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.