Five Reasons to Believe in UK fintech

NB Team

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In January, the growth of UK fintech looked unstoppable. 2019 saw huge levels of investment. We were set for another record-breaking year in 2020. That was until Covid-19 threw the world into disarray. So what does Covid-19 mean for UK fintech in the long term? Is it fatal? A bump in the road? Can the sectors’ strengths see it through?

We see plenty of reasons for optimism. While fintech has taken a few hits, it’ll take more than Covid-19 to damage the UK’s lead. Here are five ways in which fintech will bounce back.

UK Fintech made a strong start to the year. Confidence remains high

Early progress at the beginning of 2020 put UK fintechs in a strong position. In the first half of 2020, UK tech businesses raised more than $5bn in investment (Tech Nation and Dealroom). That’s more than the rest of Europe combined. London’s fintech firms alone took $4bn.

The argument is even stronger when you consider the pandemic struck the UK around halfway through this time. Before widespread lockdowns the first quarter was impressive. Beauhurst reported 112 deals totalling £1.1b. We saw businesses at all stages of maturity raise funds. From small, early-stage deals, to big-money deals like Revolut (£383m), iwoca (£85.6m) and Starling Bank (£40m).

Thanks to some eye-watering investment rounds and valuations, such as payments start-up Checkout tripling its valuation during the lockdown, the media narrative has been overwhelmingly positive. UK fintech is seen by many as a source of strength and national pride. This industry is buoyant and expectant. Amongst key commentators and the industry itself, we can see that confidence remains unchecked. That is very exciting.

Fintech weathered the storm

Unlike retail and travel, which were hit hard and are slowly recovering, most fintechs continued to operate during the chaos. In fact, many have become even more essential. For example, digital payments and online shopping have soared during the pandemic.

Research from Beauhurst also supports this observation. Only 1% of fintechs have been critically affected by Covid-19 and 2% severely affected. In the wider ecosystem of high-growth companies, 17% of businesses fall into these categories.

At the same time, jobs in fintech are also less at risk than other industries.

There are a few reasons behind these stats. Most fintechs are agile, digital and creative. This adaptability makes them more able to handle black swan events like Covid-19. Another consideration is that some of the hardest-hit industries are consumer-facing. Many b2b fintechs provide back-end or infrastructural services. This means they haven’t been impacted as badly.

So even during the crisis, fintechs continued to operate. When other industries have fallen down. That simple fact is critical.

Covid-19 has also seen accelerated adoption

Covid-19 has expedited the need for businesses to adopt digital services. Tim Levene, CEO of Augmentum Fintech, has perhaps put this best in Altfi: “The macro story has been the acceleration in digital adoption, and behaviours that would have taken two to three years to change, have changed in the last two to three months.”

The pandemic has shone a light on fintechs’ ability to bring operational efficiency and support customer acquisition using digital methods. These are key aspects to driving greater uptake of their services. Covid-19 has accelerated this pre-existing transformation trend. This is especially true for traditional financial institutions. They have been clutching on to legacy systems for some time. What happens if you pour petrol on a fire? We’re about to find out.

And for some, demand has grown

The net impact of Covid-19 on UK industries has been negative. However, some fintechs, whose services help solve problems raised by the crisis, are experiencing a significant uptick in revenues. Few businesses can hope for the extreme windfall that Zoom has enjoyed in the wake of Covid-19. To underline this, Zoom’s $328m revenue in February-April was more than double what it took in from the same time in 2019. Klarna, for example, has seen a 20% increase in new UK merchants in April. Meanwhile, Checkout hit a 5.5bn valuation this June.

You can see success in specific sectors:

  • Lending platforms for small businesses, such as Funding Circle and Tide, have experienced a massive growth in new loan applications. This is due to the new, less certain economic climate
  • Payments companies and platforms, such as Checkout and Apple Pay, have seen surges in demand. These have been largely driven by the massive increase in SaaS use and contactless payments. Alongside companies taking their business online
  • Insurtechs, such as Lemonade or Floodflash, which provide transparent and immediate payouts, are garnering increasing levels of trust and experiencing higher demand. This is due to various consequences of the pandemic. For example, job losses, business defaults and catastrophe-related impact
  • Enablers of Digital transformation, such as Nucoro and Thought Machine, that support financial firms’ digital transformation initiatives will be crucial to equip these businesses for the new wave of digitisation precipitated by the current climate
Culture breeds success

Culture has become a key strength for UK fintech. Born into the digital age, many leaders built their companies with culture front-of-mind. Sifted’s survey of Glassdoor reviews found the majority of the best-known fintechs sit above the global average Glassdoor rating.

Driven by competition for talent in a crowded and fast-growing space, culture has been a battleground. One in which fintechs consistently outperform traditional banks and financial services organisations. The result has been the emergence of more dynamic and supportive working environments. These are places in which values align to customer wellbeing. This culture makes it more likely to withstand, pivot and thrive in a global crisis.

So there you have it. Covid-19 has shaken almost every industry. But here are still reasons to believe in UK fintech. Now is the perfect time for fintechs to show their strength, resilience and willingness to support others. External communications can bring long-term benefits to relationships and reputations. It can also help the sector sustain its success.

Written by Tim Lines, Director at Nelson Bostock Unlimited