UK Fintech

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From digital currencies to robo advice, bitcoin and peer to peer lending, the fintech revolution is in full swing. Fintech firms — usually small, start-up companies using innovative software solutions to offer an array of financial services — are spreading like a virus and threaten to infect the entire financial system. The question now is whether traditional market sectors such as banking and financial advice will have the resistance to fight – or embrace – the fintech virus or otherwise succumb to the disruption it brings. Either way the fintech bug, which is fundamentally changing the way people access and use financial services, is here to stay.

Fintech firms are at the cutting edge of both technology and finance and have the potential to carve out a new financial landscape altogether. This represents both a huge challenge and opportunity for established market players. Banking giant Deutsche Bank recently acknowledged that it needs to revolutionize its business model in response to the charge of technology and consequent digital disruption.

And with Canada now exploring the establishment of a digital version of its currency, the march of fintech stretches beyond the corporate and into the national realm.

While the UK, US and China perhaps represent the hotspots, the fintech tsunami currently sweeping the world is set to penetrate previously untouched areas such as the Middle East. And according to a report by KPMG and NASSCOM, the fintech market in India will expand from $1.2 billion to $2.4 billion by 2020. Fintech is becoming a truly global phenomenon.

Global investment in fintech start-ups hit nearly $20 billion last year, according to a KPMG and CB Insights report. In the first quarter of 2016 alone, global investment in fintech companies totalled US$5.7 billion.

And Europe has seen some of the highest rates of fintech growth. Germany, where equity crowdfunding is expanding rapidly, is fast emerging as a major fintech force.

But it is arguably in the UK — and especially London – where the leading lights of the fintech revolution can be found. London in many ways provides an ideal platform for fintech companies to grow and thrive. The city is the global financial capital, according to the Global Financial Centre Index, and also enjoys high levels of digital connectivity and a technologically conversant populace.  In addition, London leads the way in the financial expertise stakes, with a vast pool of human talent at its disposal.

Over a five-year period from 2009 to 2014, the UK and Ireland led the way in fintech investment growth, according to Accenture and CB Insights.

Other reasons why fintech is taking off in the UK include a lack of innovation from, and dissatisfaction with, established players such as banks. And availability of capital is another factor. According to industry body Innovate Finance, UK VC investment in fintech firms increased 35% to $901 million in 2015, driven by large funding rounds from the likes Funding Circle, Transferwise, WorldRemit and RateSetter. The peer to peer lending, money transfer, challenger bank and alternative finance sectors account for the largest UK VC investment in fintech.

But perhaps most importantly, the UK fintech sector benefits from a progressive regulatory regime that encourages innovation and experimentation. The latest example of this forward-looking approach can be seen in the FCA’s regulatory sandbox scheme, under which fintech companies are able to test new products and business models under a lighter regulatory framework.

The sandbox initiative comes on the back of the UK regulator launching Project Innovate and Innovation Hub in 2014 — schemes designed to support firms looking to launch new products.

The fintech space is at the centre of the FCA’s innovation drive. This paper will look at the growth of the sector and how it has been supported by a progressive regulatory regime.

The CoreData figures used in this report are based on responses from three studies. One study was based on an analysis of 1,000 UK investors, with data gathered through August and September 2015 via an online survey. The second study, carried out between January and February 2016, was based on responses from 429 advisers active in the UK market. And the third study surveyed approximately 5,000 individual global investors in early 2016.

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