Building on Britain’s fintech success

17 Jul 2018

Kevin Chong

Emerging Companies

A look at how the UK's policymakers, regulators and investors have played a crucial role in the development of this exciting sector

The fintech scene in London is one of the most ground-breaking parts of the UK economy at the moment. And its success is – quite rightly – attracting considerable interest from all over the world.
 
Earlier in July, I attended the Treasury’s International Fintech Conference 2018, held at Tobacco Dock in London’s East End, and participated in a business roundtable on global investment in the UK fintech sector.
 
The event brought together some of Britain’s leading fintech businesses with investors from around the globe – in particular the Gulf states and the Far East, regions which are not just looking to make sound investments, but which are also keen to apply these technologies back in their home markets.
 
London is probably in second or third place globally – behind Silicon Valley and perhaps also New York – when it comes to the venture funding of fintech.
At the start of the conference, the chancellor Philip Hammond announced the latest in a series of fintech bridges with like-minded jurisdictions: a new partnership with Australia follows similar agreements with Singapore, South Korea, China and Hong Kong. These bridges are designed to stimulate trade flow and encourage regulatory collaboration. They’re also another sign of the government’s far-sighted and supportive approach to the sector, especially when it comes to creating the right regulatory environment.
 
London is probably in second or third place globally – behind Silicon Valley and perhaps also New York – when it comes to the venture funding of fintech. But, numbers aside, it is clear from conferences like this and the international attention they command that one of our biggest advantages is the proximity of the fintech ecosystem to policymakers and regulators.

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Each of the fintech businesses we work with on the Investec Emerging Companies team faces regulatory hurdles that need to be overcome at a very early stage. But this process has been made considerably easier by initiatives such as the Financial Conduct Authority’s Regulatory Sandbox – a scheme that gives fintech startups the chance to test their products and services in a closely supervised, real-world environment.

It is fantastic news that this is now being developed into a global sandbox, meaning businesses from anywhere in the world will be able to come to Britain, develop their ideas and get feedback from international regulators.

The people I spoke with on the global investment roundtable were certainly impressed by the progress London has made. But it was felt that there are still a number of opportunities that can drive the sector’s future success. Currently, for example, there is considerable focus on the B2C market – but there is an even bigger world of bank-to-bank and institutional finance services that fintech can turn its attention to.

There are also some financing issues that need to be addressed. On the one hand, in the last six months we have seen £792m invested in 152 UK fintech companies (Beauhurst, April 2018), which is very impressive. But if you drill down, you’ll see that this money was highly concentrated – the top 10 companies accounted for about 75% of that funding. So you are left with 140 firms which really didn’t raise that much (Beauhurst, April 2018).
 
The big challenge is: how do we get more funding to those 140 companies? Because in that group I think there are some very interesting businesses with fantastic prospects.
Recently, as the major venture funds have grown, they have increasingly focused on bigger, later-stage deals – it doesn’t make sense for them to go in early with small sums. That’s good for the ecosystem but, at the same time, the ecosystem is not going to survive in the long term if these smaller companies with excellent potential are unable to get the funding they need.
 
It requires institutions such as the British Business Bank to find a way to get some money into that end of the market. Our view is that this should be through some sort of co-investment structure in partnership with the private sector. The good news is that there are signs the government agrees with us.
 
This article is the first in our Investec Emerging Companies blog series. We’ll be posting updates every two weeks to give you insight into the venture capital market from an investor and start-up perspective.
 
Source: Beauhurst data, April 2018
 
This article is not intended to constitute personal advice and no action should be taken on account of information provided

Kevin Chong

Emerging companies

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