UK FinTech Shines Bright Amid
the Covid Gloom
By Daniel Stack, Head of Engagement and Investment Programme – Innovate Finance
the Covid Gloom
In January 2020, who could have possibly predicted the state of the world today?
After an uncomfortable ride from March onwards, in many ways, the outlook today is more certain with the widespread roll-out of a vaccine. There is light at the end of a very long tunnel. However, until we get there, the strain on our economy, its many businesses and our own freedom remains very much the same, even though we’ve said goodbye (and good riddance) to 2020.
Yet, despite this backdrop of uncertainty, the pandemic appears to only have increased conviction in and focus on those firms innovating in financial services. 2020 appears to have done little to dent the momentum of FinTech companies and the investment they are attracting, in both public and private markets.
FinTech in 2020 saw a flurry of IPOs in US firms such as nCino, Upstart and Lemonade; M&A deals such as Intuit and Credit Karma, Santander and Ebury, Visa and Plaid (although the latter has since fallen through); SPAC acquisitions such as SoFi, OpenLending and Paysafe; and venture mega-round fundraises such as Stripe, Chime and Robinhood in North America, as well as Klarna, Revolut and N26 in Europe. It’s an impressive list.
On the momentum of the sector, Tim Levene, CEO of venture capital firm Augmentum Fintech, believes “the industry is starting to mature but the wider opportunity remains nascent where incumbents still dominate in terms of market share.”
“The industry is starting to mature but the wider opportunity remains nascent where incumbents still dominate in terms of market share”
– Tim Levene, Augmentum FinTech
Weathering the Storm
Brexit trade negotiations with Europe and the pandemic did little to soften conviction or dampen growth in UK FinTech.
The UK remained a leading country for FinTech, ranking second globally only to the US in venture capital investment and Number 1 in Europe. Already in 2021, over $1 billion of venture investment in FinTech has already been announced, representing a quarter of last year’s total of $4.1 billion of investment.
Investment dipped early in 2020 but has come back with enormous momentum since late summer. The initial shock of going into “lockdown” – installing Zoom, home-schooling, adapting to the new environment – is reflected fairly clearly in the investment figures for 2020.
The first half of 2020 had 2.4x less in investment totals than the latter half of the year – $1.2 billion in H1 versus $2.9 billion in H2 – and this momentum has continued into 2021.
“The UK fintech market has shown tremendous resilience,” commented Manuel Silva Martinez, General Partner at venture capital firm Mouro Capital. “The strong 2021 start is a testament to the UK FinTech talent, that is here to stay and that thinks globally, with many companies raising to expand or further consolidate their international plans.”
Mike Benchimol, COO of Checkout.com, that raised $150 million in 2020 and $450 million earlier this month, said: “As an industry, we’re at a watershed moment. The coronavirus has created significant challenges … and the sector has demonstrated how its agility and innovation offer a path to recovery and a source of future growth.”
Within Europe, the UK accounted for just under half of the total $9.3 billion, and with more deals and capital invested than Germany, Sweden, France, Switzerland and the Netherlands combined.
Lord Grimstone, the UK’s Minister for Investment, highlighted “the resilience of this sector in the UK is remarkable and proves the UK is a great place to invest.”
“The global investment community recognises the UK as one of very few places that combines world-leading technical talent with a deep pool of FinTech entrepreneurs who, having had venture capital experience previously, know how to build at the velocity and scale that is required”
– Kevin Chong, Co-Head, Outward VC
European Top 5 Countries by Investment
More mega-deals as UK FinTech matures
FinTech companies are continuing to grow and attract large investment rounds, as sign of the sectors maturity that we started to witness last year. Since the start of 2020, nine companies in the UK have closed mega-rounds (deals exceeding $100m).
“The UK fintech ecosystem has seen increasing interest from established overseas investors who are becoming more active not only in capital but by hiring local teams on the ground – a trend which has persisted in the first 3 weeks of 2021”
– Tim Levene, Augmentum Capital
Interestingly, the majority of investors leading these mega-deals were international:
- Revolut ($580m) was led by US investor TCV
- Checkout.com ($150m Series B and $450m Series C) was led by US investors Coatue and Tiger Global respectively
- Molo ($343m) was led by German investor Yabeo
- Rapyd ($300m) by US investor Coatue
- Onfido ($100m) by US investor TPG Growth
$150m (Series B)
$450m (Series C)
Coatue (Series A)
Tiger Global (Series B)
Sprints Capital, Eurazeo, Wellington Management
Accel, General Catalyst, Various Others
Draper Esprit, British Patient Capital, Eurazeo
UK / EU
Merian Chrysalis, Harold McPike
UK / Bahamas
The maturity of the UK FinTech sector is attracting increasing numbers of international investors. “The UK fintech ecosystem has seen increasing interest from established overseas investors who are becoming more active not only in capital but by hiring local teams on the ground – a trend which has persisted in the first 3 weeks of 2021,” Tim Levene of Augmentum.
Other UK mega deals since January 2020 counted PPRO ($180m), Starling Bank ($123m), Monzo ($166m), and Thought Machine ($125m).
With the flurry of exits and acquisitions in 2020, especially in the US, UK later-stage companies have come increasingly under the spotlight. Many companies are speculated to be nearing an eventual exit from private markets into public markets, such as UK-headquartered firms TransferWise, OakNorth, Greensill, WorldRemit and PensionBee.
