A clique of companies are attempting to steal banks’ lunch and reinvent the financial transactions, payments and lending industries by adopting technology and moving services online. They are experimenting with peer-to-peer lending platforms, cashless payments systems and cheaper money transfer services.
Many of them are also founded and managed by MBA graduates of the world’s leading business schools.
In the course of doing so, they are helping London become the world’s first “fintech” capital.
According to Accenture, the consultancy, the UK and Ireland are the fastest-growing regions for fintech investment deals in the world.
Silicon Valley is home to more tech start-ups but London is seen by many entrepreneurs as the crown jewel for fledgling financial technology firms. Companies such as TransferWise, Zopa and WorldRemit – all London-based – have become significant actors on the global stage.
Crowdcube, the equity crowdfunding platform, is based in Exeter, but, like many other fintech start-ups, has opened offices in London to take advantage of new government measures designed to stimulate the sector’s growth.
“Its measures like this that are making London become the fintech capital of the world,” says Katerina Pascoulis, Crowdcube’s business development manager.
One reason for their growth is that venture capital firms have pumped record amounts of funding into them. Financial technology start-ups in the UK and Ireland raised more than $700 million from investors between 2008 and 2013, according to Accenture research, with sizable investments made in fintech companies Funding Circle, Powa Technologies and CurrencyFair.
“There is a gold rush in fintech at the moment,” says Stephane Dubois, CEO of Xignite, a data and cloud solutions company that offers financial web services.
The Bay Area boasts more total fintech funding volume, but entrepreneurs and investors think companies in the British capital have an advantage due to their proximity to the City of London, where four of the world’s ten biggest banks are based, and Tech City, the cluster of technology start-ups in the East End.
“I’m hoping we are on the brink of a wave of more big success stories,” says Adam Davidson, head of offline at CurrencyFair, the peer-to-peer currency exchange marketplace. “But in terms of the small and medium sized [companies] we are very close to matching them [Silicon Valley] already.”
Nick Hungerford is the CEO of Nutmeg, an online wealth management company, who developed his business model while studying an MBA program at Stanford in California. He banked his first round of funding from an investor in the US, but, like many fintech chief execs, relocated to the UK to set-up a London base.
Nutmeg attracts customers to its platform by delivering portfolio management services to anyone with as little as £1,000 to invest. Nick says he believes this digital model epitomises the future of investment management.
“Nutmeg is changing the world of investing – we are giving customers what they really need,” he says.
Since its launch in 2012, the company has grown to have more than 35,000 registered users. In June this year, Nutmeg raised $32 million in funding from investors including venture capital firm Balderton Capital and asset manager Schroders, bringing the total funding the company has received to $50 million.
“This significant backing endorses the fact we’re on the right track,” says Nick. He adds that Nutmeg is able to deliver portfolio management at a low cost, in a way that is convenient for the customer.
Fintech groups say their advantage over banks is an ability to concentrate on a small market sector and their better understanding of how to use technology to their advantage.
Nutmeg is an example of a wave of often MBA-founded start-ups that are biting at the edges of banks’ business models. The founders of these firms see banks as slow-moving and complacent, and often go to great lengths to point out that they have been charging unreasonable rates for some of their services.
“We offer significantly cheaper and more transparent money transfers than banks – just 0.5% of the money being transferred, while banks charge up to 5%,” says Taavet Hinrikus, CEO of TransferWise, who earned his MBA at INSEAD, the French business school.
London-based TransferWise is as a peer-to-peer money transfer system, letting individuals and businesses send money between countries, charging a small fee.
“We can afford to do that because our technology bypasses the traditional international bank payments system, and directly matches consumers and companies in different countries who want the opposite currency,” says Taavet.
Since launching in 2011, TransferWise has raised $33 million in funding from investors including Sir Richard Branson, founder of the Virgin Group, and Index Ventures, a venture capital firm. In June, the company had processed global payments worth more than £1 billion.
While many of London’s fintech companies operate money exchange marketplaces, the city is also emerging as a world leader in crowdfunding platforms. There is more of the online revenue raising campaigns being run out of the UK capital than in the US, according to Crowdfunding Centre, a research group.
These companies say they evolved to fill a gap in the market in the aftermath of the financial crisis, when banks cut back on lending in the face of regulatory scrutiny and a more risk-averse culture.
The industry’s rise has been rapid. In a year, the alternative finance market grew by 91% to reach £939 million in 2013 and is expected to reach £1.6 billion this year, according to a report by Nesta, the think-tank.
Katerina, a manager at Crowdcube, says that the start-up is the world’s first equity crowdfunding platform: “We are disrupting the traditional finance model.”
The company, which has just opened a new office in London’s Soho, has funded about £40 million on its platform through more than 96,000 investors.
Since its launch four years ago, Crowdcube has raised about £5 million in funding including a world-record fundraise of £1.2 million in just 16 minutes – through its own platform.
Peer-to-peer lenders like Crowdcube, Zopa and RateSetter benefit from new rules by the UK’s Financial Conduct Authority. Many believe the rules give it an advantage over the US, where the concept of debt-based P2P lending was invented, but where equity crowdfunding remains illegal for retail investors.
But some also say the new rules governing crowdfunding, which come into force this month, may slow the industry’s rapid growth.
Nonetheless, fintech companies including Crowdcube have been allowed to work with the FCA to develop regulation policy, and Katerina is not concerned by the rules’ imminent full-scale arrival: “We are not worried that it’s going to push us out of business.”
London’s fintech community may be eating into banks’ revenue streams, but many of the biggest financial services groups are attempting to head off the threat.
MasterCard, Rabobank and Lloyds are even helping to fund start-up accelerators. Some of the biggest fintech accelerators are based in London – including Level39, Europe’s largest technology accelerator space for finance, retail and future cities technology companies.
Apple’s new Apple Pay service, that allows customers to make contactless payments with their iPhones, is an example of another revolution in the financial sector – payments.
Michael Sanders, managing director of digital consumer payments at Barclaycard, says the UK is the number-two market for contactless payments, behind Australia.
Barclaycard has just launched bPay, a new wearable payment system which allows any customer to load any funding source onto it, in a bid to target younger customers.
Michael believes Barclaycard can target younger demographics with this product – the average age of bPay users so far is 24, well below the average age of traditional Barclaycard products, around 40. “We are seeing an amazingly young population enjoying this product,” he says.
Although he insists that the company works with the fintech community, and some banks have struck partnerships with fintech firms in other ways, start-up founders are still the competition.
“There is a huge amount of headroom for all of us,” says Adam from CurrencyFair. “But it’s a land-grab, too.”