What future for the British fintech sector?

The UK has long billed itself as the friendly home of fintechs (fintech companies), which cover everything from money transfer apps and open source banking to payments and blockchain finance. supply. UK fintechs are not subject to any specific legal regulation, except where their activities fall under the responsibility of existing financial regulators.

Around 2,500 of these companies have established themselves in the UK, according to KPMG, with an increasing drift through funding rounds towards listed status. Unlike other sectors where venture capital and private equity have largely left the scene, fintechs have continued to attract decent levels of investment. According to trade statistics, the UK fintech industry raised the equivalent of $9.1bn (£7.9bn) in the first six months of this year, up from $7.3bn during the same period in 2021, which itself became a record. year. So, despite the industry’s growth, why are investors currently wary?

The fintech industry has endured a scorching summer as questions have been raised about a series of companies suddenly grappling with questions about their accounts or facing failures to implement laundering protocols money in certain markets. In other words, the capital-intensive, predominantly loss-making business model is suddenly less popular with investors wary of debt-laden companies in an era of rising interest rates, but there’s also a feeling that growth has been stunted. – skelter and management control sometimes absent.

A word for the wise

Wise (WISE) is currently the best-known and largest fintech to list on the London Stock Exchange via the unusual route of a secondary listing. While this undoubtedly saved costs at the time, it likely limited the number of shares that could be issued and traded beyond typical fund holders, so share price movements tend to move dramatically on a relatively weak trading base.

However, the lack of liquidity in the shares is not the company’s main problem and, while embarrassing, neither is its managing director Kristo Käärmann’s deliberate tax default issues with HMRC. Instead, Wise is facing serious reputational fallout from the activities of its UAE subsidiary, Wise Nuqud, which was recently fined $360,000 by regulators for non-compliance. compliance with money laundering protocols. To be honest, that’s not unusual in the general finance industry; Natwest (NWG) was recently caught up in a money laundering scandal involving bin bags full of moldy Scottish banknotes being accepted at branches for deposit. However, the case gives ammunition to critics who demand that fintechs are essentially banking entities that should be subject to the same level of regulatory oversight.

Part of the problem for Wise, and similar payment transfer companies, is that they fall somewhere between a technology provider that can perform lower-cost banking tasks, such as foreign exchange transactions, and credit who must hold statutory levels of capital to protect their balance sheets. The question now is whether trying to remain a technology service provider is profitable enough on its own to avoid questions about the underlying business model, and whether the companies are mature enough to avoid embarrassing entanglements?

The growing pains of Zepz and Revolut

Fintechs have apparently struggled when it comes to transitioning from cocky startups to mature companies. Concretely, how to acquire the stuffy back office of a bank while maintaining the free-spirited culture of a young company. Take the example of money transfer specialist Zepz (random use of consonants is a hallmark of the industry). He avoided an IPO in London despite being based there, in favor of fundraising in New York. It raised $300 million from investors in a private funding round, giving it a potential valuation of $5 billion, but since then fintech valuations have plummeted in the private market and Zepz has become a case study of how start-ups can quickly become dysfunctional if there is inadequate control over their growth.

It recently appointed a new chief executive, Mark Lenhard, after a chaotic period in which the company had four executives all bearing the title of “CEO”. Former incumbent Breon Corcoran had proposed a cost-cutting plan so Zepz could aim to turn a profit after the company suspended its $6bn (£5bn) IPO plans. Under new management, company recently posted first profit, new boss says The temperaturebut an IPO is not on the cards.

Accounting issues look set to disrupt Revolut’s former darling fintech sector. The company is mired in an audit nightmare after its BDO auditors were singled out by the Financial Reporting Council for doing insufficient work on revenue recognition to avoid a possible ‘material misstatement’, according to a FinancialTimes investigation. The result is that auditors are now crawling through the books under pressure from the regulator, which could delay the filing of its accounts and potentially result in fines and penalties for management. The audit issue could affect Revolut’s drive to obtain a UK banking license. It has so far received 44 out of 48 approvals in different jurisdictions, with UK licenses still pending – more than 18 months after the application was filed.

In the meantime, Revolut is another fintech that is taking a hard look at its cost base. After going on a hiring spree through 2021, the company is now cutting graduate positions and cutting other nonessential costs.

It’s not hard to see why fintech valuations are plummeting in the private equity market, along with their listed brethren. Wise’s most recent earnings figures show the impact of adding back-office capacity while spending enough on marketing to keep new customers coming through the doors. Its adjusted profit margin fell by four percentage points as administrative costs increased.

Ultimately, the industry must decide whether it remains a relatively high-volume service/technology business, or whether it is more like the banking industry, with all the aggravation and bureaucracy that entails. Until this conundrum is resolved, investors will continue to be wary of the heady lure of the sector.