11:Years: How the UK became the Galapagos of fintech innovation

David Brear is CEO and Co-Founder of challenger consultancy and media group 11:FS.

I think we all remember where we were when Lehman Brothers filed for bankruptcy. The fourth-largest bank (at the time) in the world was gone.

In the days, weeks and months after the collapse, it really seemed like the banking industry was going to implode. The layoffs were terrible. People were losing their homes; business couldn’t get funding or loans.

More than anything, trust in the banking system was being lost.

But what happened next was pretty extraordinary and has changed the banking industry, I believe, forever.

As we sit here in late 2019, we have new banks with multi-billion pound valuations; new players across retail, savings; SME banking shaking up the status quo. But we haven’t paused to reflect on how and why we got here. To think back to a time before ‘challenger banks’ when ‘fintech’ wasn’t a thing.

It’s something I've thought about a lot because I’m incredibly proud to be a part of this amazing community and what it’s achieved. And that’s what led to us creating 11:YEARS.

It tells the story of how regulators, entrepreneurs, technologists and investors set about solving issues that had been brought to light, exacerbated and, in some cases, created by the financial crisis. This was particularly true in the UK, and more specifically London, where a world-leading fintech ecosystem emerged.

I think of London as the fintech equivalent to the Galapagos Islands: a place with unique characteristics that are studied and analysed to understand how it began, how it grew and how it continues to thrive.

The three factors: regulation, talent, investment

First of all, the regulators really got stuck in. The FCA is unusual because its mandate explicitly includes the promotion of effective competition in the interests of consumers. It established a Sandbox that allows businesses, authorised and unauthorised, to test innovative propositions in the market with real consumers.

That was huge, reducing the time to gain authorisation by around 40%. Another factor was the PRA lowering the initial minimum capital requirements for small bank licence applicants to £1 million, in combination with a regime that allowed ‘restricted licences’.

In combination, that created an environment that led to 18 new UK banks being formed.

Second, the financial crisis stimulated the development of the ecosystem by unleashing talent that, in turn, created innovative solutions to widespread problems. Banks were cutting left, right and centre, which goes some way to explaining why many of the UK’s earliest fintechs were started by entrepreneurs with investment banking backgrounds.

Finally, none of it would have been possible without access to funding from private equity, VCs, angel investors, and corporate venture capital. Tax incentives encouraged investment in startups, including early-stage businesses looking for initial funding. Tax credits were also available to reward companies that put money into innovation, including startups that are focused on innovative technology.

The UK’s first-mover advantage

In 2018, the UK fintech industry attracted nearly £3 billion in investment. Boom!

As a result, UK fintech had a first-mover advantage. Some of the biggest and most well-known fintechs in the UK today were formed as a direct result of ideas sparked by the events of the financial crisis – firms like Worldremit,TransferWise and Funding Circle.Zopa, the P2P lender, was founded pre-crisis but really took off once the consequences of the crisis became apparent.

This first wave of firms saw opportunities to capitalise on customer disillusionment with and abandonment by the financial services establishment.

Monzo,Starling and others chose a longer game, believing they could rival the incumbents in multiple areas. With no technical/product/process debt or culture to bog them down, they could move quickly, iterating on ideas and getting them straight into consumers’ hands.

They, and others, have shown the big banks that if you come to market with expertise and the right culture, with a real desire and hunger to deliver what customers need, then you can achieve amazing things.

Those firms are now taking major chunks of traditional business lines – from international payments, transfers and FX through to savings, retail accounts and SMB banking.

That brings us back to today. A thriving ecosystem but one, like the Galapagos, that needs to be protected.

The question now, all these years on, is this: will that talent dry up and put the brakes on the further development of the UK’s fintech ecosystem? Will the UK become less attractive for investments?

The answers are unclear. But I remain positive.

The UK, like many other fintech hubs, has more demand for talent than supply can meet. So far we’ve seen little detrimental impact on the volume of fintech investment caused by the ongoing political instability.

The success of a number of fintechs founded post-crisis will act as inspiration for budding founders, particularly in the current political and economic climate. If these fintechs did well out of what felt like the end of an entire industry, then why shouldn’t others follow in their footsteps today?

We’ve done so much, worked so hard, built so much. I believe we will continue to do so, despite the obvious challenges the UK faces in the coming months.

David Brear is CEO and Co-Founder of challenger consultancy and media group 11:FS.