FinTech: Supporting growth and overcoming the obstacles to investment
  • Axe Ali, Partner |
4 min read

As a fast-growing sector, you wouldn’t think that Fintech companies had any difficulty securing funding. Our analysis highlights almost three quarters (72 percent) of founders feel they don’t have sufficient capital to scale (Independent Fintech Strategic Review, KPMG research, 2020). A lack of investment, particularly at the growth stage, from domestic sources has increasingly pushed entrepreneurs to look elsewhere for funding.

At present, the majority of investment into UK Fintechs is coming from non-domestic capital. That means foreign investors are enjoying the proceeds, which can be substantial. Over the past ten years, the largest ten FinTechs achieved returns of 4.2x on average (Double Prime LLP analysis of Beauhurst data from 2010 to 2019.)

It isn’t only on the funding element that is limiting their growth. Two-thirds (66 percent) of FinTech founders would consider moving their company elsewhere – or starting another company elsewhere – if another country provides better incentives or a more favourable regulatory and compliance regime (Independent Fintech Strategic Review, KPMG research, 2020).

There is also a risk that promising Fintech companies find the lack of support around scaling and achieving growth so daunting, that they sell early rather than build to a position of market leadership.

There’s a real danger here of the UK economy, and UK investors, missing out.

So, how can we encourage greater domestic investment and make the UK the destination of choice for FinTech? 

The Kalifa Review – a roadmap for change

HM Treasury recently released the Kalifa Review. This sets out the findings and recommendations of the Independent Fintech Strategic Review. The review took a holistic approach, with chapters  covering Investment, Policy and Regulation, National Connectivity, International Attractiveness, and Skills and Talent.

Our Vice Chair of Financial Services, Kay Swinburne, served as the Policy and Regulation chair of the review. Hopefully, you have already seen Kay’s article on how policy and regulation can support and encourage FinTech growth – if not, please do take a look.

As part of the review, I was pleased to take on a senior advisory role on the Investment chapter. We looked at measures which could be taken to support Fintechs across the different phases of development, and how to address the capital issue. 

When I talk to FinTech founders, there are two key questions I ask them: Do you have a clear idea of what you want your business to be? And, do you have a roadmap for getting there? All too often they don’t.

They start with a great idea, but they need more than that if they’re going to attract investors and grow. Correspondingly they need the right investment, both in terms of capital, advice and talent, and a supportive ecosystem if they are to realise their true potential.

While the Fintech sector is a hugely attractive market for investors, it’s a complex and regulated environment, and can create a high barrier to entry from both a founder and investor perspective.

Supporting FinTechs across three stages of development

In the review, we identify measures that could overcome the obstacles facing Fintechs and unlock investment at three key stages of their development:

Seed and start-up

Expanding state aid schemes, such as R&D tax credits and tax relief schemes, could provide entrepreneurs with more reassurances that they can secure funding. For example, expanding R&D tax credits could increase partnership opportunities with financial incumbents. Expanding them to cover the cost of financial data sets would be particularly welcomed by founders and investors. Expanding reliefs to regulated FinTechs, meanwhile, could help level the playing field with other technology companies that face fewer barriers to entry.

Growth

The creation of a market-led specialist £1 billion FinTech Growth Fund would deliver a meaningful level of capital and create a strong pipeline of Fintechs with the support to translate into global players. The fund would be backed by large UK financial institutions, specifically pension funds and insurers, with buy in from trade bodies and regulators. The fund would be supported through wider regulatory reform – many are already in discussion or progress – to attract domestic capital. As well as providing capital, the fund could provide key talent and skills around operational support for development and growth, a key factor in achieving scale.

Maturity and expansion

In the review, we propose a number of reforms that could strengthen London’s position as a go-to for Fintech public listings and investments and to ensure that a virtuous circle of reinvesting into the economy is maintained.

These include:

  • reducing the premium free float requirements from 25% to 10% for a limited time after IPO or having a minimum threshold
  • enhancing governance rights by accommodating a golden share or dual class shares structures
  • maintaining the relaxation of pre-emption rights introduced in response to the COVID-19 crisis, allowing companies to undertake issuances of up to 20%
  • establishing a global family of FinTech indices to improve understanding and enhance visibility of the sector, and to attract passive index tracking hedge funds and investors.

Seize the opportunity

Fintech represents a huge opportunity for the UK. By encouraging more UK-based private investors to back Fintech, the sector could help drive economic growth. It could be a source of job creation, skills and talent development, and provide export potential and tax revenue benefits.

If you’d like to discuss the challenges and opportunities for Fintech, please do get in contact. I’d love to hear your views.