UK rising from crisis to Fintech hub: our takeaways from a new documentary by 11:FS
“Could the financial crisis have been prevented? Yes, it could have. But in some ways, we’ve benefited from it.”
Eric van Kleij shared the above quote in a pensive moment towards the beginning of 11 Years — The Rise of UK Fintech, a comprehensive documentary on the evolution of Fintech in the UK published by 11:FS, a UK-based firm committed to enabling the transformation for various financial services players. In this documentary, they attempt to tell the story of how Fintech evolved in the UK via interviews from key Fintech founders, regulators and investors.
Eric van Kleij is now a well-known name in Fintech. His accomplishments include co-founding credit-card fraud alert company Adeptra (sold to FICO for $115M in 2012), creating Level39 — one of Europe’s largest hubs and accelerators for Fintech, and implementing the Prime Minister’s vision as the first CEO of the UK Government’s Tech City Investment Organization. However, he reminisces that things seemed a bit more grim just a few years earlier in the aftermath of the financial crisis: “I remember trying to explain to my daughters that we had failed them because we had allowed the wrong type of financial innovation to take place”
Eric’s reflections illustrate the key theme that this documentary conveys: the story of UK Fintech involves rising from the ashes where a devastating financial crisis revealed the opportunities that led to the creation of a robust fintech ecosystem.
To understand how this story played out, the documentary elaborates on various drivers for this evolution that can be summarized into six key ingredients.
- The Customer
In the aftermath of the financial crisis, there was an overwhelming drop of consumer confidence. The consumer had been betrayed by the very banks they trusted. As a result, for the first time, consumers were willing to look at alternatives to traditional financial services providers. Thus, even though the idea of alternate banks or peer-to-peer (P2P) lending would have been laughable only a few years ago, the consumer was now ready for Fintech players to emerge.
2. The Incumbents
Incumbents were under huge pressure — with many struggling to survive for the first time. Their profit-seeking innovations had led them down riskier (and less ethical pathways) which had exploded into the financial crisis. In their new focus to regain capital, most incumbents found themselves returning to the basics. This left innovation to newer players — an opportunity that Fintech players quickly capitalized on.
3. The Talent
Due to the pressures of the financial crisis, incumbents lost more than just their capital and customers — they lost key talent. Under distress, layoffs of talented individuals across skill levels were rampant. The documentary paints images of public transportation filled with individuals carrying boxes in hand after being laid off. This tragic challenge posed a unique opportunity for Fintech players to more easily access the best talent that the region could offer — channeling their underused brilliance towards a stronger purpose.
4. The Regulators
The documentary portrays the UK government’s response to the crisis as a contrast to that in the US in that far less money was invested into the economy in the UK. Though both these systems had their own pros and cons, the UK’s model led to an environment where the savings rate was driven down to 0%, but the borrowing rate remained high as banks attempted to recoup earnings to survive. This exorbitant spread that resulted from the macroeconomic and political decisions allowed space for Fintech disruptors who could offer cheaper rates — such as Zopa, the first peer-to-peer (P2P) lending platform.
The UK authorities also set up a unique regulatory body: Financial Conduct Authority (FCA). The FCA was tasked with the dual mandate to protect consumer interests and to ensure that consumers have adequate choice via competition. Unlike typical rule-based regulators that instill fear in any entrepreneur, the FCA consisted of flexible policy makers who encouraged shades of grey. They pioneered Project Innovate that encouraged dialogue with innovative new companies and pledged to change and evolve regulation in the interest of the consumer.
These unique regulatory responses to the financial crisis created a fertile environment for the rise of Fintech in the UK.
5. The Location
The city of London plays an important role in Fintech’s growth story in the UK. Fintechs require a delicate interplay between government, financial services and technology to succeed. In the US, this would involve shuttling between Washington D.C., New York and San Francisco. However, the UK has the unique benefit of housing all these players in one central hub: London. Furthermore, London allows access to companies and talent around the world because of its timezone and language. So, Fintechs born in the UK find a fertile ecosystem that can nurture them at an accelerated pace.
6. The Technology
With the rising popularity of the Apple iPhone and the App Store, mobile apps were inserting themselves into consumers’ daily lives. They had become comfortable listening to music on their phone (iTunes or Spotify) and traveling at the press of a button via Uber. Customer-focused servicing was no longer an add-on benefit — it was now table stakes. So, evolving technology prompted consumers to prefer Fintechs’ customer-oriented approach.
The path forward
The UK has already evolved to become one of the largest Fintech hubs in the world. However, as we look forward to the next decade, the documentary poses three key challenges:
- Sustainability and expansion: Fintech unicorns are already emerging in the UK. But, will these business models stand the test of time and, can they be exported globally?
- Playing with incumbents: As the economy has recovered, incumbents have shifted focus to digital transformation as well. Many incumbents are partnering or acquiring Fintechs. How will the market shares shake out? Will incumbents lose the battle over all? Or, will we see an interwoven ecosystem with room for incumbents and Fintechs?
- Response to politics: Amidst political uncertainty related to Brexit, strategy for Fintechs must be flexible enough in the short-term to deal with large shocks. The largest challenge seems to be dealing with access to talent and the relationship with customers in the EU market. How can Fintechs respond to political shocks while maintaining their competitive advantage?
