IBS Journal June 2017
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exacerbated by premonitions of doom from the ‘then’ soon-to- be ex-Chancellor, but after an initial slowdown in funding we’ve seen growth across all tech in the capital, not just FinTech. Apple, Google and Facebook have all expanded in London despite the uncertainty.
If you look at the jobs boards, London has twice as many FinTech opportunities as its closest rival Berlin. Interestingly the rate of jobs growth for FinTech in London is also faster than comparative European centres. The city has created the most fertile FinTech ecosystem in Europe and that causes a lot of resistance to exogenous shocks such as Brexit.
IBS Journal: Which European cities are the most attractive alternatives to London?
DTH: To me, an under-rated option is Edinburgh – the city already has a reputation as an established financial services centre, and its own tech Unicorn (Skyscanner). Edinburgh has developed a niche specialty in data science and is starting to become a hub for data science and AI. The potential is certainly there for FinTech to take off as well; Edinburgh has a hugely educated workforce, finance expertise and ready access to both London and the continent. The city also has a significant cost advantage over London itself whilst benefiting from the same strong regulatory environment; there’s also anecdotal evidence that staff retention rates are higher.
IBS Journal: Are the wheels coming off the FinTech bandwagon? After a lot of hype, there now seems to be an air of cynicism in some quarters over whether startups can truly disrupt the banking sector
DTH: We’re definitely seeing more scepticism in startup stories, but it’s sometimes difficult to know what is and isn’t FinTech. Financial institutions have always been consumers and developers of technology. Technology has been disrupting the industry for probably a century, so we’re not seeing anything new here.
I hear the argument that FinTech is different in that it’s developing faster, but technological change is accelerating everywhere, this isn’t solely a financial services phenomenon. Smaller FinTechs have lost momentum as banks have felt that there’s little the FinTech community can accomplish that large institutions can’t. We’ve seen the interest from the larger financial players move from – potentially acquire, to potentially collaborate, to potentially replicate. A few years ago we heard
bank CEOs say there were scared of FinTech – this has changed to ‘interested in innovation’. So in that sense the buzz is subdued, but the ecosystem in the UK is still buoyant and will contribute significantly to financial services development over the next few years.
I think for smaller players the key is to differentiate yourself and work on the core proposition and in my view aim for the institutional market. B2C is struggling due to the high cost of customer acquisition, but B2B still attracts interest and has the potential for larger revenues from a lower cost base.
IBS Journal: Same question in relation to challenger banks. Can they really make much of a difference in the grand scheme of
things?
DTH: Focussing on the new wave of digital-only challengers separately from already successful entrants like Metro and Handelsbank. I’d say the growth of Monzo here, N26 in Germany, and Nubank in Brazil show there’s interest in the proposition (of zero branches and smoother tech), we’ve definitely seen that the mass-market appreciates a better and different user experience, what we’ve yet to see given their revenues is that the market is willing to pay for it.
I think here, with the exception of Monzo, the cost of customer acquisition will lead to issues with the newer players. With competition raising the acquisition cost at the same time as decreasing subscriber value, this environment is likely to get harder, before it gets better. Network effects will be paramount – if the challengers can reach the situation where each new customer brings another customer you can reach a period of exponential growth; this is the tech growth curve we’ve seen and gets FinTech investors excited. But evidence from recent launches is that this is unlikely to be achieved by other players with some of them spending tens of millions but generating barely a thousand customers.
In the longer-term, banks have made their money from having the scale to fund cheaply and then good credit selection – this isn’t really part of the challengers’ current focus and not something they’ve shown expertise in. Generally (speaking as an economist) new forms of credit expansion have not performed well.
IBS Journal: What are the biggest FinTech trends to watch in 2017 and into 2018?
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