The UK is ranked by most surveys as the second-biggest market in the world for fintech funding, putting it in prime position to grab a big share of the global market. Analysts reckon fintech revenues will grow sixfold to $1.5trn by 2030. Payments and bank data are two areas ripe for disruption, and here the UK is well and truly in the lead. The Open Banking initiative has allowed a whole new technology sub-sector to emerge, which can plug into your banking information as well as enable easier payments.
Other countries are now following suit, with 74 countries in the process of rolling out next-generation real-time payment systems. I'd also argue the growth of UK fintech has been a huge net win for UK savers and investors, as new entrants to the financial sector have shaken up the establishment, lowering costs and improving efficiency. Open Banking apps have also made it easier to save and invest, often with little to no effort required from the user.
Fintech: Seizing market share
Bank charges have collapsed due to intense online competition and the online banks (or “neo banks”) have been especially aggressive in passing higher interest rates on to savers. Some users might be hesitant about switching to one of these online banking providers as they lack the pedigree of the big high street players such as Lloyds and Barclays, both of which are listed and have to publish their financial statements.
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However, two of the large neo banks, Starling and Monzo, are bound to find their way to a stock market within the next decade.
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Starling is already solidly profitable with record pre-tax profits of £195m for the year to 31 March 2023, a six-fold increase on the previous year’s figure. Monzo also recently reported a net operating income of £214.5m in the year ending February 2023, almost double the previous year.
Elsewhere, London-listed Funding Circle (LSE: FCH) continues to grow its book of lending to small- and medium- sized businesses. Property lending firm LendInvest (LSE: LINV) recently released numbers that showed a solid increase in net revenues. Just a few weeks ago, the lending platform also announced another big chunk of new capital (£500m) for its mortgage-lending platform.
Both these firms are very much at the forefront of the UK fintech charge and have chosen to focus on the UK market, but both seem to be woefully ignored by UK investors.
Then there’s Wise (LSE:WISE), the global payments company. Launched with the goal of cutting costs for users sending money abroad, it has been transforming itself into a global financial services group. While not a bank in the regulated sense, users can set up accounts on the platform in different currencies, and earn interest by investing in money-market funds.
It has cut the costs of sending money abroad, and businesses as well as consumers can use its app for all their banking needs. For the year to the end of March, customer cash balances on Wise’s platform totalled £10.7bn and pre-tax profits rose to £146.1m. With ten million customers around the world and £104.5bn of transactions processed in the last fiscal year, it is one of the top fintechs transforming the financial sector.
Companies of the future
The UK-listed venture capital firm Augmentum Fintech (LSE: AUGM) has an excellent record of investing in early- to mid-stage fintech firms. It’s one of the best ways to invest in the sector, alongside a strong team with a record of success. It has exited five portfolio investments since listing, all at or above carrying value.
The £170m fund has seen its shares fall sharply in value and it now trades at a 40% discount to book value, yet its net asset value recently rose 2.4%. The top ten investments in the portfolio have grown revenues at 117% year on year, while raising over $300m despite difficult market conditions.
The UK fintech sector has real strength and opportunity. Lower costs and more choices can only lead to better outcomes for users, even if investors may have a harder time picking winners
