Has the UK’s fintech sector run out of steam?

Since Brexit, the UK Government has been actively supporting fast growing sectors it believes will redefine the country’s position on a global stage. With tech now a principal industry, financial technology offers immense potential, with the UK regarded as a global hub for fintech innovation, productivity and growth.

It is by far the most common industry for UK tech unicorns, with over 20 fintechs achieving a company valuation of over $1 billion. Looking at capital flows, UK fintech investment rose to £27.5 billion in 2021. What’s more, there were over 600 private equity, venture capital and merge and acquisition deals last year.

Core to the UK’s fintech success has been its collection of high-growth startup businesses. With a high concentration in London, the UK has become the capital of European fintech, leveraging its position as a financial services hub and actively encouraging startup growth. However, there are some concerns that the fintech sector is growing at an unsustainable rate, and if not slowed down, could result in an event similar to the dot.com boom in the late 1990s.

The questions then are whether a fintech bubble is forming? And if so, is the bubble on the verge of bursting over the next 12 months?

A decade ago, the media narrative surrounding fundraising stories was entirely different to the coverage we are seeing at the moment. Not only was there a positive perspective on the role of equity and debt finance in offering SMEs new avenues of growth capital; funding rounds were also seen as a reflection of an innovative and growing tech sector. Investors were willing to back startups offering innovative financial technology, even though it was questionable as to whether they’d be able to compete with the big banks.

In 2012, there were less than 500 equity deals in the UK, amounting to just under £2 billion. Jump forward to 2020, and the number of equity deals numbered over 2,000 and was worth an accumulative £8 billion. In one respect, these are impressive figures from the British Business Bank. Domestic and international investors are attracted to the SME talent on display in the UK, and there are evidently plenty of companies to choose from.

The rise of Web3.0 also has people excited. From blockchain technology through to cryptocurrencies, NFTs and the metaverse, a new wave of tech innovation is being explored by startups. This is leading to impressive valuations and multi-million pound funding rounds from investors keen to back Web3.0 technologies.

However, there are concerns valuations and funding rounds do not reflect the true value of tech companies. While company valuations are already complex to determine, the criticism is that tech businesses like fintechs have not been around long enough to credibly establish themselves as challengers to established financial institutions. The pace and scale of growth is too high, and like the 1990s, there is a fear that things could come grinding to a halt.

In one respect, these concerns are valid. Buy Now, Pay Later fintech platform Klarna’s most recent valuation has dropped from $46.1 billion to just $6.5 billion. There have also been high profile layoffs across the tech sector, with fintech companies also affected. However, such news shouldn’t overshadow the success stories still on display.

Naturally with any high growth industry, there will be a period of consolidation as fintech companies become integrated into the wider financial markets. This will be the case particularly here in the UK. Some companies will lose out to competition, while those who are innovative, vocal and able to seek out new opportunities will continue to strive.

However, we should not forget how transformative and disruptive fintech has been in the UK over the last decade. The way consumers, investors and businesses manage and access their finances has completely changed, offering greater effectiveness and efficiency. At the same time, they are empowering a new generation of customers and clients, which is to the ultimate benefit to wider society.

The fintech journey has only just begun, and here in the UK, we are fortunate enough to have front row seats.

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