The UK economy has been the subject of much more negative coverage in the past few years, but it has surpassed the weight when it comes to incubation of fintech businesses.
This year’s FT1000: Seven of the top 20 fintechs, banks and insurance companies in Europe’s fastest-growing companies ranking are based in the UK.
Companies such as Allica Bank, which focuses on small and medium-sized businesses, highlight the broad expertise and fertile position of Payments Tech Company Zilch, 11th and the UK fintech companies (12th).
“The UK has been a very strong magnet for founders of all regions of Europe to create financial services businesses,” said Alokik Advani, managing partner at Fidelity International Strategic Ventures.
Details of Europe’s fastest growing companies:
The specific success of the UK fintech sector lies in the combination of behavior and regulation, with some useful coincidences. In the 2010s, the UK was ahead of both the US and Europe when it came to digitalizing money. For example, “chips and pins” were introduced in the UK in 2004 and became mandatory in 2006. The US is years behind this.
Fintex flourished with the help of regulatory support, particularly after the 2007-2008 financial crash, when banking regulators decided to open the sector to new entrants. Prudential regulators have created a “startup” unit to support companies seeking to obtain banking licenses, while Financial Conduct Authority has launched a digital sandbox to nurture new fintech companies.
The creation of new banks in the 2010s, such as Monzo, coincided with an era of ultra-low interest rates, and caused a flood of venture capital investments as it was flooded with cheap money.
Finally, the Covid-19 pandemic has accelerated many of these trends, prompting a sudden, sharp decline in physical cash use as fear of pollution spreads.
The subsequent rise in interest rates was introduced to tackle the post-pandemic inflation burst, giving many bank startups a quick burst of revenue.
“Neobanks failed until interest rates returned,” Advani says. Suddenly these companies were able to earn more net interest income. The difference between the interest charged on the loan and the interest paid on the deposit.
The result was a prosperous, deep fintech sector that continues to create and develop some of Europe’s largest growing companies despite changes in interest rates and increased regulations. But there is pressure for these companies to find ways to generate profits in a sustainable way.
For Allica Bank, the secret of success has been focusing on small businesses, a often neglected part of the market. With 680 employees, the company reported a combined annual growth rate of 652% between 2020 and 2023, with revenues increasing from 228,000 euros in 2020 to 100 million euros in 2023.
Challengers and specialized banks accounted for 60% of all SMEs last year as tighter regulations prompted UK High Street Banks to withdraw from SMEs last year.
For Allica CEO Richard Davies, the current economic situation in the UK is focused on contributing to the sector. “I think the negligence of (small businesses) is part of the UK’s economic growth puzzle,” he says.
This growth issue is one of the biggest challenges for the UK economy. It is less than 20 companies listed in London last year, with fewer stock market additions since 2009. A lack of listings makes it difficult for private equity to affect fundraising for exit companies.
Persistent headwinds that blocked the pipeline of exits, funding and trading activities have made venture capital a recovery tense, according to Pitchbook’s third quarter venture monitor report. “As liquidity remains elusive, more and more cautious venture investors have tightened their standards and chose quality over quantity,” the report states.
Nevertheless, the best companies are still able to find funds and are agreed executives. “A lot of capital is available when you are perceived as a high-quality winner,” says Ben Stanway, CEO and founder of MoneyBox. He added that there is a fork of companies now, and companies that are deemed to find capital much more difficult, are a fork of companies. “The premium is paid to companies that are perceived as winners.”
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However, many of these companies are forced to engulf valuable scribes as a result of the pandemic boom in fintech investment. For example, Klarna’s valuation hit just a year later, when it was Europe’s most valuable startup from $46 billion in 2021.
“A good business can raise (finance), but it offers a huge discount on places where the high water mark was,” says Philip Belamant, CEO and co-founder of Zilch. “Due diligence is much deeper than we saw in 2020.”
Despite the success of these companies, the challenges are not over for these companies. According to Davies, one of the biggest hurdles is how to make sure every part of your business is expanding at the same speed. “How to hire the right talent quickly enough, how to place the right structure, how to maintain the culture, how to improve the way we work. It’s a constant battle.”
