UK fintech companies continue to lead the way

How much is the UK fintech market worth?

The UK government estimates the UK fintech market generates about £20 billion in annual revenue. Those fintech firms providing support services to existing financial service networks, like security or software, dominate by accounting for more than 80% of that value, but with more experimental and disruptive fintech firms taking the other fifth there is evidence that the UK is a hotspot for new innovative start-ups.

Payments has been one of the most transformed services in the fintech age and accounts for half of UK fintech revenue. Online payments are still dominated by larger incumbents because success in the sector comes down to economies of scale and the ability to expand internationally, and fast. Most have stepped up their game through acquiring smaller players with something to offer. The other end of the scale is payment infrastructure, where the market is much more fragmented and spearheaded by blockchain and cryptocurrencies which, although attracting interest, are still at a very early stage.

Learn more about investing in blockchain technology

The UK’s second largest fintech market is in software, worth £4.2 billion annually, primarily selling the likes of cybersecurity, core banking infrastructure, asset management, insurance and risk management software to the financial services industry and accountants.

Data and analytics generates about £3.8 billion for the UK fintech market as those able to handle so-called ‘Big Data’ and portray what it all means finding success supplying information on consumer credit and capital markets. Supplying trade data on capital markets has emerged as the biggest area accounting for £2.2 billion of total revenue while the swathe of credit reference companies that have surfaced in recent years are thought to collectively generate about £1 billion. Data is also proving increasingly important for insurance companies, which are thought to spend about £600 million acquiring information from UK fintech firms each year.

Last but not least are the new platforms that have spawned out of the UK fintech sector, generating about £2 billion in annual revenue. This comprises aggregators like price comparison websites that are becoming increasingly important for financial services firms to attract new customers (£500 million), trading platforms like BUX (£800 million), wealth management platforms including MoneyLion (£700 million) and P2P lenders like Funding Circle (which is small, below £50 million, but the fastest growing).

Read more: are price comparison websites still fit for purpose?

UK dominates European fintech mergers and acquisitions

The UK fintech sector is the unrivalled and dominant leader in Europe, drawing considerably more investment and activity compared to counterparts like Germany or France. As well as attracting well over half of all investment in European fintech in the first half of 2018 the UK was also the host of five of the ten biggest deals during the period.

Why is the UK a hub for fintech?

London has the highest concentration of financial institutions in the world and is renowned for its strong banking, asset management and insurance sectors, with its capital markets also well ahead of the rest of Europe. Many international companies currently see the UK as the European destination of choice as well as the Launchpad to enter the Middle East or Africa. The UK is home to 251 non-domestic banks and there are almost 600 foreign companies listed in London.

This has provided the foundation to build a hub for fintech activity in the UK and is the culmination of numerous factors, some of which are unique to the country:

UK fintech driven by country’s leading role in financial services

The UK is the world’s largest market for banking and cross-border lending and it is also a centre for trading activity, particularly in foreign exchange and over-the-counter (OTC) derivatives.

The UK handles 18-19% of the world’s loans and cross-border bank lending, well ahead of the US at 11% and France and Germany closer to 8%. It also attracts over 40% of global revenue generated through foreign exchange (ahead of the US at 19%) and accounts for almost half of interest rate OTC derivatives traded internationally, more than double the amount of the US in second place.

UK fintech builds around country’s leading role in asset management and insurance

The US is the biggest asset manager in the world accounting for about 15% of the total assets under management worldwide, driven by hedge funds and private equity. The UK is the second largest asset manager with about 8% of the world’s asset under management, versus Germany’s paltry 2% and France’s 3%. The international stage that the London market represents is demonstrated by the fact over 40% of assets under management in the UK are held on behalf of foreign clients.

The insurance market is more competitive and evenly spread out between its neighbours on the other side of the Atlantic and the Channel. UK insurers snap up about 7% of all the premium income generated worldwide, well behind the US at 26% and not holding a comfortable lead over Germany at 5% nor France at 6%. However, the UK does perform particularly well in several niche areas of insurance, such as for the marine industry where it has over one-fifth of the total market – more than the US, Germany and France combined.

UK fintech aided by digital connectivity and higher e-commerce spend

The UK’s digital transformation has been instrumental in shaping the fintech market and consumers were among the quickest to move online and has one of the highest rates of mobile adoption in the world. For example, each UK consumer on average spent €874 online last year compared to €647 in Germany and €470 in France.

