Fintech unicorns in the waiting room 

Posted on: April 19th, 2024 by Morgan Arnold

Fintech in Focus is part of The MHP Financial Services Pulse. 

This week’s gathering of the biggest players in UK fintech has offered a useful ‘check-up’ on the health of the sector.

The fintech ecosystem in the UK has been through a challenging 18 months with company valuations slashed, headline redundancy rounds announced, and question marks over paths to profitability. Despite the UK retaining its crown as the best location in Europe for fintech investment, this period has ‘spooked’ many – even some of those who have been the market’s biggest advocates in recent years.

Some suggest that the UK has lost its lustre for fintech during this period and is focusing too much on regulation while increasingly losing talent to Berlin and Paris. Yet, this pessimism was not shared by those attending the Guildhall this week with many seeing clear signs that the UK market is beginning to regain its confidence.

Underpinning this growing confidence, we are seeing two parallel story lines playing out simultaneously. One is being led by larger, more established players who have surfed the digital banking wave over the last two decades and are looking for support over the coming years to reach the exit door via an IPO. The second is the ‘billion dollar’ question that many are now asking: where will the next pocket of financial services innovation emerge in the UK?

For onlookers, notably, this week’s event started with the news that UK neobank Zopa Bank had turned a profit and was now eyeing an IPO in the next few years. This is revealing for a few reasons. First, it shows a rebound in performance with the sector’s relentless focus on profitability now starting to bear fruit for fintechs who have had to right-size their teams, refocusing as funding markets slowed. Second, Zopa is the latest fintech to join the IPO ‘waiting room’ which includes Starling, Revolut, and Atom Bank.

While fintechs are biding their time for the perfect window to list, the growing discussion around exit strategies – something rarely spoken of 12 months ago – highlights increased optimism at the top of the sector. This optimism is one motivation for Monzo, Revolut and others in the Unicorn Council for UK Fintech (UCFT) to call on the Government this week to ditch its tax on share trading. If the Government wants these firms to list in London, these firms are telling them that they will need some support to find the exit door.

On the second ask, the sector’s leaders are increasingly aware of growing competition between London and its EU rivals. Many know that innovation and technological development is key to keeping the UK market in pole position – this is becoming even clearer as the artificial intelligence opportunity grasps the sector. As a result, industry leaders are looking to old playbooks and new to find opportunities in the market.

In particular, the launch of an Open Finance Taskforce will provide recommendations to the UK Government on leveraging financial data to improve SMEs’ access to credit. This is a “quick win” for the industry, leveraging the UK markets strength and expertise in open banking. The Treasury also hopes that the upcoming National Payments Vision will further push the sector forward and create greater direction for the payment ecosystem.

But, to drive innovation forwards, you need knowledge and talent to enable technological development. Ernst & Young’s report on Monday that the sector’s boardrooms lack the AI ‘know how’ is a clear warning shot to policymakers and industry leaders that they need to do more attract and retain the best talent. EY’s research found that 47% of fintech CEOs believe their board lacks the essential skills and experience related to Generative AI.

Both of these discussions focus on how the sector can thrive over the next five years, and leverage the depth and maturity in the UK market. They also reflect growing criticism that the UK doesn’t have a joined-up approach to its fintech strategy. This echoes the sentiment of Revolut’s UK chief who yesterday noted that New York’s concentration of financial services talent posed a significant risk to the capital.

For the sector’s leaders and policymakers, creating a joined-up approach that compliments all the component parts of the sector and works with the wider financial services industry is key. Ultimately, this will dictate whether the next decade of fintech innovation in the UK will succeed, or if the sector needs stronger medicine.

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