by Charles Cohick and Ankit Jhaveri
Rapid growth of technology development has disrupted how conventional and traditional businesses function globally. During a week in London with Professor Nir Vaulkin and Dr Maria Nikolou from University of Oxford, we connected with several individuals who are transforming the financial services industry in London. The idea was to understand the present scenario and comprehend the future of FinTech better.
The week was action-packed and ranged from a visit to the Innovate Finance Global Summit (IFGS), to an upscale dinner boat cruise on the Thames, but more importantly it touched on topics ranging from ‘Proptech’ in property services, ‘Regtech’ in government regulation, ‘Insurtech’ in insurance, and just about every other ‘x-tech’ possible in financial services.
Today, the UK Financial services generate about £200 Billion annually, however only 3% of this is associated with emerging FinTech services. Thus, leaving a huge potential for growth in the future.
Hence, in 2015, London evolved as a significant hub for FinTech companies. Shoreditch started attracting start-ups, founders and talent from around the world to leverage technology and challenge existing conventional financial services practices. Over the last year, $1.2 billion has been raised across 179 deals.
The upward trend in the number of deals indicates how Venture capitalists are supporting active innovation, particularly in financial services.
Funding provided to promising early stage start-ups is more popularly known as seed funding. Seed funding is the riskiest investment, but is also the most effective if a unicorn is identified early on. Over the last few years, London has evolved into an interesting hub for investors, seed funding and start-up funding. In 2015-2016, about 35-50% of the deals that were executed were in early stage start-ups. This is particularly insightful as it indicates how investors in Europe are looking to invest in innovation at early stage companies.
We met Tara Reeves from Local Globe to better understand the Seed funding ecosystem in Europe. In a presentation to a group to students from University of Oxford, she emphasized on how FinTech and PropTech have managed to create some significant impact with companies lately. Transferwise and Zoopla are great examples of FinTech and PropTech unicorns and the number of such startups is likely to grow over the next few years as technology usage and consumer comfort level increases. Besides FinTech, InsurTech is another domain that is quickly evolving as an industry. Large corporates in London are seeing value of InsurTech and are investing actively in it. London is a prominent hub for investments after US and China.
As she went through her presentation, Tara helped us understand, “What is FinTech, why now and what is the future?”
Fundamentally, times have changed and debt is at its highest rate today. Student debt is highest in the UK at £44,000 as compared to the US, Australia and NZ. The average debt per household is at £55,982 today. Savings have dropped in UK, where 9.61 million households in the UK are without savings. To add to these factors, inflation has hit a high at 2.5%. Statistics show that youngsters are affected the most in recent times by the conditions and recent political changes such as Brexit is influencing the UK market even further. Times are tough!
Several start-ups are looking at these challenges as opportunities and are addressing the basic problems around finance by building technology that can assist consumers for better money management, saving, investing, insurance and lending. Some of the start-ups addressing the space are:
Helping consumers with saving money while improving customer experience
Millennials are particularly attracted to financial companies that offer tools that can help them efficiently save money by improving entire customer experience journey. Some of the popular FinTech firms in this area:
· Credit Karma
Assisting with more effective and cheaper money management techniques
Artificial intelligence is transforming the financial services business. Robo-advisors are taking up the role of money management for a significantly smaller fee and companies that are assisting consumers with this business are particularly:
· Property partner
· Funding Circle
Providing better solutions for insurance needs
With lower disposable income and less asset ownership available, millennials are not buying insurances how the previous generations were buying it. Hence, companies are building new interfaces for interacting with existing customer bases and developing tools to reduce costs for new structures. Companies transforming the traditional insurance industry:
· Bought by Many
There are also a series of companies that are working to address the frustrations associated with developers for an improved back office technology experience. New regulatory laws and the frustration of dealing with conventional legacy APIs is leading innovation in back office banks services. Some of the companies is this space:
· Currency Cloud
Overall, FinTech promises to be an exciting space over the next few years. It is challenging traditional businesses and banks and transforming London into an evolving hub for innovation. In the heart of this transformation are firms like Local Globe that funding innovation to develop the next big idea.
