Fintech: The UK’s unique environment for growth

Fintech The UK’s unique environment for growth

UKTI_Fintech_capability_pres_A5_Print_AW.indd 1 05/11/2014 10:14

Fintech The UK’s unique ecosystem for growth

Fintech in the UKThe UK is a uniquely well-suited location for technology applied to financial services – Fintech.

This fast-growing sector covers both:

– Traditional Fintech (with larger incumbent technology firms supporting the financial services sector), and

– Emergent Fintech (with small, innovative firms using new technology to bring financial services directly to consumers, often disrupting existing business models).

The UK and Ireland is now the fastest-growing region for Fintech investment (Accenture). Deal volumes here have been growing at 74 percent a year since 2008, compared with 27 percent globally and 13 percent in Silicon Valley. During the same period, the value of Fintech investment increased nearly eightfold, to US$265 million in 2013 – a rate of 51 percent a year, nearly twice the global average (26 percent), and more than twice that of Silicon Valley (23 percent).

The UK’s growing strengths in Fintech are due to:

– the presence of a large and technologically sophisticated customer base

– London’s position as a world-leading centre for financial services

– good availability of business capital

– a supportive regulatory approach

– excellent financial services infrastructure, and

– London’s position as a global trading hub.

I want the UK to lead the world in developing Fintech. That’s

my ambition – short and sweet.

RT Hon George Osborne, Chancellor of the Exchequer


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In addition, the UK offers many specific market opportunities in Fintech, especially in relation to payments, platforms, software and data analytics.

In Fintech, the UK is the place to do business, and the UK Government is committed to supporting Fintech companies.

Many of the biggest players in Fintech have chosen to have a base in the UK. Why have they done so? The following is based on what they say themselves.

The UK and Ireland is now the fastest-growing region

for Fintech investment.

Deal volumes here have been growing at 74 percent

a year since 2008

From 2008, the value of Fintech investment in the UK and Ireland increased

nearly eightfold, to US$265 million in 2013

74%

US$265m


2 Fintech The UK’s unique ecosystem for growth

The strength of the UK’s financial services sectorThe UK financial services sector, which accounts for approximately 9.4 percent of UK GDP, is one of the largest globally, and more active than those of the UK’s continental European peers.

Access to talent and expertiseApproximately 1.1 million people work in financial services in the UK, with two-thirds of those employed outside London. This represents a large pool of well-qualified and experienced talent that is available for the Fintech sector.

British Higher Education is world class (three of the world’s ten best universities are in the UK – Times Higher Education, 2013/14), supplying the Fintech sector with finance, engineering and design talent, while in the digital technology hub Tech City, London-based Fintech businesses have an outstanding source of technology skills, right on their doorstep.

Global talent pool The talent that the UK can draw upon comes from around the world. 13 percent of all the 4.3 million international students who are being educated at tertiary level are educated in the UK.

All of this, together with a long history of innovation, makes the UK a hotbed of creativity.


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Population by country and GDP value of financial services

Source: World Bank

UK(Population: 63m)

GDP value

£140bn

Germany (Population: 82m)

GDP value

£80bn

France (Population: 66m)

GDP value

£50bn

1.1mpeople work in financial

services in the UK, two-thirds of them

outside London

of all international students at tertiary level are educated in the UK

13%



The UK as a global hub for financial institutionsLondon is one of the world’s largest centres for financial institutions, with a truly international client base, including:

– 251 foreign banks, and

– 588 foreign financial services companies.

UK financial services infrastructureThe UK has excellent financial services infrastructure, and a willingness to incorporate innovative technologies to improve consumer experience. This creates a dynamic environment in which Fintech companies can launch their products.


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The Faster Payments system resulted from a European

Union directive, stipulating that all transfers of money should be completed within two days. Faster Payments, developed in the UK, enables the majority of transactions to be completed within two

hours, conferring a significant advantage over other economies in the EU.