Following years of growth in the amount European consumers were spending online the average spend per capita has been in decline for at least the last three years. The UK has seen consumer online spending decline 15% between 2015 and 2017, faster than the 13% drop in France and the much slower 3.7% slowdown in Germany.

Still, UK spending is considerably higher than its European counterparts with the average consumer spending €874 online last year (dropping back to levels last seen in around 2010) compared to €647 in Germany and €470 in France. However, Europe has been gaining ground on the UK throughout this decade - UK spending was two to three times higher than its European neighbours back in 2010.

UK fintech encouraged after financial crash

The financial crash in 2008 encouraged the rise of fintech and other companies with some specifically launched to provide an alternative to the financial institutions that caused the collapse. Consumer trust in the big traditional banks and others was knocked around the world but was particularly dented in the UK.

In 2008 only 47% of UK consumers held confidence in the traditional banks, higher than both Germany and France, but the fallout caused a much more severe drop in trust, with confidence falling to just 23% by 2013 to rank amongst the lowest in Europe. US consumers held much more belief in the system after the financial crisis, with confidence falling from 68% to 49% over the five-year period, according to Ernst & Young.

The displeasure with existing players has provided ample opportunity for new entrants to emerge and offer an alternative. The challenger banks in the UK have been able to compete on cost by offering purely online offerings and, noting the poor service currently on offer, make customer service a priority. The new customer service rankings that all banks will have to display to potential consumers in the UK has online bank First Direct and Metro Bank, which was the first new high street bank to be launched in over a century back in 2010, as the top two firms.

There are now thought to be around 1600 fintech companies in the UK, most of which have only surfaced in the wake of the financial crash. The amount of fintech start-ups emerging in the UK remains high but firmly on a downward trend from peaking in 2014.

A census of UK firms carried out last year showed the average age of fintech firms is just over five years, which combined with the peak in start-ups and rising M&A deals implies the industry is starting to become more mature and entering a new era of consolidation to scale-up fintech to handle the global market.

UK fintech regulation offers ‘competitive advantage’

Ernst & Young states the UK has offered fintech a competitive advantage with more favourable regulation versus European counterparts and allowing industry to help mould what is still relatively new regulation. Nearly half of all UK fintech firms are governed by the Financial Conduct Authority (FCA) and/or the Prudential Regulation Authority (PRA), showing acceptance of new entrants.

UK fintech outlook gets brighter as opportunities continue to grow

Fintech has been a transformational blend of consumer finance with new infrastructure, data and software powered by the likes of artificial intelligence but its applications currently look endless and the opportunities are only growing as technology develops.

For the immediate future, likely trends within the UK and wider fintech space include:

Fintech mergers and acquisitions to remain rife

The international nature of financial services means one crucial element behind the success of fintech firms is their ability to scale up and handle a global operation. As firms fail to expand fast enough and others look to team up to grow at a quicker rate, M&A in the fintech space will remain high. UK firms have already proven their ability to attract European investment and the fact overseas investors from outside the EU consider the UK as the perfect launchpad into the European banking and financial services market suggests UK fintech will be centre stage of any bidding battles.

The larger players, including the big banks, payment providers and insurers, will also look to fend off the fintech threat by buying smaller players to improve their offering.

More fintech IPOs expected

The Ernst & Young census of UK firms revealed almost one-third of fintech companies expect to launch an initial public offering (IPO) to join the stock market within the next five years, with a slightly higher amount ‘unsure’. Funding Circle’s imminent IPO is one of the most anticipated of the year and will see the peer-to-peer (P2P) lender valued up to £1.8 billion. However, data shows there is a gap in funding for UK fintech firms that find themselves too big to attract angel or start-up capital but too small to conduct an IPO, possibly preventing the amount of UK businesses that will make it to market before they get bought up or fail.

Financial services firms to increase partnerships with fintech

Almost eight out of ten financial service firms expect to start striking more partnerships with fintech firms over the next three to five years as banks, insurers and others look to bolster their offerings and defend against the threat of new competition. With a lot of new technology and ideas on offer it is likely many partnerships will form precursors to M&A activity to allow companies to test out new concepts.

Blockchain to prove a blockbuster for fintech firms

The possibilities of blockchain technology are only just starting to be realised and it has garnered considerably more widespread support than the cryptocurrencies that are used to oil the system. Blockchain is automating the transfer of assets and facilitating trust without the need for the intermediaries that have long dominated financial services, and on its way to helping automate deals through smart contracts that are pioneered using Ethereum.

