The new UK FinTech Focus report highlights that last year the sector drew considerable investment, with venture capital, private equity and M&A combining to reach £38.4bn in 2019, up from £20.1bn the year before. Although this year has had its challenges, Beauhurst has also just reported 99 FinTech deals were completed between January and June 2020, an increase of about 5% on the same period the previous year.
The ‘work in progress’ tag in the UK FinTech Focus report relates to profitability – the long term nemesis of FinTech – with only 6% of the sample having reached break even. At this point it is worth highlighting that the research is based on a sample of 100 FinTech firms in the UK, covering businesses in financial services and technology/processing which have been founded since 2010 and have received at least 2 rounds of external funding. Whilst the sample contains early stage businesses, it includes firms that have already displayed some longevity.
Although the report is largely focused on investment in the sector, my attention was particularly drawn to the narrative in other areas, namely two of the four calls to action in the report.
The four calls to action are:
- Patient scaling capital must be found
- FinTech market data requires significant maturing
- Evaluating demand (for FinTech solutions)
- Founder support (particularly post-COVID-19)
Each of these calls to action are strong valid points, but the two relating to market data and evaluating demand resonate with our own experience in the FinTech sector.
Firstly, on the point of market data, the report states:
“The quality, reliability, frequency and scope of publicly available data needs significant enhancement in order to create a thriving, and self-aware, fintech ecosystem. Current data points, including the following research, contribute towards a patchwork of market intelligence, but they are not significant enough to move the sector forwards alone or, indeed, make it more investible. “
We wholeheatedly agree. Over the last 6-12 months we have conducted research into five regional FinTech ecosystems in the UK, a process which meant we needed to immerse ourselves in all the insight and data available in relation to the UK’s FinTech sector, on a national and regional basis. When we delved into the data we found a number of shortcomings, and we have recently written a detailed blog about the topic of measuring FinTech. In summary, the data available in the market is dated and understates the size and value of FinTech in the UK, and needs updating and enhancing.
On the subject of evaluating demand, the report states:
“Whilst market data is required for supply side evaluation of the fintech, little formal research is available on demand side either from legacy financial institutions or from adjacent sectors like e-commerce, healthcare, real estate or smart cities, for example.“
This is an issue we see regularly, indeed it was the focus of a roundtable we hosted with DAC Beachcroft in Bristol just last week, when we discussed how FinTechs and financial institutions can better engage with each other. The typical situation is that the FinTech firms feel they have solutions which can benefit financial institutions, but are frustrated at their inability to be able to meaningfully engage with the incumbents. Meanwhile, the financial institutions find themselves continually bombarded by FinTech firms with dynamic brands and powerful elevator pitches, all proclaiming to be the optimal solution to their legacy challenges.
It is challenging for financial institutions to decipher, evaluate and engage with the FinTechs, and we regularly hear about the difficulty of directing enquiries to the right person internally. Equally, it is really hard for FinTechs to have a deep understanding of the complex problems of large financial institutions, and it’s even harder for them to navigate the multiple stakeholders within these organisations. Covid-19 has accelerated the digitisation of the financial sector and highlighted the need for FinTechs, yet without the right support, collaboration and funding, these firms will face increased pressures of their own.
So in summary we need stronger data, and more needs to be done to help FinTech firms truly understand the problems of incumbent institutions that they can help to solve. These were challenges in the sector before the current pandemic dominated the national and international headlines, but COVID-19 has impacted FinTech as it has most other sectors. The general consensus in the industry is that the impact of COVID-19 is unlikely to be fundamentally damaging in the long term. It seems certain, however, that it will further delay the route to profitability for many firms and this will create difficulties for them. This is why the sector remains a work in progress. For the time being anyway.
Established in 2012, Whitecap Consulting is a regional strategy consultancy headquartered in Leeds, with offices in Manchester, Milton Keynes, Birmingham, Bristol and Newcastle. We typically work with boards, executives and investors of predominantly mid-sized organisations with a turnover of c£10m-£300m, helping clients analyse, develop and implement growth strategies. Also, we work with clients across a range of sectors including Financial Services, Technology, FinTech, Outsourcing, Consumer and Retail, Property, Healthcare, Higher Education, Manufacturing and Professional Services, including Corporate Finance and PE.