The UK is a leading provider of insurance, accounting for 7 percent of worldwide

premiums, and with particular strengths in speciality insurance

The UK is a global leader in banking and cross-

border lending

The UK is the second-largest asset management centre in the world after the USA, accounting for 36 percent of European assets under management

The UK is a market leader in trading-related activity, and

in particular foreign exchange and over-the-counter (OTC) derivatives



Openness to new models in financial servicesUK consumers are relatively sophisticated, and are open to new, innovative models for delivering financial services both within and outside the traditional banking system. They also spend much more on e-commerce than their equivalents in Germany, France and the USA.

The UK has been an early adopter of a large number of innovative business models in financial services, especially when they offer lower upfront costs, internet delivery and greater convenience.

Examples include:

– financial aggregators (around a third of the UK population now use them to choose their car insurance)

– e-commerce: the UK’s adoption of e-commerce is significantly greater than that of its continental peers and the USA

– peer-to-peer lending: the UK has been one of the fastest adopters, with gross advances almost doubling every year since 2010. There are now at least 42 peer-to-peer lending platforms in the UK, offering equity, royalties and rewards. The UK alternative finance market has grown by an average of 75.1 percent over the last three years, and by 91 percent (£492 million to £939 million) from 2012 to 2013. Between 2011 and 2013 it provided £463 million in early-stage growth and working capital to over 5,000 start-ups and SMEs: this is predicted to grow to £1.6 billion in 2014, with £840 million in business finance being provided for start-ups and SMEs.


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Consumer e-commerce spent per capita

Source: IMRG X-border Training Guide 2013m Population figure obtained from IDATE/Industry data and Ofcom

UK Germany France

2012

2011

2010

£892£1,017

£1,175

£252£360

£446£539

£297£374

Percentage of the population obtaining car insurance through aggregators (2012)

Source: Finnacord Aggregation metrics survey

Germany

22%France

11%UK

30%



High levels of technical literacy and connectivity The ability to access online services, and an active online economy, are key to Fintech gaining traction in the market.

The UK has one of the highest levels of internet and mobile phone penetration globally. The UK is also a leader in online access to financial services.

In addition, the UK market is highly interconnected, with good IT and transport infrastructure. It is also relatively easy to communicate with, given the density of the population (especially in the South East) and the widespread use of national media (TV and newspapers).

Increasing willingness to switch providers Historically, the primary brake on innovation in financial services technology has been inertia around switching providers. But disenchantment with incumbents has combined with Government efforts to make the process of switching easier, meaning that UK consumers are now more likely to consider switching financial services providers.

The UK current account switching service, for example, simplifies, automates and speeds-up the process of changing a bank account in the UK, from an average of 18 days to seven days.


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The UK has one of the highest levels of internet and mobile phone penetration globally

The UK is also a leader in online access to financial services



London as a gateway

The vibrant city of London is a unique innovation environment:

– London is home to a number of start-up accelerators, which are a new kind of for-profit business incubator, offering seed funding, mentoring and training to fledgling technology companies. London’s accelerators include Startupbootcamp FinTech, L39, Barclays Accelerator and Bold Rocket, which are focused specifically on innovation in financial services technology, and offer office space, as well as access to global networks of investors, for Fintech start-ups.

– London is home to Google Campus, a new centre offering desk space and mentoring for technology companies.

– London is a base for one of NewFinance’s Meetup groups. NewFinance is a network of over 2,500 professionals actively involved in financial innovation through technology, including a wide range of entrepreneurs, technologists, investors and service providers, who are working on the new web and mobile platforms that are changing the face of financial services.

– London is where the sector regulators, the Financial Conduct Authority and the Prudential Regulation Authority (Bank of England), are based.

– London is the focus of the venture capital community in the UK.

– London is home to a cluster of start-ups known as Tech City, or Silicon Roundabout. Tech City attracted more than 15,000 new companies in the year to April 2013, making it the most popular start-up destination in the UK.

And with a wider community of creative, media and other B2C entrepreneurs, in London you will come across many like-minded people.

