How does the UK fintech sector compare with the rest of the world?

The UK fintech sector appears to be booming but what does its future hold, and how does it compare with the rest of the world? Business Leader Magazine investigates.

A recent report by international technology M&A advisor Hampleton Partners showed that 2018 marked the highest total investment on record in fintech start-ups, reaching a cumulative disclosed value of £24bn. But how does the UK fintech sector fare globally?

There are 76,500 people employed in the UK fintech sector, making it one of the largest in the world. This comes from a 61% increase in fintech employment in 2018 – a leap forward which marked fintech as one of the fastest growing sectors in London’s economy. The UK fintech sector is concentrated in the capital, with the regions experiencing only an 18% increase in fintech jobs last year.

The UK also boasts the highest consumer adoption rate in the West, with over half of UK consumers using fintech in some capacity. This is ahead of the global average of 33% and behind only China and India worldwide.

Characteristics of the UK fintech sector

Clearly, the UK is well positioned when it comes to FinTech but should we be concerned about London’s domestic dominance?

Charlotte Crosswell, CEO of Innovate Finance, comments: “The UK fintech ecosystem has a strong track record of technology, innovation and development – and, unlike in the US, where financial services operates on the East Coast and technology on the West – our geography means that tech and financial services have often been in close proximity and this is naturally centred around London.”

But fintech firms are becoming increasingly common in the regions, too. Louis Spencer, Senior Relationship Manager, NatWest Corporate and Commercial, explains: “Fintech is a very prominent part of a growing start-up and scale-up scene here in the UK. We are beginning to see ‘unicorns’ pop out of centres outside of London. For example, Bristol has created two unicorn businesses in 2019 alone, with Graphcore and Ovo Energy.”

So, what are the leading FinTech verticals in the UK?

The UK government has identified four leading areas in UK fintech: payments, platforms, software, and data analytics.

Charlotte says that open banking has been a particular success: “The UK has been internationally recognised as having set a gold standard in the establishment of open banking. We are seeing some early signs of how open banking is powering technologies to help address some of society’s issues, in particular in the debt advice areas.

“The UK fintech space has also produced world-leading innovators in other verticals including peer-to-peer lending (Zopa, Ratesetter, and Funding Circle,) digital banking (Atom Bank, Starling Ban and Monzo) and remittance services (Revolut, WorldRemit, and Transferwise).”

Charlotte adds: “Fintech thrives where capital, tech and talent connect with regulators and government. The progressive regulatory and policy framework within the UK has been a significant contributing factor to the growth of its fintech space.”

The importance of an eco-system

Pundits have said that what has helped the UK become so successful, in regard to fintech, is the creation of solid eco-systems built around universities, incubators and entrepreneurs.

Louis Spencer of NatWest says: “The UK has a strong and long-standing pedigree in traditional financial services with more than 60,000 banking, insurance and financial service firms. These have provided an attractive starting place for many early stage fintech start-ups to immerse themselves within. We’re good at creating eco-systems in the UK. Take Bristol as an example, which has close collaboration between tech, education and business.”

Another feather in the cap for UK fintech has been government funding.

One example of the government’s commitment to UK fintech is its recently launched FinTech Bridge Program. Under the program, the UK government is offering support to fintech companies from Australia, China, Singapore, Hong Kong, and South Korea which hope to tap into the UK market, and to UK fintechs looking to expand into the listed partner countries.

Justin Fitzpatrick, CEO at DueDil, urges for this support to continue. He says: “The UK has a unique combination of ingredients that makes it a natural leader in fintech: A large end market for digital products, a pool of financial services, creative and engineering talent, and a consistent and supportive regulatory framework that encourages innovation.

“These advantages are currently at risk, but my hope is that political and business leaders will protect the things that make the UK a great place to build a fintech business.

Global competitors

It is interesting to consider, then – how does the UK compare to other leading economies?

EY produced a report in February 2016 entitled ‘UK FinTech: On the cutting edge’. The report ranked seven fintech hubs (UK, California, New York, Singapore, Germany, Australia and Hong Kong) according to talent, capital, demand, and policy.

EY listed the UK as the narrow leader, with California and New York close behind. The remaining regions scored some way below the first three. The report also hailed the UK’s regulatory environment as key to its success: “A particular competitive advantage is its world-leading fintech policy environment. This stems from the supportiveness of regulatory initiatives, tax incentives, and government programmes designed to promote competition and innovation.”

The UK has kept its competitive edge since EY’s report was published too. 39% of European fintech venture capital funding was invested in London last year – almost double the 21% which went to the runner
up in Berlin. UK fintechs should not rest on their laurels, however: the average VC funding round in the Asia-Pacific region reached almost double the worldwide average in 2018, and the same EY report predicted that China would outstrip US FinTech in 2020.

Threats to UK fintech

With hungry global competition and the UK’s international relationships somewhat stuck in a drawn-out transition, what are some of the key threats to the UK fintech sector?

Charlotte Crosswell says: “UK fintech is highly dependent on global talent. Approximately, 42% of the current UK fintech workforce is drawn from non-UK nationals. As UK fintech is set to top 100,000 employees by the year 2030, fintech firms will require further clarity from political leaders to ensure the sector remains open to recruiting overseas talent post Brexit negotiations.”

Charlotte adds: “The UK will also need to look at our education system and define our five and ten-year plans in digitalising skill sets for the future and attracting more young people into the sector.”

Henry Whorwood, Head of Research & Consultancy at Beauhurst, also highlights some potential instabilities in the FinTech sector itself.

“These FinTech companies are using a model of company-building that has been developed by companies with different capital requirements” Henry says.

“A challenger bank is in some ways a software company, but it cannot raise money like a software company because it also needs greater capital protections for its customers. Moreover, the ability to monetise users is very different in FinTech.”

The future of UK FinTech

The UK fintech sector is now well established with a mix of start-ups and mature brands. Jonathan Simnett, director and fintech specialist at Hampleton Partners, predicts that the natural progression of the fintech sector will involve a period of consolidation.

Jonathan says: “Going forward, it is anticipated that the largest fintech firms will soon realise value through IPO in 2019. Meanwhile, most start-ups that have grown large enough to gain traction, attract a strong customer base and produce a profitable balance sheet, will remain small enough to be acquired by fintech and traditional incumbents, leading to an ongoing process of consolidation and M&A.”

Jonathan also lists current and potential trends, including: the widespread adoption of biometric technologies; a tendency towards regional rather than global dominance due to regulatory differences; and increased scrutiny by investors. Despite the general furore around artificial intelligence (AI), Jonathan cautions against wild predictions in this area.

He says: “Though AI continues to show promise as firms adopt algorithms and advanced modelling techniques for investment decisions, change is more likely to resemble a gradual process than a quantum leap into new data sources and methods.”

Innovate Finance’s Charlotte Crosswell calls for another type of change. “Fintech also needs to address diversity,” Charlotte says. “Women represent just under a third of the total staff in the fintech sector and have to face unconscious and conscious biases which limit the talent pool further. More action needs to be taken to solve the talent gap through a broader sector diversity strategy, and to encourage more funding of female-led businesses.”