Fintech specialist Tara Reeves, partner at LocalGlobe, the venture capital firm founded by renowned investor Saul Klein, Vinoth Jayakumar, the investment director at Draper Esprit, the pan-European investor focusing on disruptive technology, and Joy Sioufi, vice-president of GP Bullhound, the international tech investor, have all peered into their crystal balls to help us predict the future.
“We’ve backed quite a few fintech start-ups,” says LocalGlobe’s Reeves. “By virtue of being based in London, we are in the beating heart of fintech.”
LocalGlobe is making bets on fintech players that are taking aim at single pain points, such as Trussle, which offers mortgage broking online for free, and Cleo, the chatbot that aims to help users manage their finances. The VC has also backed Tide, which is focused on the small business market. It has shied away from backing a full-stack consumer neobank.
“I see a wall of money moving into the consumer neobanks but I see real challenges there,” Reeves explains. “No one really moves their bank account, do they? I opened my first account when I was 16 and got my free Walkman, and I still have that bank account 20 years later.
“People just can’t be bothered to switch, either because of the inconvenience of moving direct debits or because their mum used to bank there too. It’s an incredibly sticky industry. We’re seeing the likes of HSBC offering people £100 to switch and they still don’t want to.”
Reeves believes that the combination of low margins and conservative consumers in consumer banking limit the sector’s potential. "I can imagine a universe where the banks are the wires or pipelines through which platform services such as Cleo are run, just as utilities supply electricity, gas or water."
Draper Esprit, which has backed the likes of currency exchange firm TransferWise and digital bank Revolut, has its own view on this industry.
Jayakumar believes that the winners will be so-called “platform” banks, while the full-stack outfits may struggle. He explains: “Full-stack acts like a traditional bank but slicker and with fewer overheads. It has all the licences and aims to offer better customer service.” He cites the likes of Starling, Monzo and Tandem.
“Banking is a very low Net Promoter Score category… Most banks in the UK are in negative NPS, which basically means we think they are crap. And platform banks can turn on new features overnight to meet customer needs.”
“Then there’s the platform bank, like Revolut, which offers a full suite of products that look like their own but are actually powered by someone else. It acts like an operating system for all your financial needs, integrating every service you might need seamlessly.”
Jayakumar believes that the latter brings true disruption because they rethink the principles behind banking. “Instead of trying to sell a product, they start by asking what service the consumer actually wants,” he says. “You need somewhere to put your salary, so it does that for you. You have kids and need to start saving for their future, it can help. You need a pension, it directs you to the right place.”
He claims that the banks have underwhelmed consumers with their customer service for too long. “Banking is a very low Net Promoter Score category,” he points out. “Most banks in the UK are in negative NPS, which basically means we think they are crap. And platform banks can turn on new features overnight to meet customer needs.”
Banks cannot keep up with the pace of change in this industry, Jayakumar adds, because legacy systems and inflexible business models hold them back. “The strongest of the legacy banks will still be here in 2030,” he says. “That’s not far away. But in 50 or 100 years, will they have the resilience to survive?”
There is no doubt that fintech, and specifically the neobank sector, is attracting vast swathes of capital.
In 2016, Anne Boden raised £48m for her digital bank, Starling. It was the largest seed round ever raised in Europe at that time. And the numbers keep on rising. Starling’s rival, Monzo, raised £71m in 2017 from the likes of Passion Capital and venture capitalist Michael Moritz.
Recent studies show that, in the UK alone, venture capital investment in the fintech industry has jumped by 150%, from $704m in 2016 to $1.8bn last year.
In the first quarter of this year, UK venture capital flows slowed to a trickle in almost every industry except fintech. According to a study by accountancy group KPMG, the sector raised more than $1bn in venture capital during the three-month period. “The whole market is very hot and frothy right now,” says Reeves.
However, VCs generally expect around just one in 10 of their investments to hit it out the park. Does this mean that many of today’s challengers will fall by the wayside over the coming years?
“The fact that there are so many new entrants demonstrates the size of the market and the scale of the opportunity,” says Jayakumar. “There’s enough room in this market for all the start-ups to thrive. But incumbents still have a lot of money. It’s not hard for them to reduce prices for a year to kill off a rival start-up.”
Today’s challenger banks won’t be able to succeed without the support of the incumbents, according to GP Bullhound’s Sioufi. “Most of these challengers are building marketplace models,” he explains. “This means they are pulling on lots of products and services from external providers. To offer a wide range of products, they ultimately need to partner with the incumbents. They can’t do it all themselves.”
The symbiotic relationship between disruptor and disrupted will lead to a period of intense consolidation. Traditional banks may reduce their geographic span and cut their branch numbers, while picking up independent players that service a particular niche especially well.
Sioufi believes that this means the fate of challenger and incumbent alike is closely aligned. “Banking is a market where incumbents cannot just disappear,” he says. “It is a highly regulated market, which means incumbents are entrenched from a regulation and compliance perspective.”
The symbiotic relationship between disruptor and disrupted will lead to a period of intense consolidation, he claims. Traditional banks may reduce their geographic span and cut their branch numbers, while picking up independent players that service a particular niche especially well.
“In every sector where disruptive players have arrived on the scene, we have seen this kind of consolidation and banking will be no different,” he says.
Reeves adds that banks have already become highly acquisitive, picking up start-ups that threaten their future. “They're creating their own venture arms and co-investment funds but also just buying, pure and simple,” she says.