Although mega-deals accounted for 40% of the UK investment totals for 2020, the UK market is robust at all stages, with 60% of investment allocated across 401 deals representing smaller, fast growing businesses. By contrast, the top 3 deals in both Germany and France made up 58% of 2020 total investment.
Oliver Richards, Partner at MMC Ventures, a UK-based early stage venture capital investor, is excited to see an increase in the number of UK based entrepreneurs looking to start a new FinTech.
“There are a number of drivers for this but one key trend is the maturity of the ecosystem: Ex-employees from the growing number of UK success stories are using their experience to start new businesses of their own,” Richards added.
Another positive sign for the UK was the amount of money going to female-founded or female-led FinTechs – growing to $720m in 2020. This made up 17% of total UK FinTech investment, up from 11% of the total in 2019, due to several large deals in 2020 in companies with female founders – Francesca Carlesi of Molo Finance, Anne Boden of Starling Bank, and Fiona Roach Canning of Pollinate.
Crystal Ball Gazing into 2021
Looking ahead, the outlook for UK FinTech appears bright. So what are the bright stars of 2021? We asked a selection of investors, FinTech firms and advisors for their perspective.
SME lending is an area of interest for investors. COVID positioned FinTech lenders as key participants in distributing government loan schemes (such as BBLS and CBILS in the UK) helping to loan billions of dollars to small and medium sized businesses in need.
Yusuf Ozdalga of QED reflects on how “2020 was a challenging and highly unusual year on many fronts, but the silver lining for us was seeing great performance in our UK portfolio, including companies such as Capitalise that helped support SMEs through the Covid crisis.”
Manuel Silva Martinez of Mouro Capital highlighted a recent investment by his firm in Uncapped, an alternative lender which “focuses on supporting ecommerce brands through revenue-based loans…and is already thriving not only in the UK but also in Europe.”
Consumer banking is another area of expected growth as bank branches remain closed and consumers turn to digital channels.
Alexander Frean, Head of Corporate Affairs at the UK digital bank Starling Bank, said the pandemic had accelerated the shift to digital channels.
“As an app-based bank, Starling has seen robust customer acquisition since the start of the first lockdown,” she added.
Did you know that around 12% of the adult population in the UK – some six million people – downloaded their bank’s App for the first time during the first lockdown?
– Source: Nucoro report, April 2020
Many of these first time users are not expected to return to ‘physical’ banking in the future, and the way they interact with their banks will have changed permanently, representing a strong opportunity for neo-banks and the FinTechs that provide them with the tools and platforms to operate.
In the UK, government initiatives such as the stamp duty holiday (relief on the tax payable on property purchases) stimulated an increase in demand for consumer lending products such as mortgages. Francesca Carlesi, founder of digital mortgage lender Molo Finance says: “No one could have predicted the consequences that the pandemic would have on the mortgage and housing markets. However, despite being in the midst of great uncertainty, at Molo, we’ve seen a strong and stable demand across most of 2020.”
Decentralised Finance (DeFi) continues to attract enormous focus and interest. 2020 witnessed announcements such as PayPal allowing customers to pay with cryptocurrencies, as well as well established, main-street financial institutions like Fidelity, launching a bitcoin fund. Further growth is seen for this trend, whereby entrepreneurs recreate traditional financial instruments in a decentralized architecture, by using smart contracts and bypassing banks and traditional institutions.
Augmentum’s Tim Levene believes there will be “significant growth” in crypto and DeFi.
“The influx of institutional capital into crypto is bringing renewed focus on the sector as the industry becomes more mainstream, while DeFi has emerged as one of the fastest-growing categories of use cases for smart contracts built on the blockchain.”
Investors are also eyeing B2B FinTech as an area of interest.
Andrew Whiting, Principal at venture capital firm Partech, says: “We are very interested in B2B FinTech and companies offering financial tools for small and medium sized businesses (such as helping to predict cash flow, manage accounting, or process payments). This focus (…) will remain a key theme for us for 2021.”
Kevin Chong of Outward VC noted the pandemic has accelerated the “consumerisation” of B2B FinTech – solving B2B problems with B2C techniques. “We made 5 new investments last year. All were B2B, solving very large global problems in insurance, property risk, data privacy and asset management.”
Enterprise solutions, a subset of B2B FinTech, is also tipped for significant growth. Large global financial institutions are turning to FinTech companies to improve their ageing legacy technology, architecture and infrastructure.
Thought Machine, a UK based banking software provider, will use their recent fundraise to support international demand and fuel growth.
“We have already opened offices in Australia and Singapore, with a further office due to launch in the US…and ensure we are well resourced across the team to meet increasing client demand.”
Embedded finance is also receiving a lot of attention with non-traditional companies offering financial services and products as an add-on to their key activity. Ride hailing company Uber is a great example, offering a wallet and Debit/Visa cards to their drivers. Kevin Chong of Outward VC foresees “financial services integrated into non-financial platforms, with the help of middleware and enablers.”
Innovate Finance is opening up access to capital for our FinTech members, providing connections to the venture community and delivering insight with our UK Investment reports. The programme runs throughout the year and provides ongoing insights and events such as speed-dating between startups and investors. Click here for more information.