INSIGHTS

The rise of the UK's fintech industry

  • August 24, 2021
 

It is an exciting time for the financial technology industry. Investment has hit record levels, innovation is rife and the UK is eager to promote further growth. Here is a quick roundup of some of the the latest industry developments, and what we can expect to happen next.

The UK fintech industry

The UK has a long established history of excellence in financial services. Strong infrastructure, access to a diverse talent pool, forward-thinking regulation and access to capital makes the UK an ideal environment for fintech companies. As such, the UK is already home to 2500 fintech companies, 2100 of which are in London.

In terms of fintech investment, the UK is now second only to the US, with £18 billion invested in the first half of this year alone. This is up from £4.2 billion in 2020.

Where has this surge come from?

It is important to note that global fintech investment has increased as a whole, from £63 billion in the second half of 2020 to £71 billion in the first half of this year. This is largely due to COVID-19, which has accelerated the need for digital finance and other technological solutions.

According to KPMG’s ‘Pulse of Fintech’ report, UK investment has been bolstered by the London Stock Exchange’s purchase of financial market data and infrastructure provider, Refinitiv. While this is a one off purchase, it has shown confidence in the market and stimulated interest in further opportunities. Venture capital firms have shown increased interest in smaller start-up businesses, with approximately £4.5 billion invested in the first half of 2021.

Notable examples

Currency exchange fintech, Wise, received the largest ever UK tech company listing valuation of £8.75 billion. Wise markets itself as the “Robin Hood of currency exchange”. They undercut the prices of mainstream banks by offering currency exchange services without the markup. In addition, while it is common for start-ups to lose money in the early years, Wise have had four years of profitability — which has only continued to increase since the listing.

Shortly after Wise went public, banking and payments app, Revolut, became the UK’s most valuable fintech firm. After the latest round of funding, Revolut reached a valuation of £24 billion — six times more than it was worth in 2020.

There has also been a boom of “buy now pay later” companies such as Zilch and Butter. Greater regulation is expected in this area due to recent concerns over credit checks. However, this does not seem to have put off investors in this area.

The UK has always been known for its strength in wealth tech and payment technology — 50% of all fintechs operated in one of these subsectors in 2020. However, opportunities are growing and there is room for innovation across other areas. According to KPMG, payments, wealthtech, insurtech, regtech and cybersecurity (among others) are all subsectors experiencing growth in 2021. Due to the surge in cybercrime during the pandemic, cybersecurity fintechs are expected to be a particularly high growth sector in coming years.

What next?

The UK is keen to capitalise on this current fintech boom. Government, and in particular Rishi Sunak, have been pushing for changes to increase the UK’s appeal to start-ups and investors. The £375 million “Future Fund” is aimed at encouraging firms developing game-changing technology, including fintech.

There have also been calls to adjust existing regulations to make it easier for firms to list in London. For example, it has been suggested that the required free float level be reduced, and the three year track record requirement should be waived in more cases. The FCA is currently reviewing these proposals and expects to implement any changes by late 2021.

Finally, after Brexit, many are still waiting to see what access the UK will secure to EU markets. More favourable access will make it easier for fintechs to operate globally and will therefore further increase the UK’s appeal.

In uncertain economic times, the fintech industry offers hope for recovery and growth. The UK offers an ideal environment for these innovative digital startups, combining historical financial expertise with new technology-infused blood. The first half of 2021 has created a huge buzz for the industry, and many are eagerly awaiting what the rest of the year has to offer.