15,000Tech City attracted more than 15,000 new companies in the

year to April 2013


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But this is not just about London

1. Edinburgh Home to banking, insurance and pensions, investment management, asset servicing and auxiliary services.

2. Belfast Number one destination globally for financial technology research and development investments.

Traditional Fintech players have established software development centres, eg NYSE Euronext, CME, Fidessa.

3. Leeds The wider Leeds City Region is the UK’s second largest centre for banking and is home to the Bank of England’s only base outside London.

First Direct, Direct Line, TD Waterhouse, RBS and others have significant operational presence in the city.

17,200 42,00073,000

Financial and related professional services employment (2012)


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4. Manchester The Manchester metropolitan area represents the second largest financial centre in the UK and is home to organisations such as Co-operative Financial Services, BNY Mellon, RBS and WorldPay.

Barclays’ global technology centre is located just south of the city and employs over 3,000 staff carrying out work supporting the bank’s global IT infrastructure and developing new products such as mobile applications.

5. Birmingham HQ for Islamic Bank of Britain and home to Deutsche Bank’s support centre.

6. Cardiff One of the UK’s fastest-growing locations for financial and professional services.

Home to Admiral, GoCompare, Target Group, LBG, Zurich, confused.com, Brewin Dolphin operations.

20,00050,00047,600

1

2

43

5

6



Opportunities in sub-sectorsParticular opportunities exist in the UK in four Fintech sub-sectors: payments, platforms, software and data analytics.

£20bn

Santander launches US$100 million fund to back Fintech startups,

July 2014

The estimated annual revenue generated across payments, software, data and

analytics and platforms

US$100m

The UK is fast becoming the destination of choice for any

Fintech company. The UK government is committed to

supporting Fintech companies.

Sue Langley, Chief Executive Officer, UKTI Financial Services Organisation


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Payments

The cards and payments industry is going through a substantial transformation, attracting a wide range of

independent innovators and market entrants.

Platforms

Several unique platforms, including in peer-to-peer lending, trading

and personal wealth management, as well as aggregators, have demonstrated the viability of

innovative Fintech.

Software

The UK has a history of developing innovative software

solutions, for example for risk management, payments,

banking, asset management and capital markets, insurance

and accounting.

Data analytics

The financial data analytics market (including data analytics around credit reference, capital markets and insurance) is being transformed by the increased

speed and connectivity of technology.



Payments The cards and payments industry is going through a substantial transformation, attracting a wide range of independent innovators and market entrants.

Payments market by segment and estimated market size

£8.1bn£1.9bn

Online paymentsand FX

Infrastructure

Source: EY Fintech Market Overview

Estimated market size

£10bn


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The payments market is the largest sub-sector within UK Fintech, and continues to grow strongly. The Government has introduced a new payment system regulator, whose role is to ensure that the current payment system, which was owned by and operated for incumbents, is open to new companies in a fair and transparent way. This removes one of the barriers in the market, and creates new market opportunities for businesses in this area. It also highlights the role of the UK Government in creating a level playing field for companies of all sizes.

It is widely expected that the online sector will continue to grow, with a change in operating models, further emergence of new market entrants (especially aggregators), and increasing usage of big data, leading to a shift in the composition of the revenues generated by value-added services.

There are opportunities in this area for investment both in established providers and disruptive technologies.

Success story: Monitise

UK-based Monitise plc is a technology and services company that has grown in just over a decade, to become a world-leader in mobile money – banking, buying and making payments with a mobile device. Leading banks, payments companies, retailers, mobile networks and media owners use Monitise’s technology platforms and services to connect people securely with their money, using any device, operator or network, in both developed and emerging markets. Today, Monitise provides services to more than 350 financial institutions and leading brands globally, with 28 million users, and it processes 3.4 billion mobile transactions annually, to the value of US$71 billion. Now with 750 employees, Monitise had a market capitalisation of £55.9 million when it was listed in 2007.



PlatformsSeveral unique platforms, including in peer-to-peer lending, trading and personal wealth management, as well as aggregators, have demonstrated the viability of innovative Fintech.


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Thanks to a well-developed regulatory framework newly designed for this sector, and growing market penetration, businesses that can prove their models in the UK will be in the best position to export to other markets as they develop.

