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A fork in the road: The future of UK fintech Sector series

A fork in the road: The future of UK fintech

Artificial Intelligence may be leading the agenda when it comes to the future of technology, but fintech remains the sector with the most compelling success story for the here and now. A sector in flux

Businesses in the sector contribute more than £10 billion to the UK economy every year – supporting 76,000 jobs 1 . Added to this, its recent growth has been spectacular; in 2020 the UK had just two fintech unicorns (startups worth more than $1 billion), while today there are more than 20. Fintechs tend to outperform firms in other sectors too, with an annualised growth rate of 16% over the past decade, against 1.3% for the average SME 2 . While there are geographical hot spots for fintechs to thrive, from Edinburgh to Birmingham, the sector remains relatively location-agnostic, with a third of all fintechs headquartered outside of London. As such, it’s a sector with huge potential to drive prosperity across the UK. Indeed, Leeds was this year chosen to host the £5.5 million Centre for Finance, Innovation and Technology – a new national hub for fintech excellence. The UK has a natural advantage in this sector, having long been a dominant force in international financial services, and with a wealth of technical talent – both homegrown and imported. This has made it a magnet for investment; with only the US attracting more fintech capital.

But it hasn’t all been smooth sailing. The collapse of the Silicon Valley Bank caused concern for many, while the wider economic environment appears to have cooled investor appetite, limiting the availability of funding at a time when interest rates are impacting valuations. Against this backdrop, we commissioned this report to uncover the ambitions and anxieties driving decision making in fintech firms across the country. We surveyed more than 250 senior decision makers within the industry, and the current economic uncertainty is clearly reflected in their responses. We’re happy to share our findings with the aim of supporting the sector through this uncertainty and to boost those leading from the front. Dan Conway Partner Restructuring Advisory

The UK has a natural advantage in this sector, having long been a dominant force in international financial services, and with a wealth of technical talent – both homegrown and imported. That has made it a magnet for investment; only the US attracts more fintech capital.

1 through%20the%20global,76%2C000%20jobs%20to%20the%20economy. 2



A fork in the road: The future of UK fintech

A fork in the road: The future of UK fintech

For the majority of fintech businesses the valuation landscape has been positive, with 43% having increased, 29% remaining unchanged and 23% experiencing a decrease. Winds of change

How has the valuation of UK fintechs changed over the past year?

Fintech may be one of the most dynamic and fast-growing sectors in the UK, but it is in no way immune to the variables of global economic uncertainty. While the UK is still a global leader in attracting investment, rising interest rates and elevated inflation have had consequences, not least the tightening of capital markets. Indeed, the elevated cost of finance has likely made fintech a less attractive investment opportunity, as lenders anticipate better or safer returns elsewhere. As such, UK fintech investment in 2022 was less than half that in the previous year 3 . And our survey found that more than half (52%) of fintech firms have seen their value stagnate or decrease in the past 12 months – though we should note that 43% said the valuation of their business had increased. Downward pressure on valuations likely reflects a perception that valuations had overheated in recent years and were due a correction in line with the wider macroeconomic environment. Likewise, three in five (60%) have seen their growth trajectory slow or stay the same in the past year. One in 10 (12%) said their business was no longer growing or was in decline. The market has seen a shift in strategy since the height of the pandemic, when there was a buzz around consumer-facing fintechs. Fast forward three years and, with

consumers finding their spending power restrained amid a cost-of-living crisis, B2B models are being viewed as a more certain path to growth – particularly those that require fewer customers or utilise subscription models that provide some certainty over future income. It’s telling though that when we asked firms what had been the biggest operational or cost pressure on their business over the past six months, there was no stand-out answer. Respondents gave a broad spread of responses, reflecting the challenging conditions they are operating in. Many anticipate that the impact of input costs will recede going forward, with a quarter (25%) citing it among the biggest pressures of the past six months, but fewer than a fifth (19%) expect it to remain so in the six months ahead. However, interest rates will remain a consistent challenge, flagged by 22% as a headwind both in the last six months and for the next six months. And they don’t expect any respite from elevated energy prices – a challenge cited by 19% for the last six months and 21% for the half year ahead. While fewer firms think hiring staff will be a pressure going forward (13%) as it has been in the recent past (20%), they believe higher wage costs (18%) and challenges in retaining staff (17%) will remain.




