UK FinTech capital of the world, but competition is heating

29 February 2016 7 min. read

With a market value of around £6.6 billion, the UK can across the board call itself the FinTech capital of the world. A strong financial system, a highly supportive government, a well-educated workforce and entrepreneurial spirit mean that the UK is doing well in the creation of new and disruptive FinTech offerings. With competition heating up globally, and in particular the US and China gearing up, further advancement remains key.

Rapid progression in technological innovation, abundant capital and an entrepreneurial spirit, among others, have seen the FinTech sector boom in recent years. Across the globe a number of countries and, in the case of the US, states, have particularly shown strong FinTech development. The sector has the potential to create considerable disruption within the financial services industry on the back of innovative solutions for consumers and organisations alike, from the promise of cryptocurrency streamlining transactions within the financial services industry to new payment methods for consumers.

The FinTech Ecosystem

The promise of hefty returns, as well as the potential to be at the forefront of a disruptive development, has seen considerable investment into the sector. A range of stakeholders, from investors to governments, have sought to create environments that encourage FinTech innovation. In a recently commissioned benchmark report by the HM Treasury, titled ‘UK FinTech: On the cutting edge’, the researchers (advisors from EY) explore the competitiveness of the major global FinTech ecosystems. The study looks at four key attributes* (Talent, Capital, Policy, Demand), and then ranks the regions in terms of their conduciveness to FinTech development, as well as making a projection about expected changes to the market over the coming five years.

FinTech in UK
The study reveals that the UK can call itself the global leader within the industry in a number of fronts. As it stood in 2015 the sector has revenues of around £6.6 billion, with investments in the order of £524 million. The sector employs around 61,000 people in the UK, representing 5% of the total financial services market– the number of people working in the sector in the UK outnumbers those of three of the larger global hubs of sector activity combined: Singapore, Hong Kong and Australia.

share of FinTech firms by subsector

The UK FinTech sector has a clear focus on two subsectors, banking and payments and credit and lending. The latter has seen phenomenal growth in recent years, with the alternative finance market hitting £3.2 billion from almost non-existence five years earlier. Investment in the respective subsectors does not in itself reflect the level of activity, with banking and payments attracting £243 billion for its 54% market share, while credit and lending attracts £233 billion for its 20% market share. The third biggest subsector in the ecosystem is investment management, wholesale banking and capital markets. The authors note that, despite the UK’s strong position in the insurance sector, both activity and investment have been relatively subdued; however, indications are that activity is beginning to emerge.

The report highlights that the UK enjoys considerable strength in the area of policies supporting the FinTech sector. The FCA has lowered barriers for the entry of new players, while the government has a number of funding schemes in place to support the development of promising ideas. Tax incentives around R&D for the sector too provide key elements to the ecosystem in which FinTech ideas can be incubated and fostered to grow rapidly.

2015 attribute rank

From an international perspective, two US regions are placed in second and third spot – California, building on the strengths of its tech hub at Silicon Valley, and New York. California is number one in talent and capital, while demand sees it at number 2 – policy however, was found to be unsupportive, with the UK taking top spot in this area. New York, earning 13 points in the methodology of the authors (lower scores represent higher maturity and ranking) comes in third with strong performances in all categories bar policy.

When it comes to access to capital, the US blows the rest of the world away. Venture capital funding remains the primary source of capital for FinTechs from early-stage through to growth stages. As a result, a strong venture capital network can be a defining factor for scaling innovative start-ups. California is the highest ranked region for venture capital funding with over £17.5 billion in overall tech investment in 2014 compared to £3.5 billion for New York and £1 billion for the UK. Both US cities also rank ahead of the UK in the area of seed funding availability (capital to finance initial start-up activities) and listed capital (access for mature FinTechs to public market investors).

Total VC investment in tech sector, by geography

Singapore, with a highly supportive government toward the FinTech sector, comes in at number four with 19 points. Germany and Australia both score 20 points, while Hong Kong follows with a score of 21 points.

Future outlook
While the UK currently stands at the top of the global FinTech sector, the rapidly changing ecosystem may see the UK dethroned in the coming five years, warn the researchers. One factor is China, were large capital funds are looking for the next Alibaba innovation, other dangers are improvements to policy levers in the US – thus seeing the UK lose its major advantage to US regions.

As policy becomes more progressive in some geographies, EY also highlights the emergence of specialisation as a threat. Examples include Israel’s focus on cybersecurity, Benelux’s focus on payments, Dublin’s focus on fund administration, Malta and the Isle of Man’s focus on cryptocurrencies and Estonia’s focus on financial identity. “This specialisation could place London’s position as a diversified FinTech sector at a disadvantage,” state the authors.

Future position

In order to remain the global capital of FinTech, EY and the HM Treasury have drawn up a long list of recommendations for stakeholders involved, aimed at enabling the UK to keep pole position. The recommendations range from creating a FinTech “delivery body” that drives high impact policy initiatives, to providing/facilitating more delivery support in the FinTech ecosystem and strengthening the talent pipeline, particularly for tech talent. An overview:

  • Create a FinTech “delivery body” to drive high impact policy initiatives to implementation as quickly as possible
  • Build on the FCA’s position as the most progressive regulatory body globally
  • Deliver practical business support to FinTechs
  • Build FinTech “bridges” to support UK FinTechs expand internationally
  • Strengthen the UK’s talent pipeline,particularly for tech talent
  • Establish regional Centres of Excellence in the UK
  • Initiate investor-focused programmes to improve access to growth capital
  • Broaden tax initiatives to drive greater investment in UK FinTech
  • Promote government, consumer and FI adoption of FinTech services

* Talent represents the current availability of technical, financial services and entrepreneurial talent as well as the talent pipeline, both domestic and foreign. Capital represents the access to seed and scaling funding, Policy relates to the kinds of regulations bearing on FinTech players, government support programmes as well as tax incentives, and Demand is related to the adoption of FinTech offerings by a range of players, including consumers, corporates and enterprise.