Unless you have been too busy reconciling your cheque book stubs against your monthly paper bank statements, you may have heard that the financial technology (fintech) sector is white hot right now.
Global investment in fintech tripled last year from $4bn to just over $12bn. This figure is predicted to hit $46bn by 2020. With venture capital pouring into technology-driven businesses at such headline-grabbing levels, you could be forgiven for assuming that the majority of this activity is happening in the spiritual home of high-growth business, Silicon Valley. For once, however, the UK (and in particular London) is at the forefront of this boom.
The combination of London’s growing status as a technology hub and being one of the world’s leading financial services centres gives it a unique advantage over its closest rivals, New York and Silicon Valley, for the crown of global fintech capital. These factors have provided the perfect breeding ground over the last few years for an explosion of exciting new technology businesses that have set their sights on disrupting the financial services industry.
Two such companies, Funding Circle and TransferWise, have now achieved hallowed ‘unicorn’ status (being valued at over $1bn). Remarkably, both achieved this benchmark in less than five years.
This unprecedented growth means that the fintech industry is now worth £20bn a year to the UK economy. It is estimated that some 135,000 people are now employed in the UK’s fintech sector and as the buzz continues to grow, this figure can only be expected to rise. If the UK’s fintech trade association, Innovate Finance, achieves its objective, by 2020 the UK fintech sector will attract $8bn of venture and corporate investment annually.
The geographical coincidence of budding software developers and entrepreneurial bankers has undoubtedly provided the raw materials for the current boom in the UK’s fintech industry. However, a good deal of credit must also go to a variety of institutional players who have recognised the opportunity the UK has and moved quickly to provide much-needed momentum.
Some of the biggest plaudits must go to the UK Government and the Financial Conduct Authority (FCA). Each has taken uncharacteristically speedy steps to do what it can to reduce the friction that might otherwise have held back certain areas of the fintech industry. One of the best examples of this is the steps the FCA took last year, with support from HM Treasury, to regulate the peer-to-peer (P2P) lending industry. This required considerable lobbying from the founders of the leading P2P lenders. In relative terms, however, this still marked a swift response from key institutions to address a threshold issue that risked affecting the UK P2P lending industry’s prospects for growth.
Perhaps more radical was the FCA’s decision in October 2014 to launch a ‘start-up’ service of its own. The FCA’s Innovation Hub provides informal feedback to innovative fintech businesses on the regulatory implications of their business models. This service is the first of its kind among financial services regulators anywhere in the world and evidences the FCA’s determination to do its bit to make the UK the most attractive jurisdiction for fintech start-ups.
Despite being the chief targets for disruption for many fintech businesses, the big UK banks have also taken ground-breaking steps to support early-stage fintech companies.
In March last year, Barclays Bank set up its own fintech ‘accelerator’ in the East End and Lloyds Banking Group has since teamed up with MasterCard, Rabobank and others to sponsor a similar programme. Santander UK and HSBC have taken a slightly different tack, establishing $100m funds to invest in UK fintech businesses.
With such eye-watering growth and the prospect of billion-dollar valuations, one might expect the UK’s legal community to be falling over itself to get involved in this sector. But based on the feedback from early-stage fintech businesses, it may be one of the few weak links in the UK’s fintech support system.
The chief cause for this may well be the perennial question that faces any firm that considers targeting early-stage technology businesses with little or no spare capital to pay legal fees: ‘How do I make it pay?’ A number of possible solutions have been deployed for more traditional technology start-ups.
However, none seem to be a particularly good fit for fintech businesses because they tend to encounter more significant and complex legal issues at an earlier stage of their lifecycle than traditional technology businesses. These issues often require specialist input which, for most, is hard to provide on anything other than a time-spent basis, which is anathema for any start-up.
Unfortunately, without this specialist input, many fintech businesses may not get their concepts off the ground, never mind reach unicorn status.
Angus McLean is an IP partner and head of Simmons & Simmons’ international fintech team.