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Forget the funding decline, FinTech’s still thriving

FinTech thriving
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James Allgrove, head of UK growth at Stripe, looks at the state of the UK’s FinTech scene following research that funding into the sector diminished in 2016. 

New research from Innovate Finance recently found that FinTech investment in the UK dropped by about a third in 2016 to $783m. That was out of sync with prevailing global FinTech investment trends, with 2016 deals around the world totalling 1,436, attracting $17.4bn of venture capital (a 10.9% year-on-year increase). Clearly the Brexit vote and ensuing geopolitical uncertainty has cooled investor appetite for FinTech startups and scaleups.

Looking at the evidence

Should we treat it as a blip, or does it signal the end of the UK FinTech boom?

What the UK-Korea FinTech bridge may mean for your startup

Of course, investment is only one way of assessing the strength of the sector. What is arguably more important is the structural trends that drove the UK to become a global FinTech leader in the first place, the kinds of business models (in FinTech and beyond) themselves that are emerging as a result, and how sustainable the sector is as a whole.

With that lens, UK FinTech looks much healthier. As the ecosystem has become more mature and diversified, FinTech businesses have penetrated all aspects of the traditional financial sector. Beyond that, entirely new business models have been forged by combining advances from different corners of the FinTech ecosystem.

Consider, for example, how a business such as Revolut has combined aspects of prepaid cards, current accounts and currency exchange to create a whole new product, value proposition and experience. This overlap of different FinTech segments is leading to new innovations as entrepreneurs experiment with new products which borrow from advances in crowdfunding, peer-to-peer lending and alternative investing.

At this state of maturity, the ecosystem’s momentum is self-fulfilling, as more and more of these innovative companies work together to reinforce the trend. This will be fuelled further by progressive regulation like the Open Banking Standard which has the promise of stimulating more FinTech innovation and enhancing the interconnectivity between startups and banks. Obviously there are a number of dependencies attached to this promise, for example the challenge of maintaining consistency and robustness in APIs across so many financial institutions, but the direction of things is in principle good for the industry.

The rise of RegTech

There are also encouraging signs that the initial wave of FinTech innovation is also giving way to innovation in the services required to support this segment. The Innovate Finance report called out a new trend that 25% of London FinTech accelerator cohorts in 2016 were regulatory technology (or “regtech” companies). In fact, 2016 was a record-breaking year for RegTech, with $678m invested in 70 companies, compared to $185m in 32 companies in 2012.

This also reflects research we conducted with Tech City UK last year that found that 40% of startups thought that more tools in legal and compliance could help early-stage companies grow faster.

What’s more, continuous advances in machine-learning technology are emerging as increasingly fundamental to the long-term success of the industry. They’re crucial for security and fighting fraud, which is ultimately important for consumer confidence in FinTech products.

Having said that, threats still loom on the horizon for the industry. The prospect of more restricted access to talent and more challenges in competing internationally casts a shadow over these reasons for optimism. But such a shadow shouldn’t signal an end to the momentum behind the sector.

It is so nascent, investment levels are still completely skewed around by one-off investments. We’re still very early on in the revolution, with FinTech accounting for a tiny slice of the financial services pie. This means there is plenty of runway left, and plenty of reason to be bullish on the sector.

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