There are many opportunities in this nascent area for foreign direct investment (FDI).

Success story: MarketInvoice

UK-based Fintech company MarketInvoice has developed an award-winning online marketplace, allowing companies to sell outstanding invoices, confidentially, to raise working capital. Launched in 2011, the platform allows small and medium-sized businesses who have outstanding invoices to large corporates to trade these with institutional investors, online. By November 2013, the company was trading £10 million of invoices a month. The platform offers a new take on invoice finance, selling through an online exchange rather than bilaterally to a bank. In August 2013, MarketInvoice was awarded £5 million in UK Government funding to lend to small businesses, through the Business Finance Partnership – a scheme to boost finance through non-bank lenders.

The UK has been one of the fastest adopters of peer-to-peer lending,

to the value of £843m in 2013



SoftwareThe UK has a history of developing innovative software solutions, for example for risk management, payments, banking, asset management and capital markets, insurance and accounting. It offers many opportunities for international development.

In particular, the back and middle offices of financial services organisations often have systems that are patchy, and in need of an upgrade to fit with the digital, connected world. The large volume of activity undertaken by banks means that there is a major opportunity to provide sleeker, more efficient and more innovative software to the financial services industry, which has underspent on its system development since the financial crisis.


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Success story: Misys

Misys is a multinational software company, based in London. It specialises in software for banking, capital markets, lending, enterprise risk and investment management. Founded in 1979, Misys now has 4,500 employees, and more than 2,000 customers across 130 countries.



This is providing significant opportunities to improve consumer experience, manage risk and improve monitoring of business activities. This is an area where both disruptive and supportive technology is developing significantly, and the UK holds a market-leading position in financial institutions data research and analytics, meaning that there are many market opportunities in this area.

Insurance market players are increasingly embracing new technology solutions, and there are likely to be many further opportunities for innovation in this area. Recent developments include the introduction of telematics, involving the capture and analysis of driving data to help car insurers assess drivers’ risk, based on actual driver behaviour. The ever-growing amount of data that is being consumed and analysed by insurance companies also creates opportunities for innovation in visualisation, to help executives grasp all the available data at their fingertips.

There are opportunities for businesses to expand into the market both through direct acquisition and organic investment.

Data analyticsThe financial data analytics market (including data analytics around credit reference, capital markets and insurance) is being transformed by the increased speed and connectivity of technology.

Insurance market players are increasingly embracing

new technology solutions, and there are likely to be many further opportunities for innovation in this area.


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Success story: Markit

Markit is a leading provider of financial information services, providing products that enhance transparency, reduce risk and improve operational efficiency – for example through independent data, trade processing of derivatives, foreign exchange and loans, customised technology platforms and managed services. Its customers include banks, hedge funds, asset managers, central banks, regulators, auditors, fund administrators and insurance companies. Founded in 2003, Markit now employs over 3,000 people in ten countries. In 2012 the company had annual revenues of US$860 million, and it raised US$1.28 billion in an initial public offering in 2014.



The Fintech market and regulation – can I operate in the UK?

The UK regulator, the Financial Conduct Authority (FCA), supports the Fintech industry, providing transparency and creating a level playing field.

It liaises with other parts of the UK Government, so that it speaks with one voice, and it has a reputation for being open-minded.

The FCA’s Project Innovate is a clear signal that the regulator wants to ensure that Fintech businesses operating in the UK are supported by the UK’s regulatory environment. As part of the project, the FCA has said that it will open its doors to any company that is developing new business models that fall outside of current regulation.

Supporting tax measures A number of tax incentives are also provided by the UK Government to encourage innovation, including in Fintech. They include:

– the Enterprise Investment Scheme (EIS)

– the Seed Enterprise Investment Scheme (SEIS)

– Entrepreneurs’ Relief (ER)

– R&D tax credits

– the Employee Share Scheme (ESS)

– the Patent Box scheme, whereby companies pay a lower rate of Corporation Tax on profits earned from their patented inventions and other innovations.


