U.K. fintech used to be a side hustle for bored finance executives in the wake of the Global Financial Crisis. Now it’s an industry with the potential to rival the country’s big banks

What is the quintessence of British business? At Cadbury? Aston Martin? Or is it Monzo? While neobanking may not yet be a global household name, the UK fintech scene is undeniably a success story. Widely recognized as the most valuable segment of the UK technology industry, fintech has expanded from bedrooms to boardrooms at an unprecedented rate in the years since the global financial crisis.

Although Britain’s biggest banks still dominate the country’s financial landscape, outpacing fintech rivals in terms of assets and customer base, Britain’s banks have nevertheless shown signs of contraction since the financial crash.

Annual reports of five of the largest banks (Barclays, Lloyd’s, HSBC, RBS, Chartered standard) between 2008 and today show an overall decrease in numbers of around 35%. Meanwhile, data from Trading Room indicates an increase in fintech headcount of 900% over the same period. Is this correlation or causation? The verdict may not be in yet, but it is imperative to understand the interplay between the two sectors if we are to predict the direction financial services in the UK will take over the next two decades.

In its early days, fintech’s scope was somewhat limited to a range of niche back-end functions. Today, the sector has a much broader definition, encompassing everything from open finance and neobanks to digital lending platforms.

Consumers came in droves. Challenger banks like Monzo seem to be getting everyone to brandish their distinct coral cards.

In 2019, open banking users in the UK passed the one million mark; in 2023, this figure now stands at 7 million. London was the ideal incubator for all of this. Programs such as that of 2016 FCA sandbox and the regulatory bases for Open banking have all played a role in creating a strong fintech landscape. With financial institutions, significant capital and regulators at their fingertips, fintech founders have become increasingly ambitious.

The question of valuations

It was a chronically overindebted financial system that crippled the economy in 2008. The impact of the financial crisis reverberated through the existing banking sector for years. The UK’s top five banks have seen a sustained decline in their market capitalization over the past 15 years, losing a staggering $150 billion in value. Compare this to the rise of the UK fintech sector, which generated $200 billion in value over the same period.

Private valuations are not an exact science and have sometimes been pushed higher by investor hype, but the growth in value generated by fintech since its inception remains impressive. This remains true even after adjusting for the dizzying levels of 2021 valuations, many of which were significantly reduced. British fintechs have also successfully entered the public markets, despite a recent lull in listings on the London Stock Exchange. Cross-border payments company Wise completed its 2021 IPO and, despite a decline in its market capitalization since its initial $11 billion listing, its share price remained relatively stable in a delicate market.

The question of regulation

The UK’s fintech boom presents an opportunity that comes with much greater scrutiny: tensions between traditional banks and fintech companies have put regulation in the spotlight.

Revolut is an interesting example. Britain’s most valuable fintech company recently took steps to expand its services to credit and ensure the security of deposits assured by regulators by obtaining a banking license. He has not yet succeeded – and given Revolut’s recent announcement, it will not file its accounts on time for the second year in a row, it seems to be a long-term struggle. While other rival banks such as Starling and Monzo managed to secure licenses early on and become profitable, skepticism from regulators and banking institutions remains palpable.

The conversation continues

Generative AI is already demonstrating profound impact in making fintech solutions more efficient, secure, and more effective in their risk management.

As founders face tough questions amid the current economic slowdown and gloomy funding environment, we could see further consolidation of fintech solutions and an increase in cross-investment and partnerships between major banks and fintech challengers.

At the same time, we will also see whether the largest independent fintech companies can take advantage of the AI ​​technology supercycle to pose a serious challenge to the incumbent banking industry.

Sanchit Dhote is the investment manager at Outward VC.

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