Financial technology – more colloquially referred to as Fintech – has become one of the hottest corners of the UK’s startup universe.
Evidence of the sector’s strength is provided, at least in part, by the growing interest of investors. In 2017, British tech startups attracted £2.99bn in equity investment, according to figures published by London & Partners. Within that total, fintech accounted for £1.34bn.
But importantly, Fintech is not simply attracting investment. It is also proving popular with businesses and individuals. Witness the early stage fintech companies that attracted the biggest investments last year – namely payments company Transferwise (£211m), peer-to-peer lender Funding Circle (£81.9m) and digital bank, Monzo (£71m). All have successfully tapped into demand for type of services they offer.
All of which raises the simple question, why fintech. Or to put it another way, why does the world need another bank? Why does the world need an alternative means to transfer money abroad? And why have businesses been so quick to embrace market lending as an alternative to traditional bank finance?
The short answer is that the new fintech players are bringing to the party new, improved or additional services when compared to incumbents. Transferwise has thrived by offering a cheaper way of transferring money abroad. Monzo gives its customers not only a banking service, but improved account management tools. Peer-to-peer lenders stepped in to fill a market gap when the financial crisis forced banks to pare back lending to SMEs.
You could argue that good service does not necessarily require innovative new technologies. However, technology has certainly been an enabler of service and new business models.
For instance, in the case of peer-to-peer lending, market platforms have made it possible to create communities of lenders and introduce them to borrowers. Creating a peer-to-peer market could – and can – be done manually, but the technology allows the model to be scaled up and out to more businesses and lenders.
Digital technology also adds a high degree of convenience. For instance, one advantage of being a challenger bank is that there is no legacy of old technologies and processes, and nor is there a need to provide a universal service. Thus, a challenger bank is free to design a customer experience from scratch. At the user end, this is increasingly likely to take the form of an easy-to-use mobile app. Meanwhile, behind the scenes, customer-friendly features such as account management can be built in, without the need for a major overhaul of IT.
Serving a Niche
Arguably one of the biggest advantages enjoyed by the new generation of fintech companies is that they are free to concentrate on serving a market niche – such as consumer or business-to-business payments – rather than offering a universal service. Once again, that lends itself to designing technologies that make it as easy as possible to carry out transactions.
But while the technology is an enabler of service and innovation, the point of differentiation for any fintech provider lies in the business model itself and what it offers to customers and stakeholders.
To take an example, The Route – Finance’s Private Debt Platform serves two very particular audiences. On the borrower side, businesses that use the platform tend to be those that – for one reason or another – would find it hard to access finance from a bank, or indeed from a generalist Peer-to-Peer platform. This is usually due to a ‘special situation’, such as a restructuring requirement or a growth plan that is perceived to be risky. There are however, among these, viable companies willing to use their collateral as security. The Route’s team carries out extensive due diligence before introducing the secured lending opportunity to its Members.
On the investor side, The Route has built a community of High Net Worth individuals who have pre-mandated funds for use on the platform.They are sophisticated, experienced and proactive investors.
Aligning the Technology
With that in mind, The Route’s Private Debt Platform has evolved to provide investors with a superior experience. In particular, the platform allows Members to access comprehensive data on companies seeking to borrow. New deal opportunities are posted on a 24/7 basis, providing full visibility of the pipeline. Equally important, once a deal has been agreed, The Route’s community can track the status of their investment.
In other words, The Route – Finance platform is deploying technology that aligns absolutely with the demands of sophisticated investors.
And perhaps that is the point of fintech. There are hundreds of new fintech businesses starting up in the UK every year. Those that thrive will do so because the platforms and technologies on offer are providing real value to target customers. That’s true in Alternative Finance and across the Fintech sector as a whole.
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