Two UK-based fintechs – Revolut and Oaknorth – are in discussions with Softbank’s Vision Fund to secure significant investment in their next round of fundraisings. As the fund’s first commitment to British fintech, this is further recognition of the role digital banking is set to play in shaping the future of the industry. It also underlines the UK’s position as the fintech capital of Europe: according to research prepared by Dealroom for Tech Nation and the government’s Digital Economy Council, the UK has seen the entrance of some 60 fintech unicorns – companies with a valuation $1bn or more – since the turn of the millennium.
The UK´s banking sector is entering a new chapter in its history. The dominant incumbents are being forced to react to a growing cohort of new market entrants offering customers a digitalised experience more in tune with the service they have come to expect in other aspects of their lives. At the same time, technology companies related to the sector are evolving their propositions to compete with tradition financial services providers. Square´s recent move to develop its point of sale payments business to offer banking services through its Cash App is evidence of this. Meanwhile, the news that Starling is to have a high street presence shows that even the traditional home of banks is under threat.
Against this backdrop, it is unsurprising that investment funds like Vision are vying for a chance to profit from the future of finance. This is a huge boon to fintechs that have already reached critical mass, but for many the sums of money on offer – in the case of Vision, a minimum participation of $100m – are far in excess of their needs. At the same time, other young businesses may not feel culturally comfortable with the reduced autonomy that might be contingent with such backing.
However, there is another window of opportunity for fintechs and challenger banks to secure funding more aligned to their requirements. The Alternative Remedies Package Capability and Innovation Fund, part of the Government´s commitment to create a fairer playground for SME banking in recompense for the RBS bail out, is offering £425m to challenger banks and fintechs operating in this market.
Those successful in securing funds can deploy them across a broad range of business development initiatives, and as long as they do so appropriately, there is no commitment to repay their backing, nor is there the loss of autonomy associated with private equity funding. And while aimed at reducing the major banks´ strangle hold on the market, the ARP opens up the possibility of much greater collaboration with fintech disruptors as traditional players team up with innovative fledglings to retain customers who might be tempted to switch to a new banking proposition. Softbank’s Vision Fund big-ticket commitment to UK fintech is a welcome vote of confidence in the sector, but the Alternative Remedies Package shows that financial support is in reach for a much wider range of innovative, young businesses.