Coronavirus and capital: UK FinTech Investment in Q1 2020
By Innovate Finance
Written by Rolf Merchant, Senior Manager, Business Development
In the last few weeks, the global economy has slowed to a halt in the face of COVID-19. Just about every sector has been impacted.
This has obviously overshadowed our review of the UK FinTech investment landscape in the first quarter of 2020. However, up until mid-March, when the UK went into lockdown, there was plenty of positive deal activity.
First, the data: the UK FinTech sector received $1.1 billion of investment into 77 startups in the first quarter of 2020, down from the $1.74 billion raised in the same period in 2019. Early signs of COVID-19 affecting FinTech deal-making was evidenced most clearly in monthly deal volumes, which fell to their lowest since early 2016 and trailed off quite abruptly in March.
Investment grew 63% from Q4 2019 due to several large deals early in the year, notably Revolut’s $500m fundraise. Other large FinTech deals included cloud-banking platform Thought Machine ($83 million), payments platform Currencycloud ($80 million), and challenger bank Starling ($78 million).
We spoke to key investors and some of the FinTechs that completed a raise in Q1 for their take on investment trends in the sector.
“This too shall pass”
The investors we spoke to were relatively sanguine about the current state of the market.
Michael McFadgen, Partner at Element Ventures said, “To borrow the old adage – this too shall pass, and the fundamentals that make the UK a leading fintech market will still be in place.” Those fundamentals underpinning the resilience of the UK were highlighted by Ben Marrel, Co-Founder & Managing Partner of Breega: “the human element - a high level of skills and talent with a strong financial background - readily available funding, and a very favourable regulatory environment.”
Anton Ruddenklau, Global Co-head of Fintech for KPMG, agreed and suggested that “many of the deals in Q1 stamped confidence on the sector's viability.”
Tim Levene, CEO of Augmentum, added that there is still huge financial services market share for FinTechs to eat into, but he warned that “we are likely to see a greater impact on the funding numbers in Q2.”
FinTechs also pointed to the underlying strengths of the market. Stefano Vaccino, Co-Founder and CEO of Yapily said UK FinTech is “extremely versatile”, adding that “there has been an immense community spirit throughout the hardship of the coronavirus”. Alexandra Frean, Head of Corporate Affairs at Starling agreed that the market was “strong overall” and emphasised that its own digital business model is “quite literally, built for these conditions.” Ian Larkin, CEO of Trussle, thought that the crisis had “demonstrated the resilience of remote working models, cloud-based infrastructure and ability to adapt quickly to changing market conditions.”
Will the market change?
Investors don’t see radical upheaval, but rather an acceleration of trends that they were already detecting. Tim Levene said that the digital adoption of financial services was already quickening, which will “benefit our sector over the medium term as more customers eschew traditional banking and insurance.”
Jeppe Zink, General Partner at Northzone, predicted that the transition to online banking will speed up and that “this period will probably be the kiss of death for branch networks.”
Similarly, Michael McFadgen, expects to see the crisis accelerating the migration to cloud and growth of SaaS. Michael added that we will see a “renewed drive for efficiency at incumbents which will sharpen focus on FinTech firms’ ability to deliver rapid and meaningful benefit to customers.”
Expansion and evolution
International growth and expansion is one focus for the FinTechs with new funding that we spoke to. Nicholas Taylor, Public Affairs Manager at Revolut, said that they will focus on “rolling-out banking operations in Europe” as well as “increasing the number of people who use Revolut as their daily account.”
Thought Machine CEO Paul Taylor said, “Following our launch in Singapore last year, we will be investing for continued growth in Asia Pacific and North America... we will continue to invest into our core technology, ensuring that banks continue to reap the benefits of truly cloud native technology.”
Freddy Kelly, CEO of Credit Kudos said, “Or £5m Series A funding will fuel the next stage of our growth: accelerating the development of new products, supporting expansion into international markets, and enabling us to continue hiring talented individuals to grow the team.”
Stefano Vaccino from Yapily, which recently raised $13m, said that the funds will help the company “build a stronger European presence...building on Open Banking connections for the likes of Italy, Ireland and Germany.”
Meanwhile, Trussle will use the £13.6m it raised to “invest heavily in technological innovation to improve our customer experience,” according to CEO Ian Larkin.
Crisis to spur innovation
Despite uncertainty, investors and FinTechs alike are relatively upbeat about the long-term picture. Ben Marrel from Breega summed the situation up by saying “from a long-term perspective, crisis although painful, is also almost always a trigger for innovation and change...this will ultimately strengthen the Fintech sector as a whole.”
Michael McFadgen from Element Ventures suggested that “the need for incumbents to work with Fintech firms to deliver change will never have been greater” especially in verticals such as wholesale markets, insurance, SME finance and asset management.
Jeppe Zink also thought that wealthtech and savings services will be first in line to see change. He added that “financial wellness products will come to the forefront as consumers and businesses battle with tighter credit markets.”
Looking at how the UK will fare compared to other markets, Tim Levene was positive, arguing that “UK fintech will continue to lead the way in Europe over the coming 12 to 18 months, where there is more capital here than the rest of Europe combined.” Tim added that the launch of the Government’s £500m Future Fund will also bring much needed capital to the sector: “We hope it might be extended in size and scope if it proves to be delivering some positive early results,” he concluded.
Nicholas Taylor from Revolut believes Coronavirus will “accelerate demand for more transparent, convenient and flexible financial services that give customers more control.”
Freddy Kelly of Credit Kudos noted the impact of the growing importance of data: “Fintech’s ability to more easily absorb and interpret the plethora of new data available, and understand changing consumer habits, which will ensure fintechs are in good stead for further growth once the pandemic has passed.”
Overall, the immediate outlook for FinTech investment is not as positive as it would have appeared in January. Investment flows have been affected across all sectors as the global economy has been brought to a standstill. A slowdown in FinTech investment in the UK is to be expected. It is very unlikely that we will see figures close to the $4.9 billion of capital raised in 2019.
However, it’s clear that the strengths of FinTech businesses - their agility and speed and the fact it is digital by nature - will help them stay the course. Nonetheless, many loss-making start-ups will continue to be reliant on the flow of investment to get them through the predicted downturn.
Those who have recently closed funding will be at an obvious advantage right now. For the right businesses in the right verticals, there are still plenty of opportunities to grow and to disrupt financial services.
Data Source: PitchBook as of 21 April 2020. Data has not been reviewed or approved by PitchBook analysts.