A fork in the road: The future of UK fintech

A fork in the road: The future of UK fintech

Ranking the biggest operational or cost pressures for fintechs over the next six months

Female founders lead from the front Analysing this research, it was notable that female leaders were more likely to be enjoying success. These results should serve as a helpful reminder in an industry where women have historically been underrepresented in senior roles and which has faced criticism for its above average gender pay gap.

Unsuprisingly interest rates and energy costs ranked top amongst the biggest pressures.

1. Higher interest rates 2. Higher energy costs

6. Challenges retaining staff

11. Weaker customer demand 12. Challenges hiring staff 13. Exchange rate fluctuation

7. Investor uncertainty 8. Greater competition

3. Higher input costs (other) 4. Higher real estate costs 5. Higher staff wage costs

9. Meeting existing regulation 10. Meeting new regulation

“The UK is blessed with innovators but an unfortunate bi-product is that there’s lots of competition and duplication in the market. At the same time, investors are rightly being more discerning about how much they put up and what say they have in the running of the business. “The FCA is also getting tougher on regulation and my experience is that too many fintechs see themselves as start-ups and therefore don’t nail compliance early enough. “Those that are successful are the ones that remain focused and see themselves as addressing a need rather than looking to simply build a sellable business around a product. If you combine that with some proper corporate governance and the support of a good network, it is much easier to generate top line revenue as well as a healthy P&L.” Andrew Doukanaris is the founder and CEO of specialist fintech consultancy, Flotta. He established Flotta following a career that involved senior roles with Visa, JCB International and Chevron/Texaco: Emmanuel Riou is a partner at Eight International, a global network including FRP and other international advisory specialists: “Globally, the fintech sector navigates a multi-faceted landscape of international regulation. While regulatory frameworks aim to promote stability and protect consumers, they often pose challenges for fintechs themselves. Compliance with stringent regulations can be resource-intensive and requires significant investment in technology, human resources and legal expertise. “However, it’s important to strike a balance between regulatory requirements and fostering innovation. To create a coherent and globally harmonised regulatory framework, co-operation between governments, regulators and industry stakeholders is essential. Such harmonisation wouldn’t only simplify operations for fintech companies, but also create a level playing field across jurisdictions, promoting market growth and cross-border co-operation.”

55% 34% 44%

While 55% of female decision makers said their firm had grown in value in the past year, for example, just 38% of males could say the same.

A third (34%) of female fintech leaders also said that their growth had accelerated in the previous year, contrasting with just a quarter (27%) of male decision makers.

And 44% of females expect revenue growth to accelerate in the year ahead, against just 35% of the males we surveyed.



A fork in the road: The future of UK fintech

A fork in the road: The future of UK fintech

Contrasting health in the market

An uncertain future despite growth expectations

Sadly, there have been some high-profile UK fintech failures as the funding environment has become more challenging over the past 12 months. Given wider market conditions, it seems likely that more will follow. However, despite this, and the conservative view on valuations already discussed, revenue forecasts appear more upbeat. Almost three-quarters (70%) expect to keep growing their revenues over the next year, though almost half (45%) of that group expect their growth to slow. A quarter (24%) expect to maintain their current rate of growth while just 7% expect their revenues to drop. Notably, confidence was highest among northern firms – particularly in those based in thriving fintech clusters, such as Manchester and Leeds. Some of this confidence may be derived from the industry’s ability to attract foreign direct investment; research by the City of London Corporation found fintech was the largest source of financial services overseas investment in the UK during 2022, for example 4 . With such bullish views on revenue growth, it’s perhaps surprising that almost half (48%) of those we surveyed weren’t confident in their ability to trade through the next six months – perhaps linked to their funding arrangements. Smaller firms clearly perceive themselves to be more vulnerable; just a third (36%) of

