Tech companies raised $1bn in investment last year
A whopping £20bn – that’s how much the fintech industry annually contributes to the UK economy. Not just this, this hot sector directly employs 135,000 people making Britain the fintech capital of the world.
The meteoric rise of fintech companies has been widely attributed to frustrations dealing with banks.
Take small businesses, for example. Speak to any entrepreneur and they’ll tell you how challenging it’s been for them to get funding from banks for scaling their businesses. Dealing with banks often leads to business owners making their way through a minefield of paperwork, redtape and lengthy processing times.
There are stats to back this claim. A recent survey by British commercial insurer RSA found that more than half of new businesses fail within five years with bank lending issues being a vital reason.
At a time when 99.2% British businesses are small or medium-sized enterprises, the UK economy simply can’t afford to grow without these firms.
Enter fintech companies.
Companies like MarketInvoice, one of the largest peer-to- peer lenders in Europe, and money transfer service TransferWise, one of London’s handful $1bn tech start-ups, have helped small businesses grow exponentially and penetrate international markets.
Be it invoice financing, loans, payments or advice, fintech companies are giving banks a run for their money.
According to a report by consultancy firm Accenture, tech companies raised almost $1bn in investment last year to compete with British banks.
The research found that more than 90% of this investment was going to be used by fintech companies who are challenging traditional banks.
The fintech sector has gained clout because it’s disrupted an industry that was clogged by traditional and outdated methods.
The other factor making customers choose fintech companies over banks is transparency.
Companies like MarketInvoice and Funding Circle have dared to publish their loan books online giving customers a chance to access transaction figures. One can never imagine banks doing this.
It’s important to note that banks and fintech companies have a love-hate relationship. While some fintech businesses are locking horns with banks over customers, others have buddied up with banks to grow their business.
It’s probably apt to say that banks and fintech companies are the “ultimate frenemies”, the share a cordial friendship and a fundamental rivalry.
What’s driven this weird dynamic is the different types of fintech companies.
According to Accenture’s recent report, “Fintech and the evolving landscape”, there are two types of fintech companies: the competitive and the collaborative.
Competitive fintech companies are those that directly challenge banks and target their customers. These companies might not have the resources and experience that big dogs boast. However, they’re eating banks’ lunch every day.
Collaborative fintech companies, on the other hand, are those that offer services to banks to augment their market position and better serve customers.
A great example of this is GoCardless, a fintech firm that helps organisations accept recurring payments. As the company helps those who want to take payments directly from the bank accounts of customers, it’s essential for GoCardless to work with banks to run its business.
Banks too are working with fintech companies to become a part of innovation happening in the sector.
In July 2014, Santander launched a $100m fund to “get closer to the wave of disruptive innovation” in the fintech sector. Barclays followed suit and launched a fintech incubator in London.
Collaboration is becoming the order of the day, according to the above-mentioned Accenture report.
In 2015, investment into fintech companies looking to collaborate within the industry soared by 138%. Collaborative fintech firms now account for 44% of all fintech investment, up from 29% last year.
On the other hand, fintech companies directly competing with banks was up only by 23%.
That said, fintech firms rivalling banks should work hammer and tongs towards disrupting the sector.
Challenging obsolete norms, models and cultures would definitely supercharge growth within the industry and transform the financial sector forever.
Many would argue that fintech companies are too small to succeed and banks are too big to fail. But isn’t that what everyone said about game-changing yet obsolete bigwigs like typewriters, floppies, VCRs and CDs?
Watch this space.