Fintech Takes the UK by Storm

The scene is straight out of the cliché: Bean bags litter communal areas, along with Xbox One consoles and an old-school gumball machine. Tiny basketballs fly through the air with alarming frequency, shot through nets on the walls as telephone calls are made via headsets and smart watches.

Plaid shirts, jeans and a desultory attitude toward shaving are de rigueur. Shoes are apparently optional, even more so at 4 p.m. on this iron-gray Friday, when the beer cabinet is unlocked and bottles of craft IPA are popped open at desks. They have a section in their budget dedicated simply to “fun.”

It feels like a Palo Alto dot-com, but this is one of the new breeds of fintech businesses growing up in London’s East End district of Shoreditch, particularly in the Tech City cluster. The company doesn’t want to talk on the record about what they’re doing—they’re more Tech Crunch than trade magazine, the sock-walking CEO tells me, to the horror of the agency PR person sitting in—but they’re involved in some of the more arcane aspects of risk and portfolio management.

Digitally native, agile, and employing people with more letters after their names than seems reasonable, it represents the youthful vigor of the start-up culture taking fintech by storm.

Growth Spurts
This is happening all over the world, but nowhere more so than in the UK, where it’s centered on London. Accelerators, incubators, hubs and other support mechanisms, such as Level 39 in Canary Wharf, have been thriving for a while now, and the numbers can’t be ignored.

“Simply, London has a central place in the global trading map—it’s a good place to be in terms of time zone, language, its legal system and other areas.” Shaul David, UK Trade and Investment

According to figures from UK Trade and Investment (UKTI), the arm of the government that assists small businesses with growing abroad and helps foreign firms develop in the UK, the value of investment in fintech within the country and Ireland, combined, grew eightfold from 2008 to reach $265 million in 2013. The year-on-year growth rate for that figure is double that of Silicon Valley in the US, though Silicon Valley still leads globally with about $950 million in venture capital funding in 2013, according to a study conducted by consultancy Accenture.

“London, and the UK as a whole, has a very strong and internationally focused financial services industry, and a deep level of expertise,” says Shaul David, a fintech specialist at UKTI’s Financial Services Organization. “There’s a thriving technology market that’s been developing for a number of years, such as in Tech City and other clusters, and it has both governmental and regulatory bodies based here. That unique combination facilitates dialogue between all of them, which has to happen in industries such as financial services where regulation can be seen as a barrier. And simply, London has a central place in the global trading map—it’s a good place to be in terms of time zone, language, its legal system and other areas.”

The response from UK authorities, and the established industry, has been strong. Boris Johnson, the mayor of London, recently extolled the virtues of the city’s fintech scene in a trip to Singapore, and brought along executives from companies such as fixed-income specialists Algomi to prove the point.

On the industry’s side, most major banks have innovation-focused projects. Santander, for example, recently launched a £100 million ($156 million) fund to invest in fintech start-ups; Barclays runs its own accelerator project for new businesses; and innovation challenges, hackathons, and other events have become so pervasive that it’s impossible to list them all. Critically, interest in keeping an eye on what’s being produced by these firms is reaching the very highest levels.

High Priority
The contrast between the Shoreditch start-up, with its broken-down elevator, and where I meet Sumeet Chabria, CIO of HSBC’s global banking and markets (GBM) division, couldn’t be more pronounced. HSBC occupies a monolithic tower in Canary Wharf, and visitors are subjected to airport-grade security on entering the building. I’m directed up dozens of floors to a waiting area that’s staffed by two corporate receptionists, and the interview is conducted in a wide-windowed conference room that overlooks the skyscrapers of London’s second financial heart.

But while senior figures from investment banks at a recent Waters conference expressed alarm at how these new entrants are attacking every aspect of technology related to financial services, and warned delegates that they had to be on the ball regarding them, Chabria is relaxed—excited, even—about the new wave of innovation.

“We have a group of people here at HSBC who have been brought together from GBM, from IT and from the wider business, to specifically work on the innovation front,” he says. “They are following this very closely, partnering with a number of firms, and there are a number of accelerator and incubation events that HSBC has sponsored in Asia and the UK. This remains a priority.”

It’s a typical story in other banks, most of which cultivate strong links with the emerging industry either directly through outreach and engagement, or indirectly through their own innovation groups that track the work being done inside the accelerators.

Project Innovate
Key to the growth of the fintech industry in London and the rest of the UK, outside of its position as a financial center, has been a supportive attitude from regulators. The UK Financial Conduct Authority (FCA) recognized the trend early on and launched Project Innovate, a multi-pronged approach to incorporating new fintech firms within the regulated environment. As part of the project, it recently launched the Innovation Hub, a forum where firms can receive support and advice directly from FCA officials, provided they meet a number of criteria when applying to it.

