What is the quintessentially British business? Cadbury’s? Aston Martin? Or is it Monzo? While the neobank might not yet be a global household name, the British fintech scene is undeniably a success story. Widely recognized as the most valuable segment of the British tech industry, fintech grew out of bedrooms and into boardrooms at an unprecedented pace in the years since the Global Financial Crisis.
While Britain’s largest banks still dominate the financial landscape of the country, outstripping fintech challengers in terms of assets and customer base, U.K. banks have nonetheless shown signs of contraction since the financial crash.
Annual reports across five of the top banks (Barclays, Lloyd’s, HSBC, RBS, Standard Chartered) between 2008 and today demonstrate an overall staffing decrease of around 35%. Meanwhile, data from Dealroom points to a fintech workforce increase of 900% over the same period. Is this correlation or causation? The jury may still be out but understanding the interplay between the two sectors is imperative if we want to predict where financial services in the U.K. are headed over the next couple of decades.
In its early days, fintech’s scope was limited somewhat to a range of niche, backend functions. Today, the sector has a much broader definition, encompassing everything from open finance and neobanks to digital lending platforms.
Consumers have come in droves. Challenger banks like Monzo seem to have everyone brandishing their distinct coral cards.
In 2019, open banking users in the U.K. passed the 1 million mark; in 2023, that number now sits at 7 million. London has been the perfect incubator for all of this. Schemes such as the 2016 FCA Sandbox and the regulatory groundwork for Open Banking have all played a part in forging a strong fintech landscape. With financial institutions, large amounts of capital, and regulators all within reach, fintech founders have gotten increasingly ambitious.
The question of valuations
It was a chronically over-leveraged financial system that brought the economy to a halt back in 2008. The impact of the financial crisis rippled through the incumbent banking sector for years to come. The five leading banks in the U.K. have experienced a sustained decline in market capitalization over the past 15 years, shedding an astounding $150 billion in value. Compare that to the ascent of the U.K. fintech sector, which has generated $200 billion in value over the same period.
Private valuations are not an exact science and have at times been driven up by investor hype, but the growth in value that fintech has produced since its inception remains impressive. This holds true even when adjusted from the heady heights of 2021 valuations, many of which were dramatically slashed. British fintechs have also made successful moves into the public markets, despite a recent lull of listings on the London Stock Exchange. The cross-border payments company Wise completed its IPO in 2021, and despite suffering a market cap decline since its initial $11bn listing, its share price has remained relatively stable in a tricky market.
The question of regulation
Fintech’s boom in the U.K. presents an opportunity that comes with a lot more scrutiny–the push and pull between traditional banks and fintech firms has brought regulation into the limelight.
Revolut is an interesting example. Britain’s most valuable fintech firm recently made moves to expand its services into credit and provide the security of regulator-insured deposits by securing a banking license. It has yet to succeed–and given Revolut’s recent announcement it won’t file accounts on time for a second consecutive year, it looks like this may yet be a protracted struggle. While other challenger banks such as Starling and Monzo managed to secure licenses early on and have become profitable, skepticism from regulators and establishment banking remains palpable.
The conversation continues
Generative AI is already demonstrating a profound impact in making fintech solutions more efficient, secure, and effective in their management of risk.
With founders having to ask themselves tough questions during today’s economic downturn and muted funding environment, we may yet witness another re-bundling of fintech solutions and an increase in cross-investment and partnership between the big banks and fintech challengers.
At the same time, we will also see if the bigger independent fintech firms can ride the AI technology supercycle to mount a serious challenge to the incumbent banking scene.
Sanchit Dhote is the investment manager at Outward VC.
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