Given London’s position as the global financial centre and a core technology hub it is not unsurprising that Fintech has become a core area for innovation.  The interest in the sector has created a specific ecosystem based in London supporting the sector with industry bodies, incubators and venture funds dedicated to the sector. This article maps these developments  and explores this vibrant ecosystem.

Across Europe Fintech has exploded to be the largest industry sector with investments rising four fold from $ 536 million in 2012 to $ 2.27 billion in 2016 and further doubling again to $ 4.2 billion in 2017, or 22% of the European venture market.  This is double the next largest sector in 2017 and has been the largest sector since 2014. On a global basis deal count peaked in 2015 at 942 with $ 14 billion invested for 2016 up from $1.9 billion in 2012.  The UK accounts for 44% of the European market.

Deal count has increased from 136 in 2013 to 466 in 2017, a 242% gain in four years.  Much of this rise has been driven by increasing deal sizes reflecting the relatively poor business models of most Fintech companies.  In general they require significant scale to achieve profitability and the relative cost of acquiring clients can be high.

What does illustrate the rate of change in the sector is the pace of company formations on a global basis. Registrations peaked at 668 in 2014 but were only 41 to the end of Q3 2017, indicating a 80% plus decline in new companies targeting this sector.

One of the many challenges faced by Fintech startups is regulation which imposes a significant cost burden but also delivers opportunities. Early in 2018 a number of new regulations come into force including MiFID II, PSD2 and GDPR:

  • The Markets in Financial Instruments Directive applies from 3 January 2018, and will deliver some important changes to the scope of regulation in the UK. MiFID II represents a major overhaul of the existing law, building on and extending the scope of the first Markets in Financial Instruments Directive, which originally came into force in November 2007.
  • At the end of January 2018 banks operating in the EU will be forced to open up their customer data to third party firms, when customers give consent.  EU lawmakers hope that the introduction of the revised Payment Services Directive (PSD2) will give non-banking firms the chance to compete with banks in the payments business and give consumers more choice over financial products and services.
  • Additionally, from 25 May 2018, current data protection regulation will be replaced by the General Data Protection Regulation (GDPR), coupled with a new Data Protection Act that supplements the GDPR. Both pieces of legislation are based around the notions of principles, rights and responsibilities. The legislation is regulated by the Information Commissioner’s Office as well as the courts but adds to the compliance requirements for any firm operating with customer data.

In a study conducted by EY for department for UK Trade & Investment titled Landscaping UK Fintech the size of the UK Fintech market opportunity was estimated at £20 billion of which half was payments, £3.8 billion financial data and analytics, £4.2 billion in financial software and £2 billion for platforms.   These macro sectors are further broken down in to many different market and technology segments. Companies capturing the headlines and the larger deals are in online P2P lending, challenger banking and foreign exchange but from an investment perspective it is a much larger market with emerging requirements for AI, other big data solutions and blockchain leading investment flows.

Some of the key players in the sector are:

Innovate Finance is an independent membership association that represents the UK’s global FinTech community. Founded in 2014 and supported by the City of London and Broadgate, Innovate Finance is a not-for-profit that advances the country’s leading position in the financial services sector by supporting the next generation of technology-led financial services innovators. More than 250 global members have joined the Innovate Finance ecosystem to date. These companies range from seed stage start-ups to global financial institutions and professional services firms. All benefit from Innovate Finance’s leading position as a single point of access to promote enabling policy and regulation, talent development, and business opportunity and investment capital. By bringing together the most forward-thinking participants in financial services, Innovate Finance is helping create a global financial services sector that is more sustainable, more inclusive and better for everyone.

Level39 is the world’s most connected tech community. We support fast-growth businesses in three clear ways – giving access to world-class customers, talent and infrastructure. Through expert mentors, access to Canary Wharf’s dynamic workspace, a packed events calendar and best-in-class facilities we help businesses achieve scale. Owned wholly by the Canary Wharf Group, Level39 launched in March 2013. Since then, Level39 has grown from a simple idea into a three-floor, 80,000 square foot accelerator space occupying the 39th, 24th and 42nd floors of One Canada Square.

