Industry Insights

UK fintech: P2P and challenger banks leading the way

As recently reported on the Beauhurst blog, the UK fintech sector has seen more investment in 2016 than ever before.

This investment has been helping to fuel growth in the UK, with the majority of investment into the Banking and Financial Services sector coming from the increasing number of fintech companies.

Beauhurst have provided a breakdown on the fintech sub-sectors that have been receiving this investment on their blog, which makes for interesting reading, as summarised in the graphic below.

This demonstrates the sub-sectors that are most contributing to this significant growth and completing the most funding rounds.

Drawing on the data, I want to look more closely at the two sub-sectors that are of particular interest to Growth Capital Ventures, and which are contributing some of the largest raises - peer-to-peer lending and challenger banks.

Beauhurst image showing the fintech sub-sectors and individual investment amounts

Source: UK fintech data: an overview of startups and their investment 

Increasing popularity of P2P lending

As you can see from the above, peer-to-peer (‘P2P’) lending technology has seen a significant amount of investment, being the third largest subsector with over 14% of the total amount raised in this subsector alone.

On the highest of levels, P2P lending allows ordinary investors to lend cash to other credit-checked individuals or businesses to fund their plans, with the ultimate aim of making a financial return.

With P2P lending usually taking place via an online platform, the goal of said platforms is to source and credit-check potential borrowers, facilitate the loan and automate much of the legal and regulatory process involved in lending.

In the last 10 years, this sub-sector has grown out of the requirement to satisfy borrower needs that historically have only been served by banks and building societies.

To support this, online platforms are generally able to offer more favourable rates for both the borrower and lender by having significantly lower costs to serve both parties. So far, over £5 billion has been lent in the UK by the peer-to-peer lending sector – and this number shows no sign of slowing down.

Recognising this increase in popularity, the government was prompted last year to introduce the option of offering tax free ISA status to P2P lenders through the Innovative Finance ISA.

This new ISA status is offered to FCA-regulated platforms to allow lenders to receive interest and capital gains tax free as an incentive to encourage peer-to-peer lending through regulated platforms.

Having watched this sub-sector closely, we've recently developed our own P2P lending platform, GrowthLenders, which is due to launch in the first quarter of 2018.

In line with Growth Capital Ventures, GrowthLenders will focus on funding asset backed opportunities, including property development, where there is significant potential for both impact and lender returns.

Challenger Banks: disrupting the traditional model

While there have been less than half as many funding rounds in this sector as for P2P lending, funding for challenger banks have seen the largest investments of any fintech sub-sector, accounting for over 22% of the total raised.

Fintech companies that provide the services you'd expect of a retail bank, challenger banks differ by aiming to disrupt the traditional model.

To date, this is achieved through a variety of approaches, including offering innovative services, new ways to bank and, most prominently, better rates than offered by traditional banks.

One great example of a company leading the field of challenger banks is one of our portfolio companies, Atom Bank, who we were delighted to invest in during their early stages of growth.

The Atom Bank logo, strapline and screenshot of mobile app

Being the UK’s first digital-only bank that is built exclusively for mobile, this approach allows Atom to reduce costs by removing the need for legacy IT systems, physical branches and historical regulatory issues.

With savings made, these are then passed to customers by offering market-leading products with competitive rates alongside a straightforward, personal interface that is available all day, every day through their mobile app.

As a portfolio company, we relished the opportunity to support Atom in seeking further investment recently, alongside the current prominent shareholders that include BBVA, Toscafund and the Woodford Trust.

As part of a total £16 million round, Growth Capital Ventures’ investors were offered the chance to participate - and taking out a professionally prepared investment memorandum, this opportunity was oversubscribed in under two days and the full allocation secured.

The excitement of fintech

It’s clear just how exciting of a sector fintech is at the moment. The investment into the various sub-sectors is considerable, and is unlikely to slow down.

With the likes of Atom Bank growing in popularity and going from strength-to-strength on what seems like a daily basis, the fintech industry has a very apparent buzz around it right now; one that has been increasing considerably for some years.

The phrase may have been used for over a decade and companies within it having had the chance to firmly establish themselves within the arena, but fintech is undoubtedly an exciting sector and one that we’re truly delighted to be a part of.

About Beauhurst

Beauhurst is the leading source of market intelligence on business funding in the UK.

A platform that lets you track the UK’s high-growth companies, Beauhurst is trusted by hundreds of organisations to help them research and monitor ambitious businesses and the funders that back them.

A guide to tax efficient investing - download your copy

Driving Growth.
Creating Value.
Delivering Impact.

Backed by

Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.