firms with one to 10 employees said they were confident that their business will be able to continue to trade through the next six months, compared with 83% of firms with 250 to 500 staff. Given this uncertain outlook among start-ups and scale-ups, it’s reassuring for consumers and the wider industry that each of the troubled firms we surveyed said that they had a wind down plan in place. However, given the Financial Conduct Authority’s (FCA) attention to firms’ shortcomings in end-of- life planning, it’s worth noting that a quarter weren’t confident that their plan would enable them to wind down in an orderly – i.e. solvent manner. The contrasting health in the market was also apparent when talking to founders and senior decision makers about their future plans. Three in every five firms (61%) polled said that they had reviewed and changed their exit strategy in the past year. It’s instructive to see that two in five said they now plan to seek consolidation (43%) – likely as a defensive measure during this period of uncertainty. That support is likely to come from the third (35%) of businesses who plan to seek acquisition opportunities. Meanwhile, two in five (41%) firms will seek new funding – aiming to fuel growth but potentially adding to their financial challenges in the long-term.




A fork in the road: The future of UK fintech

A fork in the road: The future of UK fintech


North East

Percentage of firms concerned about their ability to trade through the next six months

Michelle Elliot, Restructuring Advisory Partner at FRP said: “There’s no denying that fintech firms in Scotland are clearly finding some aspects of life challenging. While many have struggled to grow in the last year and, for many, it’s proving harder to source funding, we can take heart from the resilience that firms are showing in the face of these conditions. It’s still concerning that two in five worry about their ability to trade through the next six months but that’s the lowest proportion in the UK. That spirit of enterprise and ambition gives me confidence for the future.”

Shaun Hudson, Restructuring Advisory Senior Manager at FRP said: “To hear that over half of the region’s fintech firms worry they might not last a year is clearly a concern. While other regions appear more bullish, the North East has a healthy fintech community, led by people with real drive and creativity, and I remain confident in the sector’s potential. We’re developing a specialism in payments infrastructure, and the region’s academic strength means we have a strong pipeline of the kind of talent that will support the sector’s future success.”

40% Scotland

56% North East



Daniel Brecker Corporate Finance Director at FRP said: “From a fintech perspective, Leeds and Manchester are hugely exciting places to be at the moment. They represent an accessible alternative to London, with lower start-up costs and an excellent pipeline of talent. Of course, the North isn’t immune to the financial challenges that all UK businesses are currently living through, and we can see that the fear of failure is elevated across the country. Still, despite the challenging conditions, firms in the North are more bullish when it comes to valuations, revenue growth and access to funding, so the future looks bright.”

Gemma Jones, Financial Advisory Partner at FRP said: “The Midlands has ambitions to establish itself as a significant fintech hub and the region has huge potential. Despite being the region with the most firms perceived to be ‘at risk’, it can take comfort from the fact that its fundamentals are fairly strong, including revenue growth, valuations and access to funding. With these strengths, as well as our excellent infrastructure and skills base, the region is well positioned to weather the current challenges affecting the UK.”

42% North

46% London

58% Midlands


Dan Conway, Restructuring Advisory Partner at FRP said: “London is an established global fintech centre and as such it is experiencing the same headwinds as the wider sector. It’s ultimately a concern that only a quarter of firms have seen revenue growth accelerate in the last year, but we can take confidence from the fact that the funding environment remains relatively strong – particularly as it looks to lead the charge and support other fintech hubs across the regions.”



A fork in the road: The future of UK fintech

A fork in the road: The future of UK fintech

Perceived changes in funding appetite from investors/funders over the past 12 months

Focus on funding While a large part of the UK fintech sector remains in growth mode, we’ve seen that funding has become increasingly challenging for some.






Indeed, our research identified a polarisation of opinion on the funding environment, likely representing a flight to quality. Although two in five (43%) said funding and/or investment was now easier to access in comparison to a year ago, almost the same proportion (41%) said the opposite. Indeed, firms flagged that funders were increasingly selective about which fintech business sub-sectors they want to invest in (43%) and that investors have fewer funds available to invest (18%). Either way, in the current environment, potential investors are clearly being more cautious and are taking their due diligence seriously. The firms we spoke to believe increased scrutiny of their financial performance will be the biggest barrier to securing funding over the next six months (48%), while over a third (37%) of firms flagged increased scrutiny of their projected financial performance as an issue. Almost half (44%) cited the increased cost of capital as a challenge – which should come as little surprise after a long run of consecutive interest rate rises since December 2021. Regulation was seen as less of a challenge than anticipated, given that incoming legislation such as the Financial Services and Markets Bill is likely to add more to their plate. An inability to meet incoming regulation is viewed as a potential barrier to funding for one in five firms (20%), while almost one in 10 (8%) say their failure to comply with existing regulation is expected to be an obstacle.