“The Innovation Hub is part of our commitment to support innovation by opening doors to those—regulated and not—who come with fresh ideas about how to deliver financial services,” says Martin Wheatley, CEO of the FCA. “This work levels the playing field by giving all firms eager to innovate access to our expertise so that the process of joining the financial markets or introducing new products does not seem so daunting.”

There are still hurdles, of course. Authorization by regulators is a complicated, arduous and often expensive task, one that might be suitable for brokers and banks, but is not necessarily within the reach of businesses at the start of their lives and with limited resources.

While Project Innovate is certainly a step in the right direction, suggestions that the FCA could implement a “badging” system to show progression through the stages of regulatory approval come up against concerns that this will compromise the FCA’s desire to foster innovation, but achieve its overarching mission of consumer protection.

Talent Acquisition
Part of the reason for this growth is the people involved. Investment banks have struggled in recent years to attract talent from top-flight universities, and graduates are often more inclined toward the hard-working but laid-back approach evidenced by firms such as the London start-up mentioned at the beginning, rather than the staid, suited-and-booted image that tier-one firms project.

Indeed, the problem is so acute that Goldman Sachs—famously described in recent months by CEO Lloyd Blankfein as a technology company—has been on the road in a protracted charm offensive at Ivy League colleges to attract engineering and technology students.

But while Goldman will never resemble Google in its working practices, HSBC’s Chabria says the traditional investment banking sector still competes strongly for talent, and it still offers a compelling proposition.

“More and more, the people who opt to join us say that they had another option, but something swung them our way,” he says. “It’s very interesting to see why they made those choices. It’s healthy. Every industry should compete—it drives us to be better and more competitive in the process. If you want to be a choice employer, then you have to offer the graduates and the young people starting their careers a compelling reason to join your team. It forces you to reflect on what that is. It’s challenging, but healthy.”

Of course, not all start-ups reflect the flip-flops and beanbags environment. While it is a romantic ideal, many are distinctly similar to the large-scale vendors currently operating in the market, and some take a negative attitude to the image their freewheeling colleagues can project.

More than one founder of a start-up interviewed for this feature expressed dismay at the long-term potential for firms that refuse to adapt to the expectations of their client base, saying that while the “Twitter-driven” culture may attract graduates and provide good fodder for the media, they would have to eventually adapt if they want to be taken seriously.

Bubbleology
It’s easy to be skeptical about the growth of these firms, but there is real money involved. Deutsche Börse, for example, recently acquired a multi-million-dollar stake in R5FX, a foreign-exchange (FX)-focused firm that resides within the Level 39 accelerator, while fellow Level 39 member and online-trading specialist eToro secured $27 million in funding from Ping An Ventures and SBT Venture Capital. These are not just Massachusetts Institute of Technology (MIT) alums, working in labs and producing grand ideas without substance, but real companies producing real products of interest.

The stunning growth of the industry, coupled with wider movements in the technology space, such as the absurd $19 billion price tag attached to WhatsApp, or the initial public offering (IPO) of Chinese online giant Alibaba, which attracted $25 billion, has prompted fears of a technology bubble and raised questions about the risk of engaging with the fintech boom.

Michael Cooper, CTO of the financial technology business of telecom giant BT, says there is naturally a lot of hype built into the world of start-ups as everyone wants to be the next IPO to strike gold, but failure is also part of the process, as there will naturally be more losers than winners.

“I think it’s getting a lot of hype, which is indicative of a bubble,” he says, but he adds that in the fintech space there are opportunities to provide goods that will have longevity.

“If I look at the reality of some of the financial markets, there are strong business drivers creating financial technology opportunities, such as the changing cost profile of some activities, the opportunities created by collaboration and consumerization,” Cooper adds. “There are sufficient, long-term benefits to be had that fintech will continue to grow.”

Salient Points

• The growth of fintech firms is plainly evident, with huge levels of interest and investment from financial services firms and beyond. In London’s Tech City alone, 15,000 new companies set up shop in the locale between April 2012 and April 2013.
• The response from the government and regulators has been to work with the new boom. The UK Financial Conduct Authority’s (FCA’s) Project Innovate, for instance, seeks to guide the development of firms that work with finance-related technology on a road to authorization through initiatives such as the Innovation Hub.
• While clearly concerned by the ability of firms to grab market share to a certain extent, the industry has also sponsored accelerators and fintech innovation contests to an unprecedented degree. While elements are disruptive, most say, many are complementary to what they do.
• This explosion is not just happening in London—the West Coast of the US and New York are natural competitors, along with technology campuses in areas such as Indonesia and Malaysia. However, the lion’s share of investment is currently geared toward London and other UK locations, such as Belfast in Northern Ireland.