Contribution by Bryan Shaw, Corporate Associate and David Gardner, Technology Partner at TLT.
As we look back on 2018, the fintech sector stands out as being one of the biggest investment heroes. UKTI estimates the UK fintech market is worth around £20bn in annual revenue and its value is rising. Notable success stories include the £9.1bn takeover of Worldpay; a $250m fundraising round for Revolut; and Funding Circle’s plans to raise £300m in an initial public offering (IPO) that is expected to value it at more than £1.5bn.
The introduction of the CMA’s Open Banking reforms and the coming into force of the second Payment Services Directive (PSD2) on 13 January 2018 undoubtedly had a strong positive effect on the investment industry’s enthusiasm for fintech. The UK is now held up as a beacon for other European countries to follow, with UK industry figures being called upon to convince other European national authorities to fast track their own Open Banking reforms.
And while you’re unlikely to be banking in a whole different way just yet, the lack of mainstream consumer use of Open Banking belies significant internal effort, planning and preparation by banks, building societies, fintechs and payment service providers during 2018. According to our research report, Opportunity Knocks – the future of Open Banking, 84% of financial services companies have new Open Banking products in development or due to launch in 2019. The competition is about to heat up.
This isn’t just fantasy; the industry sees fintechs as the second largest group of Open Banking competitors, just behind GAFA (Google, Amazon, Facebook and Apple).
Venture capital will continue to play a critical role in unlocking this future potential for UK fintechs. Plenty of
companies are hard at work exploring, developing and promoting new offerings, so we should be expectant. The customer market is still at a relatively early stage, so there is a genuine opportunity to create the first killer app using Open Banking.
Until that happens, there are various factors that could affect how quickly the market evolves and the challenges that different market players face. So what can fintechs and market investors expect in 2019?
- Increasing consumer awareness
Customer understanding of Open Banking was low when it first launched and seven months later only 29% of the financial services companies we surveyed believed it had improved. However, those businesses that have launched Open Banking products are reporting positive uptake and feedback, particularly among tech-savvy customers. Promoting new services and winning trust will be critical to success in 2019, because early adopters suggest that once customers are exposed, they are quickly captivated by the ways of managing their money.
- At least one IPO or acquisition by GAFA
2018 saw several new UK fintech unicorns gallop onto the scene. Next year, we predict that at least one will announce an IPO or be acquired by GAFA.
The tech giants have already shown an appetite to disrupt the financial services market and have gained a toehold in the payments space via popular services like ApplePay and AndroidPay. While historically they have shown reluctance to shoulder the regulatory burdens of a full banking licence, Open Banking and PSD2 may encourage them to make further inroads. They have a substantial tech-savvy customer base, powerful data analytics capabilities and a relentless focus on good user experience, along with a significant capacity to invest.
- Continued investment
Based on recent trends and the eye-watering valuations seen in the past year, investor interest in fintech is set to continue throughout 2019. The trends identified in our research – from product development and imminent launches to strategic partnerships and customer communications – mean the competition for investments is likely to heat up. Predicted IPOs and acquisitions will also generate significant returns for investors, fuelling more investment.
- Relative regulatory respite
While Brexit is not expected to dampen investment spirits, the impossible task of knowing where the Brexit negotiations will lead means that regulators like the EBA, FCA and CMA are likely to be cautious in their approach. They will likely wait and see how 2019 plays out (in particular with Brexit) before making any radical changes to the status quo.
In parallel, the EBA’s Regulatory Technical Standards on Strong Customer Authentication will enter a test phase in March and come into force in September. This increase in stability and certainty should create a more positive environment for continued investment.
- Data privacy and protection
Customer trust – including in data privacy and protection – is critical to the success of Open Banking. While Open Banking and PSD2 bring significant improvements to data security, half (49%) of financial services companies believe high profile data breaches (of which we saw several in 2018) have damaged customer trust. It is more important than ever to communicate with customers about the security measures built into Open Banking to protect them.