Post-Brexit London races to keep its head start in fintech

[LONDON] AT the 600-year-old Guildhall in the City of London, key players in a 2-decade-old industry looking to remake finance are gathering.

Innovate Finance's summit - part of UK Fintech Week - aims to showcase Britain's financial technology sector and its global ambitions. Its profile has never been higher, with soaring demand from both customers and investors - even if the latter are proving a little harder to find than in the US.

Investments in UK fintech companies more than tripled to US$11.6 billion last year, figures published by Innovate Finance, a trade body for the industry show. That is not including the billions that more traditional banks and tech giants are splashing out to upgrade everything from current account apps to emerging uses for blockchain.

This week's conference will discuss "what the UK needs to do to remain the world's preeminent financial services and innovation hub in the coming years", said Janine Hirt, chief executive officer of Innovate Finance. The clock is ticking on this goal.

Britain, where the wider finance sector makes up just under 10 per cent of the economy, has some fintech success stories including Revolut, Monzo Bank and OakNorth Bank that command multibillion-dollar valuations. However, few fintechs opt for London when it comes to selling shares on the stock market - something the government is trying to change as it hunts for post-Brexit growth.

There are about 2,500 fintech companies in Britain, according to research by Deloitte. Most of these are based in London, which - according to the accountancy firm - is the third-biggest fintech hub in the world.

The term can apply to a wide range of businesses including online banks, technology to help apply regulations, price comparison websites and crypto exchanges.

British startups have attracted several blockbuster funding rounds in the past year. Revolut, valued at US$33 billion in its last funding last July, has more than 18 million customers worldwide on its app that offers services including money transfers, savings and investments.

In December, digital bank Monzo completed its biggest funding round of US$600 million, valuing it at US$4.5 billion.

Copper.co, which helps financial institutions trade cryptocurrencies, has been in talks with investors to raise funds that would value it at around US$3 billion.

Checkout.com, which processes payments for retailers, in January announced new funding that valued the business at US$40 billion. In 2021, the company tripled the volume of transactions processed - for the third year in a row.

Finance unicorn Starling Bank, whose backers include Goldman Sachs, is looking for fresh funding a year after its last round, Bloomberg News has reported.

Almost all of the investment is flowing into London and the south-east of England, though US$696 million went to firms outside this region during last year, said Innovate Finance. In turn, the UK dominates fintech funding across Europe, which itself pales in comparison to the US.

The British government thinks it can go further. One untapped source of funding for fast-growing companies is pension funds, which account for about 12 per cent of the venture capital funding in Britain, compared with 65 per cent in the US, a 2019 report from the British Business Bank showed.

Chris Philp, Britain's minister for technology and the digital economy, said in a February interview that investors are "missing out on the returns opportunity provided by pre-IPO tech".

There is also a challenge matching small, unknown companies to large investors who would rather put cash into more established firms.

Late-stage funding also risks falling behind in Britain, which missed out on the craze for special purpose acquisition companies that brought a wave of firms to US markets in the past few years. Money transfer platform Wise achieved a direct listing in London, only to see its share price struggle since.

More than a third of privately funded UK fintechs expect to list within 5 years, according to figures from consultancy EY cited in last year's Kalifa review. That review for the government recommended softening rules on areas such as founders' stakes to entice fintechs to list in London.

Another avenue for growth is collaboration with the so-called legacy banks. Consultancy EY and trade body Tech Nation launched a "fintech pledge" to increase the use of startups in the finance supply chain. All 5 major UK lenders have signed up.

There is also still a long way to go for diversity. Kalifa's report highlighted the importance of skills, access to global talent and strengthening the domestic pipeline to increase diversity and inclusion in the sector.

Seed stage companies across the UK technology industry have approximately 15 per cent representation in the workforce of ethnic minority and other underrepresented communities, falling to 9 per cent at more established firms, a report last year by trade body Tech Nation showed.

Women fintech founders in the UK receive 9 per cent of all capital, and just 3 per cent of venture capital (VC) funding goes to all-female teams, the report said. Entrepreneurs from Black, South Asian, East Asian and Middle Eastern backgrounds receive in total 1.7 per cent of VC investment.

It is a sign that the upheaval promised by the industry is yet to come to pass. For Marieke Flament, change is not coming fast enough.

"While fintech was instrumental in improving financial services for consumers, it didn't really disrupt things in a revolutionary way; and the space has become very crowded and mainstream," said Flament, the chief executive officer of the Near Foundation, a non-profit that oversees the development of a blockchain.

"Some are disillusioned by this, and feel as though their work life is in mid-life crisis mode and they need to reboot," she added.

The solution is for fintech itself to be disrupted, she said, arguing that web3 - the catch-all term for new online concepts including decentralised finance - will be the opportunity for developers to "inject adrenaline" and "true disruption" into the industry. BLOOMBERG

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