If you are a FinTech junkie like myself, you review dozens or articles each week from around the world to try to keep up with the latest hot news and hot companies in this space. Many of the articles highlight recent startups, or report on the investments banks are making in specific companies or their own innovation centers to keep pace with this hot sector. It's all very exciting, but it's hard to formulate a deeper understanding of the industry as a whole.
A recent article titled "Silicon Roundabout" in Institutional Investor provided some excellent insights into the FinTech world by looking at the strengths and weaknesses of the FinTech industry in the U.K. and in the U.S. Below is a summary of some of the most interesting points from this lengthy, 3200 word article followed with my own thoughts based upon Akamai's work with FinTech customers around the globe.
Highlights from "Silicon Roundabout":
- Geography: London has a competitive advantage because of they have technology and finance in the same city, less than a mile apart. Eleven big international banks are based within walking distance of Level39, a major FinTech innovation center at One Canada Square, the central tower in Canary Wharf. In the U.S., technology is on the west coast and finance is on the east coast, and "there is little consolidation between the two."
- FinTech Investment Growth: Europe investment is FinTech is growing faster that any other region in the world, with an increase in 215% last year to nearly to nearly $1.5B, with London having the largest share of over $500M. The U.S. does lead in overall FinTech funding, at over $2B in 2014, but investment in Europe is growing at a faster rate.
- London as a FinTech Hub: As the world's leading center for international wholesale financial services, London's growth as a hub for FinTech is only natural. It boasts more banks than Hong Kong or New York, employing some 2 million people, or about 7 percent of the country's workforce, and generates 10 percent of the U.K.'s gross domestic product.
- People: An estimated 44,000 people are employed in FinTech in London, more than in New York or Silicon Valley. Not only are more people employed in FinTech, but unlike in the U.S where many firms are founded by 20-somethings hoping to overthrow an entire industry, in London many FinTech firms are started by midcareer professionals with a working knowledge of the industry, frequently seeking to create technology solutions that can be used by large institutions to cut costs and streamline their businesses, and not compete with them.
- Government Support: The British government sees the financial services sector as essential to the overall health of the U.K. economy. It understands that technology plays a critical part in maintaining London's competitive edge, and provides strong support to the sector. The government funds a variety of organizations that support what is know locally as "Silicon Roundabout", and offers tax incentives to FinTech investors.
- Regulatory Support: Additionally, the government has streamlined regulations for startups, providing a critical early advantage in the heavily regulated world of financial services. The Financial Conduct Authority has established an Innovation Hub, providing advice to to 276 companies, and accepting 171 into its program which offers legal advice and reviews business plans to determine which regulations apply to the startup.
- Venture Capital Funding: Even with all the benefits offered to FinTech startups, financing is a sore topic in London. Only a few firms exist to provide angel or venture capital funding, and much of the startup funding comes from the U.S. or international companies. As one entrepreneur states, "When I talk to U.S. venture capital firms, they always say that we are not asking for enough money. It's a completely different world than in the U.K." As simply stated in the article, "The U.K. lacks the depth and scale of venture capital funding available in the U.S."
- Exit and Harvest Opportunities: Another concern in London is the limited exit possibilities. The U.K. had 19 technology IPOs in 2014, and none were in FinTech. In contrast, Lending Tree, a Silicon Valley-based peer-to-peer lending startup, was valued at $8B after its IPO in 2014. These high valuations for FinTech companies in the U.S. are due in part to large capitalizations by a strong VC community. Also, the sheer size of the consumer market in the U.S. results in big valuations for FinTech startups focused on the consumer market, such as Lending Tree, as opposed to the the institutional market in London.
Akamai and FinTech:
Akamai has dozens of FinTech customers around the world, and from this we see some patterns in the maturity of this sector. In general, all are focused on getting their products out the door and building their businesses, and have no time and very limited funding. Many take a "good enough" or "just enough" approach to web performance and web security to get them to the next stage.
But for many that turn to Akamai, they understand that:
- Performance matters, particularly for consumer facing applications, where users demand fast web pages and applications. The success of many FinTech startups hinges upon customer acquisition, where performance and speed is especially critical.
- Security matters. Consumers expect it, and institutions demand it. Some FinTech firms come to Akamai for our security solutions with rush orders, saying "we just landed a bank, and we need the same security solutions that they are using from Akamai."
Whatever the future holds for the FinTech sector, it is certain to provide FinTech junkies plenty of news and drama to keep us all captivated.
Rich Bolstridge is Chief Strategist, Financial Services at Akamai Technologies