Falling for fintech

The UK is proving fertile ground for fintech entrepreneurs, but mainstream operators are starting to muscle in on their territory, writes the Review Consultant Editor Andrew Davis

The buzzAsk a financial type to pick a buzzword for what's been happening lately and there's a fair chance they'll say "fintech". The idea that there is a wave of digital disruption breaking over the stodgy world of traditional finance has gained much greater currency over the past year or so, however you choose to measure it.

Media coverage of the poster children of UK alternative finance - online peer-to-peer lending sites such as Funding Circle, RateSetter and Zopa, and equity crowdfunding operations like Crowdcube, Seedrs and Syndicate Room - is multiplying furiously. Apple's US launch of its payments-via-iPhone service attracted huge attention.
The IPO price tag for Lending Club, the largest US peer-to-peer lending site

Investors are now putting serious money into these businesses - from the $32m raised in June by Nutmeg, the online wealth manager, to the $5bn IPO price tag for Lending Club, the largest US peer-to-peer lending site.

The sceneAlthough the numbers are bigger in the US - as always - there is huge government interest in the UK's fintech scene.

This is partly because of a desire to foster greater competition with traditional finance providers and partly because of a desire to avoid previous disappointments, when innovative British thinking in other fields has failed to translate into large, successful companies and the commercial spoils have ended up elsewhere.

The UK has undoubtedly produced a lot of pioneering fintech companies and enjoys some important advantages as a place to set up, notably London's position as the financial capital of Europe.

It is no coincidence that the UK's leading fintech entrepreneurs include plenty who are not British, but have chosen to start their companies here - including Seedrs founder Jeff Lynn (US) and Taavet Hinrikus, an Estonian who was an early employee at Skype and then cofounded TransferWise, an online money transfer service which has just been valued at $1bn by Silicon Valley venture capital firm Andreessen Horowitz.

The reviewKeen to ensure that the UK is able to maintain its position as one of the world capitals of fintech, the Government last autumn set up a review under the Chief Scientific Adviser, Professor Sir Mark Walport, bringing together a group of experts to examine how these financial technologies will evolve. It is expected to report early this year.

Sir Mark's review follows hot on the heels of Project Innovate, an interesting initiative from the Financial Conduct Authority that enables entrepreneurs pursuing disruptive ideas in financial services to engage with regulators much earlier than in the past, so they can receive timely guidance on the regulatory issues they will face, and regulators can better understand how these markets are evolving.

Initiatives like these are important and should be applauded: unpopular though they may be, financial services represent a big and extremely important slice of the British economy and we stand to lose a lot if the UK falls behind the leaders in this field.

The agendasHowever, it is equally important to recognise that people involved in the fintech movement have a variety of agendas.

Fintech entrepreneurs naturally want the most favourable possible environment in which to create large new businesses that will make them personally wealthy. Policymakers also have an interest in seeing companies created in the UK that can achieve significant scale, but they have other interests too, notably ensuring that consumers receive better, cheaper and more effective products and services from all sources.

This is where it gets interesting and potentially controversial. The problem is that innovation in financial services cannot be patented or protected - as soon as someone comes up with an interesting new idea, there will be a host of imitators. As a result, size and incumbency count for a great deal in this industry, which makes it extremely hard for upstarts to break in and become big.

The mainstream responseSure enough, signs have started to emerge that the big players are beginning to work out how to respond to the innovations coming from the fintech movement.

Several banks are now engaging with P2P platforms or (in the case of RBS) apparently preparing to launch one.

Similarly, the online wealth management model pioneered by Nutmeg is attracting mainstream imitators: as a major participant in Nutmeg's fundraising in June last year, Schroders is in pole position to acquire the business in due course, while both Hargreaves Lansdown and Barclays have indicated they are looking at launching something similar.

The likely winnersThose hoping to see a new generation of financial services companies emerge to challenge today's giants may end up disappointed.

Although these innovations may change the market, it is quite possible that the real winners will be shareholders in mainstream operators that have the resources to reproduce the newcomers' business models and scale them more quickly.

That may be unwelcome news for fintech entrepreneurs, but it should not necessarily trouble the policymakers unduly, provided the benefits ultimately flow to the customer.

The original version of this article, written by Andrew Davis, was published in the December 2014 print edition of the Review.
Published: 29 Jan 2015
  • Wealth Management
  • Operations
  • The Review
  • Opinion
  • technology
  • Finance

No Comments

Sign in to leave a comment

Leave a comment