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Supportive regulation: Bitcoin

Virtual currencies, like Bitcoin, were banned in many countries, while others levied a form of VAT or other tax on its use. After careful consideration, the UK chose not to introduce any taxes on Bitcoin, demonstrating an open mind when it comes to innovative Fintech.

Responsibility for regulation of the peer-to-peer lending (or crowdfunding) industry has now been passed to the Financial Conduct Authority. Crowdfunding platforms will have strict systems in place, to protect investors. The move, which enables new business models to be developed whilst protecting consumers, has been broadly welcomed by the industry.



Access to finance in the UK – can I get funding for my business?

Many different sources of finance are available in the UK, for Fintech businesses.

The Fintech sector is well served by angel investors, many of whom have worked in financial services, have the required skill sets and experience to understand Fintech business models, and are excited by the market opportunities. The SEIS and EIS tax breaks provide a significant benefit to start-up investors.

A new development in the UK market is the emergence of accelerator and incubator schemes (eg Techstars, Startupbootcamp and Level 39). These provide access to a network of contacts in the relevant market, and help prepare businesses for venture capital fundraising.

In terms of development capital, UK venture capital funds invested between £300 million and £400 million in 2012. Recent deals include Transferwise receiving £25 million, and Spanish bank Santander establishing a new US$100 million fund to back Fintech start-ups, which will be managed out of London.

The private equity investor base is well-established in the UK, with over 130 funds locally registered.

The UK Government also supports the availability of capital at this stage, for example through the British Business Bank, which aims to ensure that there is a healthy supply of finance providers for smaller businesses, in addition to the High Street banks. The British Business Bank’s Business Finance Programme, and its successor the Investment Programme, explicitly support lending to smaller businesses through innovative finance providers, both by providing funding, and stimulating similar investment from the private sector. Applications for over £800 million in funding are currently being considered, from a range of Fintech businesses and other alternative finance providers. The British Business Bank also supports Fintech businesses through venture capital funds, including the Business Angel CoFund, the Enterprise Capital Funds, and the VC Catalyst Fund.


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UK Export Finance are the UK’s export credit agency, helping exporters and investors by providing credit insurance policies, political risk insurance on overseas investments and guarantees on bank loans.

Finally, listing is an important source of capital for Fintech companies, and is potentially the ultimate destination for ambitious and innovative Fintech companies. The UK has an active initial public offering (IPO) market.

£800mApplications for over

£800 million in funding are currently being considered by

the British Business Bank

There is no doubt the UK is leading the way in financial

innovation, not just in Europe, but globally. This fund… will help the UK and the rest of Santander Group stay at the forefront of financial

technology.

Santander UK’s CEO Ana Botin, on the launch of Santander’s new

Fintech venture capital fund



Further informationContact UKTI For specific advice on how UKTI can assist your plans to invest in the UK Fintech ecosystem, or facilitate your plans for growth worldwide, please contact:

Shaul David Fintech Specialist, Financial Services Organisation UK Trade & Investment E: [email protected] T: +44 (0)7818 454 312

Gavin Cleary Chief Commercial Officer, Financial Services Organisation UK Trade & Investment E: [email protected] T: +44 (0)7776 244 221

General email: [email protected]

Telephone (from outside of UK): +44 (0)20 7333 5442

Telephone (from inside UK): 0845 539 0419

gov.uk/ukti


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Image creditsCover: Getty, p01: Stocksy, p02: © Image Courtesy of Rail Images, p04: iStock, p08: iStock, © Crown Copyright, p09: © Crown Copyright, p12 and p13: © Crown Copyright, © Paul Reid/Shutterstock, © VisitBritain/Britain on View/ Pawel Libera/Jason Hawkes, p17: Getty, iStock, p18: Getty, p19: iStock, p21: Stocksy, Getty, p23: © Richard Newstead/Flickr/Getty Images, iStock, p25: ITO World, p27: © Jason Hawkes


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Published August 2014 by UK Trade & InvestmentURN UKTI/14/1028


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Fintech: The UK’s unique environment for growth