Finance / A stellar year for the UK fintech sector
A stellar year for the UK fintech sector
15 March 2019
According to KPMG, in the first six months of 2018 UK firms brought in £12.3billion worth of investment, leading the way in Europe and outshooting the US for the first time.
The UK had four of the top 10 fintech funding deals in Europe, with the biggest being the $250million raised by digital banking firm Revolut.
But it is not just investors taking a keen interest. According to the government’s Fintech Sector Strategy report earlier this year, the public is also opening its eyes. The report stated that over 42 per cent of digitally active adults now use the services of at least one fintech firm, and more than 20 million people make use of banking apps as a more convenient way of managing their finances.
Revolut increased its customer base to 1.3 million at the end of 2017, compared with 450,000 in 2016. Fellow digital bank Monzo recently signed up its millionth customer, marking a 75 per cent growth in the last six months – Monzo now represents 15 per cent of all new UK current account openings. And app-only bank Starling has also seen its personal current account numbers grow, from 43,000 to over 210,000 in the last year or so. Monthly transaction volumes exceed £200million a month.
Tom Bull, Director, Fintech Strategy at EY, says regulators supporting fintech’s banking endeavours has also helped stoke the demand. “They have been encouraging when it comes to applying for banking licences,” he said. “But becoming a bank changes the DNA of a start-up fintech. There are more elements of risk, compliance and control. It is a challenge, but the very best fintechs are finding ways of doing it.”
This growth raises the question of how traditional big banks should respond to these surging fintechs and others in the banking space. Are they competitors or potential partners?
“Banks do consider Monzo and Starling and other digital banks as competitors, but they do not see them as a genuinely considerable threat at this point in time,” says Jibran Ahmed, Managing Principal at tech consultants Capco. “These fintech banks have large social media profiles but the customer numbers are tiny. However, the banks do recognise that they have credible services and [that they] are increasingly missing out on vital customer data because of them.”
Ahmed explains that a Monzo customer, for example, often puts their salary into their main high street bank account but will then transfer a lump sum every month to the digital bank.
“The customer will then use the Monzo account to spend at restaurants or cafes, and as such it is Monzo and not the high street bank who gets their valuable spending behaviour data,” he adds. “Eventually the big banks will try to figure out how to get that data back, and that could be the trigger for partnerships or acquisitions.”
There are some signs already of partnership, but also competition.
According to a recent shareholder letter written by Starling Chief Executive Anne Boden, Starling has signed “a contract to provide payment services to support new initiatives at RBS/NatWest”.
The deal will reportedly see Starling help RBS with the ongoing development of a new digital platform through use of its infrastructure.
It is understood that HSBC and Santander are also looking to build their own digital bank brands to challenge their fintech rivals. Goldman Sachs has already created Marcus, an online platform offering no-fee personal loans and savings accounts, to customers.
“Banks are looking at building certain capabilities themselves in-house and that’s sensible,” said Ahmed. “Every bank will have to invest in AI, data science and machine learning. But they will be building their own new products and services, they won’t be trying to replicate those already on the market and performing effectively.”
The partner/competitor question is, he believes, clearer when it comes to those existing fintechs producing technological innovations in areas such as machine learning and automation rather than direct banking services. They are seen by banks as potential partners or acquisitions, says Ahmed.
“The banks see the direct value in harnessing this technology and providing additional services to their customers,” he explains. “Yes, they could replicate this technology, but why spend £100million doing it over four years when a partner can have it up and running for your customers in six months?” says Ahmed. “The fintechs in this space, even though they may have started out believing they were going to take on the big banks, are also increasingly keen to partner. They see the advantages of having the banks’ access to capital and letting them deal with compliance and regulations.”
Bull agrees that partnership is the favoured option. “Fintechs see the opportunities of getting their great innovations out to more customers by partnering with banks,” he says. “From the banks’ perspective they are getting back into growth mode and recognising that new services are changing the game. They can import these from partnerships.”
An example of this is the collaboration between Barclays Business Bank and online invoice financing platform MarketInvoice. Barclays took a minority stake to allow its SME clients access to the fintech’s “proprietary single-invoice finance product as well as broader digital-invoice finance facilities”.
Another is the partnership between Quantexa and Deloitte to identify money-laundering activity within financial institutions such as banks.
Ahmed adds: “Most banks have departments now scouting for fintechs to [either] form a loose or strategic partnership with, or acquire. Banks want a return on investment, but they also want a say in how the fintechs develop.”
That can often lead to disharmony, however.
“I can’t think of a smooth partnership between a fintech and a bank,” Ahmed states. “Fintechs are used to making decisions quickly, while banks have to go through many steps lasting months. Start-ups also get frustrated at the annual funding cycles of banks. They don’t want to wait for a green light before starting a new idea. The answer is forming a hybrid lean-and-agile operation within a large company.”
Bull believes new Open Banking rules, which require banks to share data with authorised third-party providers, can catalyse new partnerships.
“It has energised banks as they see what consumer services they need to provide. It could lead to new clever partner propositions and products,” he says.
One fintech eager to make use of Open Banking is Ecospend, which helps people plan their finances better.
“We are still a long way from major banks becoming agile or indeed innovative. We do not see banks as competition and we would love to partner with them,” says Ecospend’s managing director William Burton. “I think banks will increasingly become wholesalers of products and services to niche ‘front-end’ services like ours. Knowing your customer will become paramount and banks will be able to utilise fintechs to connect to customers indirectly.”