UK fintech traders sharpen give attention to doubtless ‘winners’ | USAEMALL.com

The UK economy has been the subject of much negative coverage in the past few years, but it continues to punch above its weight when it comes to incubating fintech businesses.

Seven out of the top 20 fintech, banking and insurance companies in this year’s FT1000: Europe’s Fastest Growing Companies ranking are based in the UK.

Businesses such as SME-focused Allica Bank, in second place overall, payments tech company Zilch, ranked 11th, and investing and savings app Chip (in 12th place) underline the broad range of expertise and fertile ground for fintech companies in the UK.

“The UK [has been] a very strong magnet for founders from all parts of Europe coming to create businesses in financial services,” says Alokik Advani, managing partner at Fidelity International Strategic Ventures.

The particular success of the UK’s fintech sector lies in a mix of behaviour and regulation, with some helpful coincidences. In the 2010s, the UK was ahead of both the US and Europe in terms of the digitisation of money — for example “chip and PIN” was introduced in the UK in 2004 and mandated in 2006. The US has been years behind this.

Fintechs also flourished with the help of regulatory support, particularly after the financial crash in 2007-08 when banking regulators decided to open up the sector to new entrants. The Prudential Regulation Authority created a “start-up” unit to support companies trying to get a banking licence, and the Financial Conduct Authority launched a digital sandbox to incubate new fintech companies.

The creation of new banks in the 2010s, such as Monzo, coincided with an era of ultra-low interest rates, prompting a flood of venture capital investment as cheap money abounded. 

Finally, the Covid-19 pandemic accelerated many of these trends, prompting a sudden and precipitous decline in the use of physical cash, as fears about contamination spread.

The subsequent rise in interest rates, introduced to tackle the post-pandemic burst of inflation, also gave many banking start-ups a quick burst of revenue.

“Neobanks were failing until interest rates came back,” says Advani. These companies were suddenly able to earn more net interest income — the difference between the interest charged on loans and paid out on deposits.

The result is a thriving, deep fintech sector that — despite a change in interest rates and tightening regulation — continues to create and develop some of Europe’s biggest growth companies. But the pressure is on for these businesses to find a way to generate profits in a sustainable way. 

For Allica Bank, the secret to success lay in focusing on an often neglected part of the market: supporting SMEs. The company, which has 680 employees, reported a 652 per cent compound annual growth rate between 2020 and 2023, with revenue rising from €228,000 in 2020 to €100mn in 2023.

As stricter regulation prompts the UK’s high street banks to pull back from SME lending, challenger and specialist banks have filled the gap — last year they accounted for 60 per cent of all SME lending, according to data from the British Business Bank. 

For Richard Davies, CEO at Allica, the current economic climate in the UK adds importance to serving this sector. “I do think the neglect of [SMEs] is part of the UK’s economic growth puzzle,” he says.

This growth issue is one of the biggest challenges for the UK’s economy. Last year, fewer than 20 companies listed in London, the lowest number of stock market additions since 2009. The lack of listings makes it harder for private equity to exit companies, which has a domino effect on fundraising liquidity for other businesses.

The persistent headwinds that blocked the pipeline of exit, fundraising and dealmaking activity have caused the recovery in venture capital to be strained, according to Pitchbook’s third quarter Venture Monitor report. “As liquidity remains elusive, increasingly cautious venture investors have stepped up their standards, opting for quality over quantity,” the report noted.

Nonetheless, good companies are still able to find funding, agreed executives. “If you’re perceived to be a . . . high-quality winner, there’s lots of capital available,” says Ben Stanway, CEO and founder of Moneybox, which is at 110th on the fastest growing list. There’s now a bifurcation of companies, with those deemed not as potentially successful finding it much harder to raise capital, he adds. “The premiums are paid for the companies that are perceived to be the winners.”

But many of these companies are still forced to swallow writedowns in value as a result of the pandemic boom in fintech investing, for instance Klarna’s valuation crashed from $46bn in 2021 — when it was Europe’s most valuable start-up — to $6.7bn just a year later.

“Good businesses are able to raise [funding], but at significant discounts to where the high-water mark was,” says Philip Belamant, CEO and co-founder of Zilch. “Due diligence is significantly deeper than what you saw in 2020.”

The challenges are not over for these companies, despite their success. One of the biggest hurdles, Davies says, is how to make sure all parts of the businesses are scaling up at the same speed. “How do you hire the right talent fast enough, how do you have the right structures in place, how do you maintain culture, how do you improve ways of working. It’s a constant battle.”