FINTECH Circle is a London based organisation looking to empower the global FinTech community to Learn, Innovate and Invest through  four key theme areas. Invest provides smart capital to exceptional FinTech entrepreneurs by bringing together innovative companies with its syndicate members with a focus on seed rounds.  Innovate works with corporates and institutions to accelerate innovation returns through our open API FinTech methodology and ecosystems. Learn provides training and educational content for the FinTech sector. Institute empowers Finance professionals to acquire the necessary digital understanding and entrepreneurial skills to play a leading role in the future of Banking, Insurance and Asset Management globally.

Barclays Accelerator is a global fintech focused program run by Techstars in four locations, London, New York, Cape Town and Tel Aviv. Barclays has demonstrated a high level of commitment with significant direct involvement from key decision makers at Barclays. The intensive 13 week program includes an investment from Techstars and is located in a dedicated co-working space in White Chapel, close to London’s Mile End.

Key aspects of the programme include: Introductions and guidance from key decision makers at Barclays, who are looking for innovative solutions, mentoring from leading entrepreneurs and FinTech industry experts, up to $120,000 investment from Techstars (depending on location), as well as other corporate perks, access to technical expertise in a dynamic and collaborative community working space with cutting-edge resources, the opportunity to pitch your business to the influential tech community, and lifetime membership of the prestigious Techstars alumni community

Illuminate Financial is  focus on finding and funding enterprise FinTech solutions that will effect real change within capital markets at a late seed and Series A stage of development.  They are looking to help financial institutions thrive in this ‘moment of generational change’ by connecting those who need solutions to those that have created them.  Their distinct operating model starts with partnership at all levels, with banks, buy-side and strategic investors  enabling them to better assess market opportunity, validate early stage solutions and catalyse adoption.

We are witnessing a tremendous opportunity to create value from the emergence of a new paradigm in financial services and markets. Disruptive new business models, products and services – enabled by exponential improvements in technology – are fundamentally challenging incumbent firms and market structures. These new approaches are driving a reconfiguration of the financial services industry and the structure of many markets within the wider economy.

Anthemis has a diversified portfolio of 49 best-in-class, high-growth, digitally native financial services companies based around the world. We are thesis-driven investors and hold several vehicles in which we invest discretionary and non-discretionary capital across a wide range of companies, from early stage to growth.

Santander Innovations is a corporate investment fund based in London with a global reach and builds on a philosophy of collaboration and partnership with small and start-up companies.   A $100 million fund launched in July 2014 to get closer to the wave of disruptive innovation in the FinTech space. With the aim of supporting the digital revolution to make sure Santander customers around the world benefit from the latest know-how and innovations across the Banking Group’s geographies. The fund is part of the Santander Group’s broader innovation agenda, in which we help FinTech companies grow from a very early stage (i.e. seed) to a more mature stage.

ING Ventures, is a EUR 300 million fund that invests in Fintech companies around the world. In the next four years (2017 to 2021), it will build a portfolio of investments to help ING accelerate the pace of innovation.  An important element of ING’s innovation strategy is partnering with and investing in Fintech. Over the years, ING has launched its own innovations, but scanning the outside world for services that help create a differentiating customer experience has also been part of the bank’s approach.   The mission of ING Ventures is to help entrepreneurs build businesses that empower customers to stay a step ahead in life and business.  ING Ventures invests from seed for companies that have graduated from its own accelerator programme and more generally in growth stage companies globally.

DB1 Ventures’ vision is to be a strategic partner of choice for early- to growth-stage companies which are core or adjacent to Deutsche Börse Group’s strategy, generate attractive investment returns and add strategic value to its growth plans. DB1 Ventures considers itself Deutsche Börse Group’s “eyes and ears” in the venture ecosystem. Its focus is set on areas of strategic interest to the Group to help the company drive innovation. DB1 Ventures makes and actively manages long-term and strategic minority investments. The investment focus is on technologies and capital market applications that are and will be reshaping the way financial markets operate. The strategy is global and not limited to a particular geographical region.

Seismic Foundry has been established by five partners to provide unique access to start-ups for both Individuals and Financial Institutions in the Capital Markets sector of Fintech.  For individuals they run an SEIS fund investing in qualifying early stage companies.

All the major venture funds and many corporate funds have been active in this sector and due to the deal sizes many PE funds have also participated in later rounds.

Data sources include Pitchbook, Dealroom, GP Bullhound, EY, CB Insights, Deloitte (Venture Scanner)