Given the perceived tightening among venture capitalists (VCs) and other funders, a healthy majority of firms (78%) agreed that they need to increase their focus on profitability over market share as they look to make their business more attractive or increase their valuation. Those seeking additional funding are expected to approach an even spread of sources, including VCs (40%), public markets (38%), high street lenders (37%), private equity (34%) and specialist lenders (32%). The fact that specialist lenders placed low on the list is the likely legacy of the failure of Silicon Valley Bank in 2023. As the funding landscape changes though, public markets are being viewed as the most likely to have increased their appetite for opportunities in fintech, while high street lenders are perceived to be most cautious. Access to funding and investment over the past 12 months







Increased Decreased No change N/A or unsure










High street lenders

Specialist lenders

Venture capitalists

Private equity firms

Public markets

Nina Mohanty is co-founder and CEO of Bloom Money. Having worked at Mastercard, Starling Bank and Klarna, she set up Bloom Money to help diaspora communities in the UK build generational wealth: “We’re a pre-seed stage company that will be looking to raise a seed round this year. The market has changed drastically since our initial fundraise in 2021. It was a six-month process then, whereas now I would expect this round to take at least nine months. “We’re pitching a vision of the future, but that’s difficult when there’s so much uncertainty in today’s macroeconomic environment. My experience, and that of other founders, is that there’s lots of capital available but it isn’t being deployed as actively or as easily as previously. “I’ve been encouraged by some of our existing investors to consider pitching in the US, the GCC, Nigeria and India as we seek new funding. That said, I do think the UK is a fertile ground for innovation and competition compared to other markets. “I’m meeting new fintech founders every week, many of whom are bringing a whole new perspective and approach to building a business. At the same time, working with the FCA is relatively straightforward compared with regulators in other countries.”



No change






A fork in the road: The future of UK fintech

Duncan Childs is head of financial services (commercial banking) at Metro Bank, which was the first new high street lender in 150 years when it launched in 2010: “The collapse of Silicon Valley Bank (SVB) was an important moment for the sector but I would argue that the £100 million+ fine handed to Santander by the FCA in 2022 has had the most significant impact on lenders. “The cost of non-regulation tends to fall on those with the biggest balance sheet within the supply chain, so compliance is an important consideration when banks work with fintech suppliers and customers. Fintechs are classed as high risk, so they are likely to find that clearance banks are asking questions about their compliance with the same rigour as investors. “My advice – for suppliers and customers – would be to start the conversation as early as possible and with as much transparency as you can to aid that due diligence process.”

Those firms that can reassure investors about their commercial strategy will find that investment is still very much available. “

The UK should be proud of its flourishing fintech sector, which is internationally recognised as being among the most innovative and important in the world. A positive reset

While the trajectory of valuations seen in recent years may now be flattening out, it represents a return to normality after the unprecedented impact of the pandemic, with the sector’s fundamentals remaining strong. Of course, fintechs are experiencing new uncertainty, the causes of which are far from unique to the sector. It’s a new environment for many newer entrants who only emerged in the sector’s purple patch during the pandemic. The amount of businesses pursuing M&A strategies suggests that many remain in rude health and are likely to lead a market reset in pursuit of both new customers and innovative IP.

For those considering consolidatory support, the next 12 months will be crucial in optimising their commercial operations and profitability to develop the best proposition for would-be suitors or new investment. As advisers, our focus continues to be supporting the profitability and value of firms as they look to attract investment and realise their valuations. There may be some pain along the way, but we can have faith in the long-term future of UK fintech. Phil Reynolds Partner Restructuring Advisory



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July 2023

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