Focus on fintech
Fintech in the UK Financial technologies, otherwise known as fintech, are experiencing a boom of innovation and development. The UK is uniquely placed to grow this… Read more
Fintech in the UK
Financial technologies, otherwise known as fintech, are experiencing a boom of innovation and development. The UK is uniquely placed to grow this booming sector, due to London’s position as a world-leading financial centre and trading hub, a supportive approach from the financial services regulator, the Financial Conduct Authority (“FCA”), and good availability of finance – a fact not lost on the Government, who have singled out the fast-growing sector as one for growth, expansion and investment (see “Financing for fintech companies” below).
Whilst some might consider the UK weaker in “traditional” fintech businesses (these “facilitators” are larger technology firms, already well established within and supporting the financial services sector), emergent fintech companies are growing from strength to strength. These “disruptors” are typically small, growing, innovative firms bringing financial services directly to consumers using new technology. Whilst traditional fintech players tend to focus on providing, supporting, and maintaining the existing infrastructure, emerging fintech players tend to work around the existing financial service providers and disrupt the more traditional business models.
Reports commissioned by UK Trade & Investment (“UKTI”) identify four key sub-sectors within fintech – payments, software, data and analytics, and platforms. According to the UKTI report, the estimated annual revenue generated across the sector as a whole is £20 billion, with the estimated market size of the payments sub-sector accounting for half of that. The payments sub-sector continues to grow and the Government has introduced a new payment system regulator to ensure that the existing payment system, operated by established players in the market, is open to new companies – the intention behind the new regulator is to remove one of the barriers to entry to this sub-sector and create further opportunities for new entrants (see “Regulatory developments for fintech” below). Significant players in the payments sector include Transferwise, GoCardless and Astropay.
Although currently the smallest sub-sector, platforms still have huge growth potential, with several unique platforms having developed in peer-to-peer lending, such as Funding Circle, personal wealth management, like Nutmeg, and trading. Data and analytics is also developing significantly, in particular in the insurance market – for instance, approximately a third of the UK population now use financial aggregators to choose their car insurance.
Financing for fintech companies
According to a recent Accenture report, fintech investment in the UK and Ireland was up 136% to US$623 million in 2014, and the UK and Ireland accounted for 42% of European investment.
Access to finance is a perennial problem for start-ups and emerging industries – however, there are many different sources of funding available to fintech businesses in the UK. Several accelerator and incubator schemes have emerged in the UK, such as Level 39, Startupbootcamp and Techstars, which enable young companies to grow by providing a network of contacts, mentorship and, often, office space, to enable them to seek initial funding.
Venture capital and private equity funds are also investing in the fintech space – one noticeable development is that established financial services firms are investing in young companies in the hope that it will generate innovation for their own businesses. Over the past five years, American Express, BBVA, HSBC, Santander and Sberbank have all developed investment vehicles, and in February 2015 AXA, the insurance and investment management firm, launched a €200 million fund to act as “an accelerating force for start-up companies” in its areas of business.
There is also lending available to smaller businesses through various venture capital funds supported by the British Business Bank, set up by the UK Government, such as the Business Angel CoFund, the Enterprise Capital Funds and the VC Catalyst Fund.
Regulatory developments for fintech
In June 2014, the FCA launched Project Innovate, an initiative aimed at encouraging innovation in financial services by supporting innovative businesses. The main focus of the project is the Innovation Hub within the FCA’s policy team, who are dedicated to helping innovator business understand the regulatory framework and how it applies to them, assisting in applications for authorisation to ensure that the business understands the regulatory regime, and providing support for up to a year after the business is authorised.
Since the Innovation Hub’s inception, it has provided or is in the process of providing ongoing assistance to 91 firms as their requests for support met the eligibility criteria. The regulator has provided informal steers in 34 cases and also received 137 requests for support that did not meet the eligibility criteria. Firms either received limited support or an explanation why the FCA could not help in a particular instance.
