With investment in UK fintech firms increasing year-on-year, market participants are debating just how new prime minister Boris Johnson might affect the industry.
“I believe the new PM is increasing the level of risk and, in the short-term, reducing the level of return. That’s a double-whammy. So, it’s highly likely that investment in fintech will be hit if there’s a hard exit from the EU,” said Tony Craddock, director general of the Emerging Payments Association, over email.
Johnson pledged £300m of new funding for Scotland, Wales and Northern Ireland in late July, some of which would be going to the Northern Innovation Hub, which has a focus on emerging technology. The new prime minister called London the “fintech centre of the world” and “at the forefront of financial innovation” during trade missions as the Mayor of London in 2014 and 2015.
For Aftab Malhotra co-founder of Growth Enabler – an AI-powered b2b marketplace – the path to boosting fintech investment in the country is clear.
“An active focus on cutting corporation tax, shrinking the income higher rate tax band, and the bullish move to increase trade with the US four or five times the current baseline, suggests that a trend that will boost economic growth and attract new venture and private equity investment into high-tech sectors.”
For James Butland, vice president of global banking at Airwallex, Johnson’s appointment won’t have a major effect. “We’re on our third prime minister in as many years. [Johnson] is prepping for a renegotiation of things with Brussels after the summer break and positioning himself as a no deal PM.” The fintech sector in London, he adds, has always been driven by innovation and the ability to recruit talent, not necessarily by political will.
According to an Innovate Finance report, $2.91bn was invested in UK fintech startups in the first half of this year. The figures represent a 45 percent year-on-year increase from 2018. Around 85 percent of the investment went to late stage venture capital (VC) and private equity rounds, with three percent going to angel and seed funding and 12 percent to early-stage VC.
Rounds for Greensill Capital ($880m) and OakNorth ($440m), both conducted by SoftBank’s Vision Fund, represented the largest deals in the first half of 2019. Aside from OakNorth, challenger banks Monzo ($147m) and Starling Bank ($89m) also saw funding. The payments and FX sectors also saw investment, with Checkout.com ($230m), WorldRemit ($175m) and GoCardless ($76m).
While investment size has increased, the number of deals has declined since the start of 2018. 123 rounds were completed in H1 2019, compared to 179 in H1 2018, a 30 percent year-on-year decrease.
While Johnson might not have an immediate impact, Butland believes the biggest threat to the fintech market in London is the lack of movement around Brexit.
“One of the things which surprised me about the Innovate Finance report was that investors are still realizing the value of these fintechs in London even with this uncertainty. Still, I don’t think this limbo is helping anyone. Brexit has been a huge distraction.”
Craddock also believes that any current uncertainty will be short-lived. “I believe there’s a good chance that after the UK has left the EU – and we discover that it’s not quite as bad as people feared – perceptions of risk will fall within a few months,” he said.
“I also believe the potential returns from being outside the constraints of the EU will be greater than at present. This is because, for fintechs, the market is global. The UK has proven its ability to create strong trade corridors outside Europe in the past – and it can do so again. That means we have the potential to see long-term investment in fintech in the UK return to its pre-Brexit levels and, quite possibly, soar above them significantly.”
Butland agrees that London’s status as a global financial hub will protect it. “[In the event of a no deal Brexit] things won’t change overnight. It’s going to be five, 10, 20 years until we see real change in the market. But London is a global financial centre and I don’t think that’s going to change in the future. There’s no other European Capital on the size and scale of London. It’s difficult for me to imagine that in 20 years’ time [London] is going to be replaced by a city like Dublin.”