Innovate Finance | Daniel Stack | Jan 31, 2021
In January 2020, who could have possibly predicted the state of the world today?
After an uncomfortable ride from March onwards, in many ways, the outlook today is more certain with the widespread roll-out of a vaccine. There is light at the end of a very long tunnel. However, until we get there, the strain on our economy, its many businesses and our own freedom remains very much the same, even though we’ve said goodbye (and good riddance) to 2020.
Yet, despite this backdrop of uncertainty, the pandemic appears to only have increased conviction in and focus on those firms innovating in financial services. 2020 appears to have done little to dent the momentum of FinTech companies and the investment they are attracting, in both public and private markets.
On the momentum of the sector, Tim Levene, CEO of venture capital firm Augmentum Fintech, believes “the industry is starting to mature but the wider opportunity remains nascent where incumbents still dominate in terms of market share.”
Looking ahead, the outlook for UK FinTech appears bright. So what are the bright stars of 2021? We asked a selection of investors, FinTech firms and advisors for their perspective.
SME lending is an area of interest for investors. COVID positioned FinTech lenders as key participants in distributing government loan schemes (such as BBLS and CBILS in the UK) helping to loan billions of dollars to small and medium sized businesses in need.
Consumer banking is another area of expected growth as bank branches remain closed and consumers turn to digital channels.
Alexander Frean, Head of Corporate Affairs at the UK digital bank Starling Bank, said the pandemic had accelerated the shift to digital channels.
“As an app-based bank, Starling has seen robust customer acquisition since the start of the first lockdown,” she added.
Many of these first time users are not expected to return to ‘physical’ banking in the future, and the way they interact with their banks will have changed permanently, representing a strong opportunity for neo-banks and the FinTechs that provide them with the tools and platforms to operate.
Decentralised Finance (DeFi) continues to attract enormous focus and interest. 2020 witnessed announcements such as PayPal allowing customers to pay with cryptocurrencies, as well as well established, main-street financial institutions like Fidelity, launching a bitcoin fund. Further growth is seen for this trend, whereby entrepreneurs recreate traditional financial instruments in a decentralized architecture, by using smart contracts and bypassing banks and traditional institutions.
Augmentum’s Tim Levene believes there will be “significant growth” in crypto and DeFi.
“The influx of institutional capital into crypto is bringing renewed focus on the sector as the industry becomes more mainstream, while DeFi has emerged as one of the fastest-growing categories of use cases for smart contracts built on the blockchain.”
Investors are also eyeing B2B FinTech as an area of interest.
Andrew Whiting, Principal at venture capital firm Partech, says: “We are very interested in B2B FinTech and companies offering financial tools for small and medium sized businesses (such as helping to predict cash flow, manage accounting, or process payments). This focus (…) will remain a key theme for us for 2021.”
Kevin Chong of Outward VC noted the pandemic has accelerated the “consumerisation” of B2B FinTech – solving B2B problems with B2C techniques.
Enterprise solutions, a subset of B2B FinTech, is also tipped for significant growth. Large global financial institutions are turning to FinTech companies to improve their ageing legacy technology, architecture and infrastructure.
Embedded finance is also receiving a lot of attention with non-traditional companies offering financial services and products as an add-on to their key activity. Ride hailing company Uber is a great example, offering a wallet and Debit/Visa cards to their drivers. Kevin Chong of Outward VC foresees
“financial services integrated into non-financial platforms, with the help of middleware and enablers.”