Amongst the initiatives in train within Project Innovate:
- In June 2015, the FCA published a paper calling for input on “regulatory barriers to innovation in digital and mobile solutions.” The FCA is calling for views from businesses who seek to use digital or mobile solutions in the provision of financial services including from innovator firms (both authorised and new entrants), accelerators, telecom businesses, software firms and technology businesses. The FCA want to hear whether there are any specific rules or policies that cause barriers to innovation and whether there should be any rules or policies that should be introduced to facilitate innovation.
- Later in 2015, the FCA will consult on fresh guidance on how businesses can outsource data storage to the Cloud, while remaining compliant with regulatory requirements, in response to concerns raised by a number of innovative businesses as they have sought to design efficient and cost-effective business models.
- The FCA is exploring the feasibility of regulatory “sandboxes” – safe spaces in which businesses, both authorised and unauthorised, can “experiment with innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.” The results will be published in autumn 2015.
Payment Services Regulator
The largest sub-sector of fintech, payments, has also seen a change in regulatory approach. The Payment Services Regulator (the “PSR”), set up on 1 April 2015, regulates the payment services industry. The PSR’s main objectives are to promote effective competition in the markets for payment systems and payments services, promote the development of innovation in payment systems and payment services and ensure that payment systems are operated and developed in a way that considers and promotes the interests of service users.
The PSR Policy Statement sets out how the PSR will regulate the payment systems industry – it also contains Terms of Reference for two market reviews relating to the supply of indirect access to payment systems and the ownership and competitiveness of infrastructure provision.
Initially, six interbank payment systems and two card payment systems have been designated by HM Treasury for regulation:
- Cheque and Credit
- Faster Payments Scheme
- Northern Ireland Cheque Clearing
- Visa Europe
The remit of the PSR extends to all participants involved in these regulated payment systems. This has been interpreted to include the operators managing those systems, the payment service providers using those systems and the infrastructure providers.
The PSR is generally positive to the innovative activity in the provision of payment services to the UK public and, in particular, welcomes the introduction of digital wallets, the growth of contactless devices and payments, new developments such as Paym and firms such as PayPal.
Trends in fintech M&A
Typically, where investment leads, M&A follows, and the fintech sector is no different in that respect. There have been a number of high profile acquisitions in the fintech sector over the past few years in the United States, and it appears that the UK is not far behind.
In April 2015, Finnish firm Basware, a provider of e-invoicing and purchase-to-pay solutions, acquired Procserve, a UK public sector e-procurement provider, reportedly for approximately €25.9 million. In August 2015, online payment provider Optimal Payments plc closed their acquisition of rival Skrill Group, a digital payments business, from CVC Funds and other shareholders for approximately €1.1 billion. This follows an acquisitive 12 months for Optimal Payments, who called the Skrill deal “transformational,” having also acquiring Ukash, another competitor, and Canadian mobile developer Fans. The company has also reportedly already started the process of identifying new candidates for acquisition and, currently listed on AIM, is seeking admission to the London Stock Exchange. Also in August 2015, CSC, a US technology provider, announced its acquisition of Fixnetix, a UK trading technology group for an undisclosed amount. The deal is expected to close in the final quarter of 2015.
The US IPO market is looking strong, with fourteen IPOs of fintech companies in the last three years. In the UK, payment processing company Worldpay had London’s biggest stock market listing of the year in October 2015, with a valuation of £4.8 billion when the shares initially listed. Whilst some in the fintech sector don’t consider Worldpay to be a truly innovative fintech business – although initially so, Worldpay was bought by RBS in 2002 and quickly became more corporate. It was then bought by private equity groups Advent International and Bain Capital in 2009. However, it is clearly a comparable business, and is a good indication of the appetite for listings of similar businesses in the UK. If the Worldpay IPO is successful and can demonstrate that the UK stock market supports fintech businesses, further fintech flotations may be seen in the future.
For more information, please contact Charles Claisse, Head of Corporate.