It seems barely a day passes without news of another fintech raising or seeking to raise funds. And there is no shortage of routes to securing financial backing. This week, Nutmeg, the online wealth management platform, followed in the footsteps of Monzo, Freetrade and Revolut in announcing it plans to attract £10m through crowdfunding. In February, OakNorth secured $440m from Softbank, the highest level of backing for a fintech in Europe to date. In fact, overall venture capital and private equity investment in UK fintech reached a new high of $3.8bn in 2018 putting the sector in third place globally for funding behind China and the US, according to figures from Innovate Finance.
The scale of this investment is testament to the confidence investors have in the ability of fintech to disrupt the traditional financial services industry. And given the dominant role financial services play within the overall UK economy, it stands to reason that fintech has a commensurate importance. It is not just the venture capitalists who have recognised this. In its final report following the Mortgages Market Study, the FCA called for much greater innovation in the way consumers are served both by lenders and intermediaries – innovation which will undoubtedly involve fintech participation.
The same is true for the banking sector. While digital disrupters such as Monzo have gone mainstream for retail customers, Banking Competition Remedies has demonstrated its faith in the ability of digital players to shake up the SME banking market. Its Capability and Innovation Fund has a war chest of £425m available to challengers and fintechs to help them develop their offerings to the benefit of this historically under-served sector of the banking market. In late February, Pool A of the fund awarded neo-banks Starling and ClearBank, partnered with Tide, a combined £160m. It is likely that other fintechs and digital banks will win favour in the remaining three pools of funding. While pool B has just closed to applications, pool D remains open until the end of April – a window of opportunity that should not be overlooked by fintechs seeking to bolster their development.
Pool D is aimed specifically at fintechs and comprises five tranches, each worth £5m to help them facilitate the commercialisation of technology relevant to SMEs. While £5m may seem modest compared to some of the sums raised by other more established players, this should not discourage firms from applying, indeed there are very compelling reasons why firms should file their application. These funds can be put to use across a broad range of business development initiatives from recruitment to marketing to investment in new service offerings. Starling for example has announced it plans to use the funds it secured from pool A to open its second office in Southampton and to recruit 50 software developers and 100 customer service team members while ClearBank and Tide will invest in brand-building, removing friction for those wishing to transfer their custom and developing new services.
An additional advantage of funding from the Capability and Innovation Fund is that these monies do not need to be repaid, as long as they are put to use as proposed in the successful firms’ applications. Nor is there any loss of autonomy which is frequently contingent with private equity and venture capital. A further commercial benefit is the strong public endorsement which comes with being successful in winning a grant, perhaps less tangible but a powerful marketing tool in building a young brand. And as one door closes, another opens. Pool C will accept applications from the 1st of May providing four tranches of £10m aimed at boosting the expansion of business offerings including lending or payments services to SMEs.
For both Pools C and D, the prospect of partnership opportunities with larger players, including Pool A and B winners, could help solve the distribution challenge faced by many scaling businesses as they seek to get their product or service in the hands of enough customers´ hands for it to become mainstream. Both Metro and Starling have made significant commitments to work with FinTech partners, and ClearBank/Tide, as a utility service provider, is an ecosystem designed to bring in further collaborators.
The appetite for investment in fintech seems to be as strong as ever with private equity investors and venture capitalists queuing up to take a bite of the UK’s vibrant fintech sector. However, businesses that need an injection of funding to take them to the next stage of their growth would be well advised to seriously consider the Capability and Innovation Fund and its offer of effectively free cash. The window of opportunity is still open but will not remain so indefinitely.