The Bank of England: reaffirming fintech's significance
The term 'fintech' (the abbreviation of 'financial technology') has been a popular phrase for some years now.
Used in relation to the financial sector, its general purpose is to describe technology across multiple forms of alternative finance ('altfi') and other relatively new financial institutions.
These can range considerably from payment systems through to equity crowdfunding platforms, and whilst the term was first used in the 1980s, it wasn't until the recession in the mid-2000s that the popularity of 'fintech' really started to take off.
Rolling back the clock to the financial crisis of 2008, leading banks were insufficiently capitalised and/or too exposed to short-term capital markets. Inevitably, this led to structural instability.
A need to address this under-capitalisation, coupled with plummeting investor confidence, resulted in companies that were seeking funding facing difficulty gaining capital investment from the banks.
The unsurprising consequence of this was that they began to look elsewhere.
This disruption to the banking system provided a clear market opportunity for the fintech / altfi sector, and fintech's prestige in the UK financial landscape was cemented in 2016, when the Bank of England launched its fintech accelerator project.
The Bank’s Andrew Hauser reflected on the initiative during a wide ranging speech on fintech earlier this month. Most notably, he explained that banks can no longer ignore fintech if they are to see continued success.
[central banks] cannot afford to stand on the sidelines [of technological change and innovation] if they are to continue to deliver their mission of monetary and financial stability
The need for new financial technologies
Since the financial crisis, technology has become both more sophisticated and more ubiquitous.
With the adoption of these new technologies having also become less expensive, nearly a decade on and more and more financial institutions are harnessing these technologies to increase their efficiency.
At the same time, investors are ever more discerning and expect greater financial returns on their investments.
Financial institutions are being forced into reducing their costs, some by up to 40%, and such a fundamental change drives demand for new technologies.
This goes hand-in-hand with the fact that the goliaths of technology - think Google, Apple and Amazon - are constantly striving to improve their user experiences. Customers of financial products are now expecting this same level of user experience from their banks and other financial institutions.
Fintech as a sector is advancing rapidly in response to this, influencing many along the way. In his speech, Andrew Hauser explained that "engagements with fintech firms have also exposed central bankers to some very different ways of working and thinking: more agile, more willing to experiment, less bound by convention."
We're not in a time whereby companies are tinkering with technology or using a 'sandbox mode' to test the water. Fintech has established its place as an extremely beneficial - and much needed - sector and growing consumer demand reinforces the need for the financial industry to embrace it.
Growth of fintech
London is a thriving, global centre of commerce where so many leading companies are established and headquartered. Because London is such a dominant location for financial services, many assume that technology companies are similarly concentrated in London.
However, this couldn't be further from the truth - out of the UK’s 100 fastest growing technology firms, 44 of them were based elsewhere in the country.
This is a perfect representation of the fintech sector as a whole; from the outside one might assume that London is the UK's fintech epicentre, it's a different picture once you dig deeper. Fintech is enabling nationwide growth in financial services; leading digital challenger bank Atom is based in Durham, 300 miles from the city of London.
A truly national-level awareness, in our industry at GrowthFunders, is particularly fascinating as it is enabling more and more ‘everyday’ retail investors to invest alongside professional and institutional investors.
There no longer needs to be obstacles that prevent the former from making the same investments as the latter - a perfect example of this is being able to invest alongside experienced house builders in residential developments through property crowdfunding.
And this is only going to become a more interesting time, as Andrew Hauser explained "technological change and innovation...will have profound implications for the nature and range of financial services available to households and firms."
Fintech is now an established part of the investment lexicon, and not just throwaway jargon.
While many established financial institutions are still in their early stages of utilising fintech (one of the primary reasons for setting up the Bank of England's accelerator program was to improve their familiarity with the sector) it is clear more companies are adapting and recognising potential of fintech.
In our industry, the rise of the fintech sector has enabled innovative companies to offer investors the opportunity to get involved in some unique investment opportunities. There are multiple benefits to this, from easily-accessible tax efficient investing schemes through to the ability to invest for impact.
For many, these are not brand new options but they are options that were previously difficult to access and benefit from.
Co-investment platforms such as ours are becoming an increasingly popular way for start-ups to raise capital and for investors to invest into an established company seeking growth capital, and invest into asset backed property schemes.
And with the alternative finance market estimated to hit $1trillion by 2020, it is clear it is only going from strength to strength at a rapid rate.