UK fintech startups are raising fresh investment cash at a fast pace, with many managing to raise funds from investors and put the UK ahead of countries like China and Germany. With these promising efforts, there is some degree of hope for the state of finance in the UK post-Brexit.
Kiara Taylor is a financial analyst. She has been employed in a number of roles at JP Morgan, Citigroup, and more recently DCG Group, and transitioned to finance writing in 2019.
Here she discusses the British fintech companies that are bringing hope for the future.
It’s no secret that the UK has had a tough year. But amid the bad news – which includes some of the worst pandemic statistics in the world, and the looming shock of Brexit – there are some small signs of hope.
Most of this good news is economic. There are reports that a UK-India trade deal may sustain the country’s manufacturing sector even through the economic difficulties caused by it leaving the European Union. And on a more everyday level, some of the UK workforce seems to have adapted well to the pandemic, with the self-employed set to contribute $125 billion to the UK economy this year.
Another area in which analysts are predicting growth is in the fintech sector. The UK has become a European leader in fintech, and some hope that Brexit will give the government the freedom necessary to unleash these companies.
Investment pours in
Much of this confidence is based on buoyant recent investment figures. The government in the UK has recently hinted that it will loosen the financial regulation that currently binds fintech firms, both because it sees that fintech is crucial to the post-Covid recovery, but also as it seeks to keep its place as the preeminent European financial centre.
Investors seem to like the sound of that. In February, a number of London-based fintech firms received record inward investment. Checkout Ltd., a business online payments processor, raised $450 million to become the most valuable venture-backed company in Europe.
Similarly, a number of smaller firms are also attracting support. Revolut and Monzo Bank, two fintech companies focused on providing banking services to younger customers, raised over $4.3 billion last year. This was second only to the nearly $22 billion in capital raised by fintech companies in the United States.
These impressive recent figures are all the more important because the government in the UK appears to have spotted them, and to be taking their impact on the wider economy seriously. In January, the country’s government published a new report that stressed the centrality of the sector to the UK’s plan for the future. As the report stressed, the fintech industry now contributes £11 billion annually to the economy of the United Kingdom.
That said, the sector faces some real challenges in the next few years. A good proportion of the UK’s fintech companies are focused on making international banking easier, and the travel industry has had a very bad year. Similarly, the impending exit from the European Union threatens the business model of these companies, who are based in Britain partly to take advantage of the ease of doing business in Europe that it used to afford.
Brexit threatens to make it much more difficult for fintech firms to hire staff – a problem directly addressed in the aforementioned government report, which proposes a £1 billion fund to make it easier to hire foreign workers by speeding up visa applications. But it also threatens a number of less obvious advantages of being in the European Union – access to the big data that is used to optimise financial planning, and a continent-wide consumer base within which young, pluck startups can build a strong community.
Nevertheless, at the moment the government of the UK seems well aware of these risks. The report highlights specific threats to the UK’s dominance over the fintech sector, including the coronavirus, competition from other nations such as Canada and Singapore, and the effects of Brexit. And while it contains little information on how, exactly, these challenges are going to be met, the direction of travel is clear – de-regulation.
Agility vs. risk
For most people from the UK, even mentioning “de-regulation” brings back bad memories of the 2008 crash, and the lack of accountability that followed it. But there is good reason to believe that the economy we are now working with is fundamentally different from that of 2008, and far more resilient than it was at that time.
Part of the reason for that, and in fact part of the reason why fintechs are currently doing so well, is that investment is a much more personal matter than it used to be. Many UK citizens are now using mobile apps to invest their own money. According to London-based online trader Alex Williams of Hosting Data, this is because most investment apps are very beginner-friendly, saying “Most great investment platforms in the UK will also come with educational resources. These include tutorials and advice on how to analyse different stock information.”
Similarly, some in the City of London have long pointed out that the path to unleashing the UK’s tech firms is already well defined by the US, and that deregulation is, therefore, less of a shot in the dark than it was in the years leading up to 2008. The London Stock Exchange does not have the same giant tech corporations that now dominate the stock exchanges in the United States and Asia. It’s perhaps for this reason that the S&P 500 is up by over 110% in the last five years, while the FTSE 100 is up by just 10% in the same time period.
If some of the massive profitability of US tech firms can be coupled with the financial expertise of the City, London should have no trouble maintaining its lead in the sector.
Of course, for most of the residents of the UK, these gains will not be visible for a few years yet, and there are short-term challenges to be overcome first. The UK will need to become a more tech-friendly environment if the fintech boom is to be sustainable, with better training and facilities for technology companies. Failure to build these risks repeating the story of the UK falling behind in electric vehicles, and the country subsequently losing business to European rivals.
Still, the dynamism and agility of the UK’s economy, especially after being freed from the Brussels bureaucracy, will make it a tempting target for many investors in the next few years. And with Gen Z busy starting their own businesses all over the island, the future looks bright.