If you haven’t heard of Fintech by now, where have you been? It is the jewel in the UK economy and currently the driving force powering the growth of London’s famed Silicon Roundabout – Britain’s answer to Silicon Valley.
For any newbies playing catch-up, Fintech is the established buzzword used to describe products and services that perform a financial function (the ‘fin’) via the medium of cutting-edge digital technology (the ‘tech’).
Examples of hot companies operating in this sector include TransferWise, a British billion-dollar success story, or ‘unicorn’ as such valuable startups are labelled these days – a reference to their rarity.
Founded in 2011 by two Estonians, Kristo Käärmann and Taavet Hinrikus, the business allows customers to transfer currency at a vastly reduced rate compared with standard fees offered by high street banks. It does this by matching customers changing money in opposite directions.
This obviously makes the business very sought after in investment terms, and in its brief lifetime TransferWise has scooped several cash injections totalling nearly $100m.
Other businesses include peer-to-peer funding platforms such as Funding Circle and Zopa grew up in the UK. Just in London you’ll find a constellation of businesses ranging from fledgling startups to the big stars of global business.
Why is Fintech so hot right now?
Fintech has been hot for a while, mainly because the banking industry was ripe for a shake-up and the internet provided a quick and easy medium for this. Momentum redoubled as banking moved from the high street to laptops and desktops and then onto mobile devices, each transition multiplying the possibilities.
Some new businesses were set up to support existing banking structures – and the major financial institutions have been busy buying up promising businesses and launching their own agile Fintech products – while others have sought to destroy old systems and replace them with ones that are simpler, quicker and cheaper.
Access to the financial market, once practically impossible, is now comparatively easy, especially for ‘platform businesses’ – non-banks that do nothing more than allow processes to become more convenient than they were before. Many of these don’t need to comply with EU and UK regulations covering financial firms and can therefore move quicker.
Cue a big increase in startups. Fragmentation in the space has created a lively investment landscape and deal-doing has peaked in the last couple of years.
It’s particularly hot in the UK because London’s tech scene – the Shoreditch area – is right next door to its financial heartland, the City, and only a stone’s throw from that other centre of money-movement, Canary Wharf.
In the US the financial hub is New York, while the technology centre is thousands of miles away in California.
A cautionary tale
From an investment point of view, Fintech is an attractive prospect because, although it’s not without innate risks (high street banks still have the power to squash startups if they really feel like it), the potential rewards are arguably greater than any sub-sector of the internet since social media first took off.
TransferWise achieved its billion-dollar valuation just four years after it launched, and its story isn’t that uncommon. Fellow unicorn Funding Circle founded in 2009, while hot on their heels are companies like Azimo, a money transfer business founded in 2012, and Atom Bank, which launched in 2014 and has already scooped nearly $200m funding.
But for every tale of joy there is at least one of woe. Powa Technologies, a UK provider of ecommerce and mcommerce services, collapsed into administration last year despite $220m invested and, at one point, a $2bn-plus valuation.
This rollercoaster ride was reminiscent of the dotcom bubble and served as a reminder to investors that fundamentals – i.e. is it making or will it make any money? – remain important.
Another masterful valuation disappearing act was performed last year by Monetise, another promising Brit business that listed on the stock market and soared to a ten-figure price tag in 2014, only to lose 96% of its share price within two years.
Make no mistake, however, Fintech is the darling of the startup scene and, such is its promise to revolutionise the way we save, spend and organise money, the sector will remain a plentiful source of exciting businesses for years to come.