The Financial Crisis One Decade On: The Rise of FinTech

The Financial Crisis One Decade On: The Rise of FinTech

Ten years ago, our trust in legacy banking institutions was rocked by the 2008 financial crisis. This left the atmosphere ripe for a new finance sub-sector to emerge and flourish, making use of sophisticated technology– dubbed “fintech”. In the first part of this series, we explored the changes that occurred during this tumultuous decade; now in this second and final piece, we will explore the rise of fintech companies.

Humble beginnings

In 2008, the term fintech had not yet entered the mainstream lexicon, but a handful of platforms were already paving the way. These were niche platforms, such as MyFootballClub (2008), which allowed fans to come together to buy a football club, or Slice The Pie (2008), who paid music lovers for referring the best up and coming artists.

Sadly, many of these fan-based platforms are no longer around but have left a legacy by sowing the seeds of a fintech revolution. From these humble beginnings, fintech in the UK is now estimated to generate £20 billion in annual revenueand employ over 60,000 people.

Trust and transparency

While many established financial service companies were complicit in the financial crash, fintech in comparison is perceived as being fair and trustworthy by their customer base. Their low fees, quick, personal service and fresh, often informal, demeanour set them apart as companies to be trusted. Moreover, with their high levels of transparency, it is perceived as unlikely they would ever sell packaged subprime loans, often cited as the cause of the Financial Crisis.

What are the different types of fintech companies?

One of the main differentiators between fintechs and legacy institutions is their level of customer service and fees. Fintech companies use technology to lower transaction costs between buyers and sellers of financial services, and in some instances act as marketplaces allowing individuals and/or companies to transact with one another directly– no middlemen required.

Fintech covers a broad range of subcategories of financial services with notable groupings including the following:

Payments:utilising smartphones and tablets, they provide quick and cheap transactions between customers and businesses with small start-up cost or for free between friends.

Equity Crowdfunding:allowing retail investors to invest in early stage, high-growth companies, who are selling shares to raise equity. In 2017 total volumes in the UK reached £217.7 million.

Peer to Peer Lending:these companies allow individuals to lend money to businesses seeking investment for growth. Without the slow bureaucracy of standard banking, the companies can access funding much more quickly and at cheaper rates. Meanwhile, individuals can access the high rates of return which were previously only enjoyed by the banks. Some platforms, such as Crowd2Fund, go one step further by allowing businesses and investors to communicate directly. This means the investors can choose the businesses they have a personal affinity with and the businesses not only gain investors but new customers and brand advocates.

Challenger banks:with many offering an exclusively mobile service, enabling consumers to conduct transactions from their smart devices and receive real-time notifications related to their spending. Some companies even empower those in unbanked and economically deprived areas to transact in the digital economy by providing a prepaid debit card service.

P2P Currency Transfer: by matchmaking individuals seeking to sell currency to those seeking to buy it, they fulfil orders within a few minutes and have very clear small fees.

Insurtech:offering highly competitive prices to the end user, they make use of technologies to both reduce operating costs and reward lower risk behaviours such as safe driving, tracked by GPS, or healthy living, tracked by wearable activities monitors.

 Why has fintech thrived in the UK?

A history of world-class financial services

Globally, there are a handful of hotspots for tech start-ups and London, in particular, has a reputation for financial tech. This is in part owed to the centuries-old tradition of finance in the capital. For example, one of the worlds first business insurers, Lloyds banking group, was founded in London just over 250 years ago. Recently, in the 1980s, London was once again at the forefront of financial services with the “Big Bang” dramatically deregulating financial markets. This led to London consolidating its position as a global innovator, making it an attractive place to start a fintech company.

Access to talent

The UK is fortunate to be home to some of the world’s leading universities. Imperial, Oxford, and Cambridge are ranked in the top 10 global universitiesand London’s fintechs benefit from a rich talent pool to build their team from.

Moreover, the reputation of being a fintech-hub can be self-perpetuating. The to global talent and expertise in computer science and web development head to the UK to be part of this pioneering industry. Free movement within the EU has resulted in web developers and data scientists from Eastern Europe moving to UK fintech companies to fulfil their economic potential. Whilst freedom of movement is likely to end subsequent to Brexit, tier 1 visas for “exceptional talent” will allow fintechs to continue to access these talented and highly-skilled individuals.

Government Support

The UK Government recognised and nurtured the potential of the fintech industry by introducing various schemes and initiatives. In 2014 they backed a fintech membership trade body, called Innovate Finance, whose role is to advance the industry. At its launch, just a handful of companies were invited to apply for membership, with Crowd2Fund being the first to offer the Innovative Finance ISA.

The government department of UK Trade & Investment regularly put on overseas trade missions and invite members of the innovative finance sector to promote themselves to new international markets.

Additionally, in 2015 Eileen Burbidge, who has invested in a number of fintechs such as GoCardless and Monzo, was appointed as the UK Treasury’s special envoy for fintech.Her role is to promote the sector locally and internationally, as well as advising the government how best to support it.

Government policies such as SEIS and EIS (mentioned in the first part in this series) have also made it easy for fintechs to access the capital they need to grow. These schemes helped to facilitate over £1.3bn investment into fintech during 2017.

What’s next for fintech?

With new innovations such as Open Banking and the FinTech Bridge, the UK is still set to lead the industry globally.

Open banking, a new directive, launched in January 2018, giving business and consumers the ability to share their banking data with third parties. This allows fintech companies to analyse the data to provide better lending decisions in less time while enhancing price comparison, to keep prices low for consumers.

The FinTech Bridge is a partnership facilitated by the Australian and UK governments, aiming to encourage partnerships between their respective fintech industries, by recognising each other’s regulatory bodies. So, if a company is registered with an Australian regulator, a British company can treat it as if it were also registered in the UK, rather then go through a lengthy procedure of paperwork. Crowd2Fund was one of the first UK companies to take part in the initiative, partnering with the Australian based AI debt collection company, InDebted, to bolster their debt collection technologies. With Canada, the USA, China, and Singapore also establishing FinTech Bridges with the UK, the industry is set to scale even further.

The fintech sector may have only been around a decade or so, but the pace of innovation and growth isn’t likely to slow down any time soon.