The UK fintech scene is heating up as banks look to start-ups for innovation
- Summary:
- The UK government has just set up a trade body for the fintech industry in London and a new report by Ernst & Young claims deal volumes are growing at 74% a year.
Has the London and UK technology start-up scene finally found its niche with fintech? For three or four years now the UK government has been promoting
technology start-ups via its PR quango Tech City, and whilst it has attracted attention and somewhat of a community has developed, many still complain that it will never replicate the force that is Silicon Valley. Not enough capital, not enough risk taking.However, separate to the creative and digital companies that dominate Tech City and the Old Street area in the east of the capital, it seems that some start-ups have been successfully tapping into the thriving financial industry in London and are now attracting attention and a growth in investment.
Two announcements this week highlight this. First of all, the Chancellor of the Exchequer, George Osborne, announced the creation of a new industry body to promote the interests of the rapidly growing financial technology sector – dubbed Innovate Finance.
Innovate Finance aims to 'directly support the next era of technology-led financial services innovators' and 'aims to be the voice of a new movement that believes in the immense transformative power of technology to improve every aspect of banking'. Although drowning in PR fluff, you get the general idea – the organisation will do what it can to support the UK's fintech industry.
The body is being headed up by Claire Cockerton, who according to her LinkedIn page seems to have held a number of similar 'advisory' roles across a number organisations, and is also being backed by a number of big names in banking and technology, including Barclays, HSBC, IBM, Lloyds, Mastercard, RBS, Visa etc.
George Osborne said the following at the launch yesterday:
Key to the government’s long term economic plan is cementing Britain’s position as the centre of global finance. It’s only by harnessing innovations in finance, alongside our existing world class knowledge and skills in financial services, that we’ll ensure Britain’s financial sector continues to meet the diverse needs of businesses and consumers here and around the globe, and create the jobs and growth we all want to see in the future.
It is likely that Innovate Finance will face similar challenges to its sister organisation, Tech City, in that people and companies have struggled to understand and quantify where value is being delivered – beyond PR. A few years ago it was revealed that Tech City was costing the government approximately £1.7 million a year to run, which many argued could have simply been put into funding start-ups. Many also see it as the government jumping on a bandwagon, as the start-up community was already growing organically.
However, I tweeted one of the ex-CEOs of Tech City, Benjamin Southworth, and asked for his opinion on whether he perceived the new organisation as necessary or not. Southworth has always been a vocal figure in Tech City and the start-up community, but has always provided honest and fair feedback on where things needed improving. He said:
@Derek_duPreez I think it's always necessary to have people responsible for translation of startup culture to large scale orgs.
— Benjamin Southworth (@inthecompanyof) August 7, 2014
And I tend to agree. That's how this new organisation will prosper, if it can successfully connect the banks with the start-ups they need and help them work together in a way that makes it easier for the start-ups. The banks are struggling to innovate, we all know that, you only have to look at the number of failures that occur on what feels like a weekly basis. Thanks to creaking mainframes and ageing legacy systems, the banks haven't been doing so great on the technology front. Many view this growing fintech scene as an opportunity to tap into areas of tech excellence that they don't want to, or can't, develop in-house. We will probably see a few acquisitions over the coming months too.
Banks are increasingly recognising the importance of this, which is evident from the number of funds and accelerators that have been announced in recent months from top institutions including Barclays and Santander.
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The second announcement to catch my eye and provides further evidence that London fintech is on the way up is that Google's UK vice-president of brand solutions, Dan Cobley, announced that he will be leaving the company to start his own fintech incubator and investment fund. Brightbridge Capital, based in Hammersmith in west London, aims to build businesses that 'promise to redefine how financial services are delivered through the smart use of internet technology'.
Cobley commented on his departure from Google by saying:
The decision to leave Google is a really tough one, and I will miss the place hugely. But I have always wanted to run my own thing, and having secured the support of such amazing backers there will never be a better time to make the leap.
Finally, Accenture also recently released a report, which outlined a number of stats that pointed to the rapid growth of fintech investment in London and the UK. Here are some of the headline figures:
- Deal volumes have been growing at 74% a year since 2008, compared with 27 percent globally and 13 percent in Silicon Valley.
- During the same period, the value of fintech investment increased nearly eightfold to $265 million in 2013 – a rate of 51% a year, nearly twice the global average (26%) and more than twice that of Silicon Valley (23%)
However, despite this optimism, Accenture also said that while fintech investment in the UK is growing fast, the market is still relatively immature. Fintech companies in Silicon Valley, for instance, received $950 million in venture funding in 2013 alone, while investment in the UK's fintech sector has totalled just $781 million since 2004. Julian Skan, Accenture's managing director overseeing its FinTech Innovation Lab in London, said:
For a relatively new sector, fintech is developing fast. There are growing number of incubators and accelerators and increasing interest among both the big banks and the venture capital community. But there are still challenges to overcome. It is harder to raise funding, and entrepreneurs are less focused on commercializing new ideas than in the US. It is also difficult for small entrepreneurial companies to gain entry to big global banks.
Verdict
Fintech seems to be a feasible option for London and the UK to carve out a niche in the technology sector. Unlike some of the other ventures in Tech City,
although many being successful, fintech has an advantage because it can tap into the demand in the capital's thriving financial sector. There are the skills in London, as well as the appetite and demand from the big banks.However, the Innovate Finance trade body needs to be careful that it doesn't just come across as another PR quango that doesn't do much else apart from send out press releases that outline 'successes' with very little evidence to support. Where it will prove useful, as Southworth pointed out, is getting these small, innovative start-ups access to large financial institutions that need their technology. Helping them work together.
Funding and risk taking is a problem in the UK, in that there is just a lack of both, but maybe if we begin to see a few success stories emerge out of the start-up community, more money will begin to flow.