Learn how to trade ethereum

The development of blockchain is the most ambitious response to the perceived failings of the financial system to date, with its decentralised nature all about taking the power over money and assets away from the corporations and into the hands of the people. But the banks and others have already seen the opportunity and are increasingly using blockchain to their own advantage, mostly centralising it.

Read more: how will blockchain change banking?

Blockchain is arguably the biggest driver of change within the fintech space at present and is being used for everything from helping to provide trustworthy online identities to prevent fraud to streamlining supply chains and auditing the transfer of goods at each stage of what can be complex journeys involving large numbers of businesses.

Read more about the founder of Ethereum, Vitalik Buterin

A group of energy and banking giants including Shell, Societe Generale, Citigroup and ABN AMRO have all recently announced investment into blockchain platforms that aim to digitise contracts, letters of credit and invoices through the Ethereum platform with the hope of speeding up trading and improving security. Many of the world’s biggest companies and industries have formed consortiums to discover how blockchain can revolutionise their markets – it’s all about cooperation. According to PwC, 77% of financial services firms expect to have implemented blockchain into their business one way or another by 2020.

RegTech to grow as more countries adopt open banking and other fintech

Open banking – allowing third parties to build financial services and products around the existing institutions – is being increasingly adopted by countries around the world and more mature markets, including the UK, have introduced legislation to facilitate the rise of fintech businesses. Canada, as one example, is expected to include open banking when it updates its banking regulations in 2019, which has drawn attention from foreign players looking for new markets.

In addition to the UK, Germany is the other major European hotspot for challenger banks where N26 raised $160 million earlier this year and sourced investment from Chinese giant Tencent. Both countries have seen increases in the amount of fintech firms applying for banking licenses, and they are getting them.

Read more: are UK challenger banks failing to challenge the big banks?

Europe has introduced legislation such as the Payment Services Directive 2 (PSD2), General Data Protection Regulation (GDPR) and, of course, the Markets in Financial Instruments Directive II which has swamped financial services with more regulation as a consequence of their poor handling of the economy ten years ago. This has fuelled the need for RegTech, which tries to help automate and simplify the growing regulatory burden that financial services face. Global investment in RegTech in the first half of this year has already exceeded the annual total for every single other year on record apart from 2016, implying this year should easily prove to be a record high.

Read more: what’s the effect of GDPR and how is big tech responding?

How could Brexit affect UK fintech?

The strength of UK financial services and its outsized role in European markets is often cited as a key argument as to why the UK and the EU can’t afford a clean break from one another and why a trade deal is needed. There is no doubt that Europe needs the UK to keep financial markets going after Brexit, but there are plenty of signals that European leaders are looking to change that.

The Telegraph recently reported that the French government has launched a project to help bring fintech firms to market, and is offering ‘relocation packages’ to overseas firms in what is seen as an attempt to entice UK start-ups concerned about losing access to Europe. French President Emmanuel Macron has already initiated a wider strategy aimed at making France a nation for new businesses.

Read more on the potential economic impact of Brexit

With so many unknowns about future UK-EU relations fintech firms are currently concerned with the obvious hurdles that Brexit presents, and at the top of the list is talent. Eight of ten UK fintech firms already cite securing talent – particularly for coders and other tech-folk – as one of their top three biggest problems and Brexit is likely to exacerbate that, at least in the short term. Although, some would argue the ability to source talent from outside of the EU post-Brexit presents worthwhile opportunity. Ernst & Young's government-commissioned report concedes the UK fintech market is 'dependent on importing technical talent'.

The UK is already leading the international fintech space in several areas, including P2P lending, aggregation sites and in data and analytics. That, combined with the financial hub that is London, means fintech and financial services are arguably the UK’s biggest potential export weapons post-Brexit, not just with the EU but the rest of the world. The UK has already beaten the EU in implementing fintech-friendly laws and in March this was demonstrated by the publication of its first Fintech Sector strategy that openly outlines its plans on how it will remain dominant in Europe.

The outlook is looking steady if not rosy. The potential of a ‘hard Brexit’ (a clean-break from the EU with no deal) has never been greater but investment in UK fintech is breaking new records and forecast to continue to do so. Ernst & Young said 207 of the UK’s 1600 fintech firms expect to raise a collective £2.5 billion in their next round of funding – many of which could involve M&A or IPOs.

Brexit is of course the biggest threat that could hit home early next year but, regardless of the outcome of negotiations, there is no denying the UK is the undisputed rival of fintech in Europe – 28 of Europe’s top 50 fintech firms are from the UK, more than triple the amount of any other European nation, according to independent publication of the FinTech 50, FinTechCity: