What does the future look like for UK FinTech?
Roberto Napolitano, MBA
Chief Marketing Officer | Innovate Finance | FinTech | Helping companies grow 🚀
The global FinTech market is expected to triple and reach £380bn by 2030.
In the UK FinTech is a key sector of the economy with 2,500 companies employing over 60,000 people, a total investment of $11.6 in 2021 and 16% annualised growth.
According to research by Innovate Finance, the leading FinTech trade association, the UK is the second country in the world after the US for FinTech investments attracting almost half of total investments in Europe.
London has achieved global status as a FinTech innovation hub. Six out of ten European FinTechs are based in the capital including a number of unicorns like Revolut.
With such impressive growth what is the future for FinTech in the UK? What are the opportunities and what are the challenges ahead?
Opportunities for UK FinTechs
Accelerated growth, access to capital, investment opportunities, exit options and a collaborative ecosystem are some of the key opportunities for UK FinTechs.
Growth
The UK FinTech market is expected to reach a global market share of 12% by 2030. Today almost 70% of UK individuals use less cash and more digital payment solutions, a phenomenon that accelerated during the recent pandemic crisis. This is a clear opportunity for UK FinTechs to scale faster. To support such growth, keep the momentum and maintain its international leadership, the UK needs to strengthen its national ecosystem connecting political institutions, innovators, investors and accelerators.
Investors
The level of investments in UK FinTechs have increased significantly in the last few years. Easier access to capital, both foreign and national through Private Equity and Venture Funds, has enabled growth both for FinTechs and for the whole economy with additional 50,000 jobs to be created in the UK.
The interest of PE firms and financial institutions means that more FinTechs can follow growth trajectories and exit successfully. PE firms are attracted by FinTechs’ attractive propositions, higher margins, scalable business models and a growing customer base, while financial institutions see in FinTechs the opportunity to add complementary businesses, broaden their offering, increase revenues and drive merger cost synergies. Mergers and acquisitions continue to constitute a compelling exit for many FinTechs - just in 2020 there were 28 M&A transactions, and the number is set to grow.
Democratization and societal change
FinTechs are making finance accessible to the masses. The democratization of financial services is enabling customers to manage their wealth in a more direct, transparent and engaging way; at the same time it contributes to creating a more inclusive ecosystem. The explosion of FinTechs in the UK is also attracting a diverse talent pool with more women and minority groups in leading positions.
The Challenges ahead
High growth rates, Brexit, a complex regulatory framework, traditional finance for HNWIs and control of large institutions could harm innovation and attractiveness of the UK as a global hub.
Scaling, leadership and global competitiveness
As FinTechs continue to scale, the UK ecosystem is called to preserve growth, competitiveness and leadership. High growth can indeed have a negative impact on FinTechs: the faster they scale and the more customers they serve, the higher the costs from service delivery and compliance.
The recent Kalifa Review of UK FinTech has indicated international attractiveness and competitiveness as the two key elements to focus on as global competition rises with countries like Singapore, Australia and Canada increasing their investments in FinTechs. It is clear that the UK needs a more integrated ecosystem of businesses, investors and policies working for the same goal: to attract more FinTech innovators to the UK and to export UK FinTechs globally.
Brexit
The decision of the UK to leave Europe in 2016 is creating challenges for UK FinTechs to access the European market and attract talent. Non-UK FinTechs looking to scale and expand internationally might also start to see a post-Brexit UK as a smaller, less competitive market. They could prefer countries like The Netherlands, the Nordics, Germany or France as their European headquarters to attract a larger customer base.
Regulation
As the country starts defining its regulatory position in Europe, one may ask whether UK FinTechs will still be regulated by EU law or revert back to UK Law. It is unlikely that European regulations such as the Payment Services Directive or the Markets in Financial Instruments Directive (MiFID) will be less relevant in the UK regulatory framework. Uncertainty on this matter can be detrimental.
HNWIs and FinTech adoption
The success of FinTechs has been built upon high adoption rates by small investors and retail customers looking for convenience and ease of use. Can UK FinTechs attract high net worth individuals who are used to personal advisory approaches and traditional investment models? In tackling this challenge FinTechs might find a much larger market to serve. This is why the UK FinTech ecosystem needs to seek an active participation of larger investors and their trade bodies.
Are acquisitions hurting innovation?
Successful exits such as IPOs and M&As are proving popular and growing in number. But are acquisitions of FinTechs by financial institutions good news for the market? They are indeed a great opportunity for FinTechs to fuel growth with substantial capital injections. At the same time they could hurt innovation especially when M&As focus on cost reduction and business efficiency rather than product development and market expansion. One could also think that large institutions acquire FinTechs to reduce market competition and become market leaders, harming innovation as a consequence.
Conclusions
The UK FinTech market is a truly success story of recent years. Increased technical innovation, democratization of financial services, the development of a collaborative ecosystem and diverse talent have made the UK one of the most attractive countries for financial technology in the world. As opportunities continue to materialize, new challenges can disrupt this impressive growth. The future of UK FinTech depends on how well equipped the ecosystem of political institutions, entrepreneurs, investors and incubators is to support growth, maintain competitiveness and face the challenges ahead.
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