The magic of Crowdfunding
People cite ‘the wisdom of the crowds’ for everything from guessing the number of jellybeans in a jar to pricing shares of companies. The principle suggests that while individual guesses and valuations may not be reliable, the average of large numbers of guesses should hover around a true answer. If the wisdom of the crowds helps people grow and share knowledge, crowdfunding uses ‘the riches of the crowds’ to provide financial access to new asset classes for everyday investors, and allows entrepreneurs to build communities of users while they fund their businesses. Technological breakthroughs such as online payments, social networking, and increased connection speeds allow people and companies to share ideas through text, photo, and video content. From this concept, three main forms of crowdfunding have developed: non-monetary or rewards crowdfunding, debt crowdfunding, and equity crowdfunding.
Rewards is the largest form of crowdfunding, and has several recognizable brands such as Kickstarter and Indiegogo. It can actually be viewed similarly to e-commerce. These platforms allow business owners to demonstrate and pitch their product or service, offering funders a non-monetary reward such as a discounted pre-order on the product. Since the people funding the companies aren’t officially investors receiving monetary benefits, rewards crowdfunding is largely unregulated by governments.
Debt crowdfunding is commonly referred to as ‘Peer to Peer Lending,’ or P2P. This type of crowdfunding allows groups of investors to pool funds for loans to business projects, receiving their principal back with interest over the loan’s lifetime. This model can be applied to everything from nonprofit microloans, with companies like Kiva, to small business loans through platforms like Funding Circle, to student loans by firms like CommonBond, SoFi, and Prodigy Finance. Whitney Morgan from Prodigy Finance presented the company’s model for financing international students to close the course’s first day.
Prodigy began with a question and an unmet need: why must credit be local? Incumbent banks weren’t structured to lend to international students, even though many such students present low credit risks in their home countries. Prodigy manages a two-sided marketplace, providing funding for current students while packaging loans as bond investments offered on the Irish market to investors. Bonds are school-specific to their 150 global partners, including Oxford Said, and Prodigy enjoys one of the lowest default rates in the industry, ranging from 1-2%.
Morgan credits User Experience (UX) as a key component of Prodigy’s success. While digital experiences are facilitated by technology, these experiences are meant to impact us as humans. The ‘design now, develop later’ mantra presented emphasizes the need for Fintech firms in any space to focus on the unmet needs of their human customers. Having the best technology does not equate to the most success; having the easiest and best solution to a problem attracts customers.
Equity crowdfunding is the most recent form to emerge, allowing investors to purchase equity stakes in startups, usually in their earliest stages. One of the original ideas for this concept came from Oxford MBA students during their Entrepreneurship Project. Jeff Lynn and his MBA team developed a model that allowed groups of investors to purchase shares in startups, and he launched SEEDRS in London after graduation. Students in the Fintech elective visited the SEEDRS headquarters to hear the company’s story and vision for the future.
Investing in early stage or ‘seed funding’ of startups is one of the riskiest asset classes around. Lynn told students to expect roughly 4 of every 5 companies at the seed funding stage to fail. Those that don’t fail, however, succeed so greatly that they often cover the losses of the failed companies. Seed or angel investors generally invest £25k per startup, but due to the high expected failure rate, they build portfolios of hundreds of these investments. A typical offline seed portfolio requires £500k in investable assets. Beyond the capital requirements, seed investing also demands time and energy spent in researching the startup, its potential market, customers, business plan, etc. SEEDRS was founded to reduce the costs of accessing this asset class, and allows investors to join for as little as £10.
Like Prodigy, SEEDRS provides services to two sides of the same market. In addition to the access provided to investors, they actively recruit and help entrepreneurs construct funding deals on their site. Early round funding is one of the most stressful periods in a startup’s journey, and using SEEDRS for written and video campaigns can help expose companies to broader markets and communities. The added buy-in from SEEDRS investors has prompted some successful campaigns to reuse the platform for later rounds of funding.
A week amongst fintech companies showed us how expansive people and innovative companies (several associated with University of Oxford) can be when they leverage technology to fill consumers’ unmet needs. Even spaces within Fintech such as crowdfunding offer multiple models, allowing people to back ideas in exchange for rewards, debt repayments, or equity in start-up firms.
 FinTech Market Perspectives by Tara Reeves, LocalGlobe, February 2017