A year in fintech & alternative finance: part 1

Funding rounds, expansion into new markets and high street banks playing catch up, were key fintech themes in 2018.

In a year plagued by Brexit uncertainty, slowing investment and faltering consumer confidence, fintech businesses attracted investors and opened up new markets.  

In this article we take a look back at stories that set the pace over the first six months of the year.

January

The fintech year started with a bang with reports that the world’s biggest peer-to-peer business lender Funding Circle was in talks with city bankers over lining up a £1bn flotation, but the UK firm, which has lent over $5bn globally would not take the plunge until much later in the year (See, A year in fintech & alternative finance: part 2).

Star fund manager Neil Woodford got in on the action and upped his stake in the £787m P2P Global Investments portfolio. Woodford, who has been a long term backer of fintech firms, increased his stake by £8m to £102m, lifting his total holdings in the fund by one per cent to 13 per cent of the total share capital.

The sector even tempted celebrities to put their hands in their pockets.

The investment firm run by US frontman Bono, The Rise Fund, was set to fund its first fintech business, the US micro investing app Acorns, which has over 2.7m user accounts. Other notable investors in the platform include actor Ashton Kutcher and basketball player Kevin Durant, who both hold stock in the firm.

February

Revolut became the first UK banking app to announce it had broken even, passing 1.5m customers after boosting customer acquisition by 50 per cent in two months. The firm, launched in 2015, said it was  signing up between 6,000 and 8,000 new customers a day.

German savings marketplace Raisin opened its British operation, Raisin UK, in a bid to add to its 150,000 customers across Europe, allowing them invest across a range of products with partner banks. The European-wide business, launched in 2013, has processed over €7bn of savings to date.   

British challenger bank Virgin Money said it was gearing up to take on app-only rivals such as Revolut and Monzo, by revealing it spent £38.3m on building a new digital banking platform.

Virgin Money chief executive Jayne-Anne Gadhia said, the business, which is part of Sir Richard Branson’s Virgin Group, had “refreshed our strategy” in order to take advantage of “technological and regulatory changes shaping UK retail banking”.

March

US online giant Amazon sent a chill through the digital banking industry, as it has done in retailing and television. Reports emerged that the US online giant has held talks with investment bank JPMorgan Chase to develop a personal account product.

This would not be Amazon’s first foray into the financial services sector. It has become a major player in online lending to small businesses, announcing last in summer 2016 that it had originated $3bn in loans since launching the service in 2011.

By contrast, leading marketplace lender Funding Circle only recently passed the $5bn mark globally. Meanwhile, Durham-based Atom bank raised a £149m in its latest fundraising round to boost growth and upgrade its technology. Its heavyweight investors include BBVA, a multinational Spanish banking group with more than 8,000 branches worldwide, and asset manager Toscafund with over $4bn under management. So far the digital bank, launched in 2014, has raised just under £400m from investors.

Atom chief executive Mark Mullen said: “This further significant injection of capital secures the bank’s place as a disruptive force in the mainstream of UK banking.”

Intermediary finance firm MarketInvoice said it passed £2bn of invoice finance and business loans following 74 per cent jump in invoice financing volumes over the previous year.

The UK business, set up in 2011, said it had been helped by greater “awareness and adoption of alternative finance options”.

Chief executive and co-founder Anil Stocker added: “Open Banking presents an unrivalled opportunity for us to increase speed at which business can be funded and to create innovative pathways to solving the biggest issues for businesses in the UK - available cash flow.”

April

US online payments giant PayPal said it would expand into banking services, without becoming a fully-fledged lender.

The business said it would launch a Mastercard debit card, attached to a bank account with the ability to accept direct cheque deposits, through partner lenders. The account will have no monthly fee or minimum deposit required to use the account.

PayPal chief operating officer Bill Ready said: “We’re not looking to move into banking at all. What we are doing is democratizing access to financial services.”

PayPal has more than 203 million accounts worldwide in 202 countries.

British banking institution Barclays launched a new unit focused on developing new business such as fintech operations.

The new division, Barclays UK Ventures, is led by Ben Davey, who was formerly Barclays’ group head of strategy. He is tasked with investing in outside firms as well as developing opportunities within the lender, which came trace its history back to 1896.

Davey said: “We intend to drive this initiative by building a strong team of technologists, developers and entrepreneurs within Barclays UK Ventures, mandated to operate independently of, but in partnership with, our core operations.”

Manchester-based peer-to-peer lender Assetz Capital has said it now has more than 200 loans live on its platform for investors using its Manual Lending Account, which loans investors to make individual loans rather than through automated diversified funds.

The firm, which began trading in 2013, added it had more than 100,000 private investors signed up to its platform, and was closing in on more than £500m to lending to borrowers.

May

The size of this booming market was highlighted when research revealed more than $127bn has been invested in fintech firms around the world since 2014, with funding topping $40bn in 2017, according to data gathered by Fintech Global.

The research firm found that investment in disruptive financial start-ups doubled between 2014 and 2017, with the number of deals breaking the 2,000-mark in 2015 and 2016. Last year this number fell to just over 1800, but the average deal size lifted to $22.4m last year.

Spanish high street player Santander said in May it intended to establish a digital bank under a separate brand as it bids to compete with growing mobile rivals, such as Monzo and Revolut.

Its new banking project plans to offer a range of services beyond traditional lending, including payroll and pensions products.

The move followed an announcement two months previously from Edinburgh-based RBS who said it would launch its own digital brand, understood to be called Bo, set to trade later this year.

However, this did not stop, Warren Buffett, the world’s most famous investor, from damning part of the industry. The 87-year-old chief executive of investment firm Berkshire Hathaway predicted that “cryptocurrencies will come to a bad ending”.

He said that investors would likely see losses eventually by speculating on Bitcoin and other cryptocurrencies, because they are not backed by anything nor do they produce any sort of income, yield or dividend.

The sage of Omaha added: “There is also a problem that it [cryptocurrency] draws in a lot of charlatans who are trying to create exchanges or whatever it may be.”

June

At the City’s annual showpiece event, the Mansion House dinner, of Bank of England governor Mark Carney laid out plans for maintaining the City of London’s standing as the preeminent hub for financial innovation.

Carney, in a speech to the City’s great and the good, said that the economy is reorganising itself “into a series of distributed peer-to-peer connections across powerful networks”. He added that we are on the brink of a “fourth industrial revolution”, that demanded new forms of finance and “a new Bank”.

He announced a series of changes to the way the bank operates, including its Real Time Gross Settlement system – which he described as “the backbone of every payment in the UK”. The governor said this is being revamped, primarily to accommodate non-banks.

As if to underline the pace of change, Revolut said it had topped two million customers in Europe, representing growth of more than 300 per cent growth over the past 12 months.  

Revolut, which claims it is the fastest-growing fintech firm in Europe, added its monthly transaction volumes had hit $2bn, with customers making over 100 million individual transactions.

It also revealed it is working on a new commission-free trading tool, allowing users to invest in UK and US-listed firms, as well ETFs and options. The business said it was taking aim at traditional brokerages, which charge as much as £5 per trade.

Founder and chief executive Nikolay Storonsky said: “To put it bluntly, we are going to cause the same disruption in investments as we have done in banking.”

Across the Channel, French small business marketplace lender Lendix raised €32m in its latest round of funding, as part of plans to expand into five European markets by the end of 2018 – and seven by the end of this year. Noteable backers included German insurance giant Allianz.

Lendix, formed in 2014, at the time had lent just under €200m to small businesses, according to Brismo’s market data page.