed a similar situation unfold
“I saw this happen in Ireland,” he notes. “There didn’t seem like there was a lot going on for the longest while, but then all of a sudden you have a tonne of companies coming through.”
“It takes time to nurture these things, and in Ireland they’re now reaping the rewards.”
Join the Conversation: Fintech Summit 2021
Now in its eighth year, the Fintech Summit is the largest annual gathering of financial technology leaders in Scotland.
Following one of the most turbulent periods in modern history, the 2021 Summit will consider the role of financial innovation in socio-economic recover, featuring talks from a range of industry leaders.
For more details and information on how to register for the 2021 Fintech Summit, please visit: www.fintech-summit.co.uk