London might have positioned itself as the most attractive European city for digital entrepreneurs, according to the European Digital City Index, but what happens when a new wave of Fintech start-ups want to scale-up, and will Brexit thwart their plans?
The way consumers and businesses spend, save and invest money has changed dramatically over the past few years, with start-ups utilising technological innovation to disrupt the traditional financial services industry.
And thanks to the close proximity of the City and Canary Wharf’s long-established financial services sectors and Old Street’s booming technology sector – dubbed Fintech’s Silicon Valley – many have chosen London as their home.
In addition, current tax break incentives such as the SEIS, which allows an investment of £100,000 in a start-up with a 50% tax break, have positioned the UK as a clear leader in Europe and the world – the sector has received $5.4bn from a total global investment in Fintech of $49.7bn since January 2010.
It’s already an established scene – with four Fintech ‘unicorns’ operating here with a combined valuation of $18.5bn, according to a report by technology investment bank GP Bullhound. In contrast, there are two in the rest of Europe, worth a total of $4.6bn.
From start-up to scale-up
Promising to democratise the world of finance, peer-to-peer lending, crowd-funding and innovative payment platforms are rapidly gaining traction across the country, with several start-ups successfully growing their offer in recent months thanks to finance for scale-ups:
- Alternative lending
In response to the high fees associated with traditional banking services, peer-to-peer lenders and crowd-lending companies such as Zopa and Funding Circle found their niche by cutting out the middle man when connecting borrowers to investors. Both have benefitted from venture capitalist funding in their bid to scale-up.
- Challenger banks
Offering real-time information about a customer’s money, geo-located transactions, peer-to-peer transactions and historic spending data, banking software start-ups have gone from strength to strength. Having gained its full, unrestricted banking licence from UK regulators, Monzo raised £19.5 million in February 2017, led by Thrive Capital, and is also seeking a further £2.5m crowdfunding round through Crowdcube, having raised £1m in 96 seconds on the platform in March 2016.
- Mobile payments
With the total number of contactless transactions on mobile devices reaching 38 million in 2016, it’s no wonder cloud-based payment start-ups have flourished. Processing B2B payments quicker than traditional providers, GoCardless has raised £20m in funding so far.
- Equity crowdfunding
Offering an alternative means of financing, Crowdcube took the Kickstarter model (a peer-to-peer platform that enables the public to support people and initiatives through donations) and applied it to actual businesses. Offering members of the public the opportunity to be venture capitalists, the company itself has raised £6m from stockbroker Numis, Draper Esprit and Balderton Capital.
- Money transfer
Providing flexible and cheaper solutions to consumers and corporations looking to move money between countries and currencies, International payments provider TransferWise is authorised by the UK Financial Conduct Authority and attained unicorn status in May.
However, with Brexit on the horizon comes uncertainty, and many are concerned that last year’s vote to leave the European Union will have an impact on the sector’s growth.
Brexit and the future
As the UK prepares to withdraw from the EU, it remains unclear as to which financial regulations will be kept, amended or disregarded. Will international expansion become problematic as access to European markets is disrupted, and will this deter foreign investment? In addition, will we still be able to harness talent in technological expertise from EU countries?
While there are lots of unknowns, the current outlook is far from gloomy. Several start-ups have recently developed into scale-ups following the Brexit vote, and the UK enjoyed the second highest rate of deals globally in 2016 (second to the US) with 173. This represents a 5.5% year-over-year increase, up from 164 deals in 2015. And more and more start-ups are emerging in the footstep of their successful predecessors – pushing into new areas of digital finance such as Insurtech.
As the Fintech landscape evolves, both investors and talent will continue to be drawn to London’s vibrant alternative finance scene, and it seems clear that the attributes that make these start-ups so attractive – flexibility, alternative solutions to traditional institutions, and innovative thinking – will ensure their continued success.