The UK capital’s financial reputation coupled with a thriving technology scene has transformed the city into a hub of digital innovation. Payments are the largest fintech subsector in the UK, with the UK Trade and Investment Government department estimating its worth at £10bn ($14.4bn). Ian Dowson writes

Research from William Garrity Associates shows over the last five years (January 2010 until June 2015) global fintech investment – including institutional debt financing provided to P2P platforms – hit $49.7bn. The UK has raised more than 10% ($5.4bn) of this figure, with the majority going directly to London ($4.5bn).

The analysis marks the UK as the European leader of the fintech industry, as the continent’s entire direct investment for the same duration has hauled $4.4bn. Elsewhere China has secured $3.5bn over the five years, and India $2.2bn.

While the US has received the lion’s share of direct investment ($31.6bn over the same period), IC Dowson William Garrity’s report shows the total value of fintech deals – including direct investment, plus listed companies, and acquisitions – in London has topped $18.4bn. This figure includes the capital’s aforementioned $4.5bn and contributes to the UK’s total investment figure ($5.4bn) over the five years.

Interestingly, Silicon Valley has secured only $200m more than London in terms of deals, with $18.6bn of investment flowing to the region over the same period.

London’s unique access to talent and its strategic geographical position, in terms of middling the Asian and American time zones, are proving especially relevant to investors.

Presently there are 44,000 people working across London’s fintech scene – which is more than New York or Silicone Valley – and more than 150,000 digital tech professionals.

The fintech industry is not exclusive to established banks or small firms. It is a melting pot of financial interests, all of which contribute in some way to the sharing economy.

Bridging the gap
Banks like Barclays are already capitalising on this. Fintech accelerator programmes, coordinated in conjunction with start-ups like TechStars, help to develop the next generation of digital entrepreneurs. But just like any other industry, innovative banking products will fail to exist without cash injections and an operable legal climate.

Luckily for London, these conditions are being met. In the first six months of 2015 the capital’s fin tech companies had raised $1.5bn worth of venture capital investment. This figure, according to London and Partners, eclipses the same period in 2014, when just more than $1bn had been raised.

In addition British regulators, especially the Financial Conduct Authority’s Innovation Hub, are self-styled supporters of fintech. There are three main investment areas: Payments, Loans consisting of Direct and Peer to Peer Lending and Cyber Security, including Identity and Fraud prevention, representing $29.8bn, or 60%, of total global investment ($49.7bn).

Within this context, electronic payments services are especially popular.

Low cost FX transfers benefit economically and socially disparate regions like Africa- once viewed as extremely difficult to reach digitally. Yet nowadays the continent has a record number of mobile phone owners (67% of total population as of June 2015), opening up interest to international investors.

However, in the UK, 82% of the public own smart phones that can downloads apps and operate email services, according to Deloitte. The firm’s research also shows that, collectively, UK consumers check their smartphone one billion times per day.

Changing consumer behaviour has led product developers – from both traditional banks and challengers – to prioritise the creation of digital-first platforms.

Nine of the biggest names in banking (RBS, Santander and JP Morgan to name a few) recently announced a partnership with startup firm R3 to integrate blockchain-inspired systems into the financial landscape. It is a landmark initiative, potentially weaving the fabric for cheaper, faster, and online only services from legacy structures.

Already offering this kind of deal is TransferWise, arguably London’s best known fintech start-up. It almost became a ‘unicorn’ company (worth $1bn) in January 2015 after securing $58.8m of investment.

Mobile money
Mobile penetration and the internet have revolutionised payments. Tech geniuses with banking backgrounds are grasping the opportunity, with mobile-only banks like Mondo, Atom and Starling trying their best to enter the British market. Interestingly, Germany’s Fidor bank, also without a branch presence, has outflanked its UK contemporaries by opening its virtual doors on 18 September.

Amongst the German challenger’s list of financial products are European money transfers for a flatfee (£2.49 charge for transfers up to £25,000) and flexible savings bonds that allow customers to invest £100 to £100,000. However, Fidor’s interest rates are not exactly table-topping. It offers 0.75% AER on a 3 month term, rising to 1.80% for the longest term of 36 months. Yet the draw for UK customers could be the 60 seconds it takes a Fidor Current Account holder to set up a Savings Bond, or the fact that credit checks are not required.

Even more interesting is the fact Fidor does not have a UK banking license. It enacts a method called ‘passport in’. This effectively allows financial firms regulated by a state within the European Economic Area to offer services or products in the UK.

Critically, however, UK consumers depositing into Fidor’s Savings Bond are protected by the German savings guarantee scheme rather than the British Financial Compensation Service. The scheme, under Entschädigungseinrichtung deutscher Banken or EdB, covers up to €100,000 ($109,090).

Either way Fidor’s emphasis on social media, ‘community’ and its app like design has a hold on more than 100,000 customers in its native Germany. The waves it makes in the UK remain to be seen.

Similarly, smartphone based banking service Monese is adding to the number of market disruptors launching in Britain. Its services became available on 21 September, but unlike Fidor this market disruptor is not a bank. Monese focuses on ex-pats, immigrants and those who find it difficult to open a UK bank account.

Monese customers sign up to the free account and receive a free Visa debit card that can be used to pay for items in-store at no cost. However, there are a few limits. The account comes with five credits, meaning customers can withdraw money from ATMs and make transfer without paying. Once the credits are used, customers will be charged 50p.

Globalisation has been instrumental to the growth of fintech, and vice-versa. However, the technologies are relatively new and many challenger services offered today may not be around tomorrow.

And as more millennials pick and choose their financial products, traditional banks will have to entice this demographic to their service or risk losing potential customers. Today, however, fintech has never looked stronger.

Ian Dowson is a manging director at William Garrity Associates