London’s Startups Show the Way in Remaking Finance

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There’s a conspicuous change underway in London’s financial sector. The British capital, with its well-established reputation as a global center of finance, has played host in recent years to a growing number of fintech—or financial technology—companies. These are small, nimble start-ups that are using technology and data analysis to reinvent doing business in areas such as peer-to-peer lending or foreign currency exchange. They’re often led by young, tech-minded entrepreneurs—more likely to be dressed in a t-shirt than the dark-suited uniform of a banker—who talk about issues such as transparency and trust. Some have the high hopes of being able to change finance for good, others to simply bring efficiency and innovation to a sector that has arguably been in long-need of change.

“Banks are big behemoths. They don’t have a history of innovating quickly,” says Anil Stocker, co-founder of fintech firm MarketInvoice, an online platform for growing businesses to auction invoices to investors. Stocker, like his two colleagues with whom he set the business up, has first-hand knowledge of the established finance sector: he worked in Lehman Brothers’ private equity division and left before it went bust five years ago. Stocker says that that gave them an advantage: “One of the reasons why we could innovate is because of our expertise.” Established in 2011 to plug the funding gap for small businesses, MarketInvoice broke even by 2012, prompting Forbes to include Stocker in its list of 30 under 30 in finance.

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Stories like this echo throughout parts of east London’s Tech City—Britain’s answer to Silicon Valley—a place where hipster coders, design aficionados and entrepreneurs have converged in droves. Following investment from the government, the area is now home to some 300 technology companies. It’s already produced successes such as TweetDeck, a dashboard for managing Twitter accounts and Wonga, a short-term lender. The capital’s global tech credentials have been further boosted by the fact that U.S. web and tech companies like Amazon and Google have chosen to invest in offices in London.

It’s this “eco-system” that made London a natural choice for setting up their fintech company, says Taavet Hinrikus, Skype’s first employee who went on to set up TransferWise with his colleague Kristo Käärmann in 2011. TransferWise helps people make international money transfers between currencies at a lower rate compared to that of banks. Both hail from Estonia—which holds the world record for start-ups per person—but consider London to have “the most developed eco-system in Europe for both technology and finance”, says Hinrikus. The idea for TransferWise was born organically out of Hinrikus’ and Käärmann’s frustration at the expense and hidden fees involved in sending money abroad. They market it as a “Robin Hood of currency exchange”, and its ethos is built on transparency and what they call “knab”—the word bank spelled “rightwards” according to their website—“because it stands for things flipped on their head and finally done properly”.

Their enthusiasm for challenging the status quo and misspelling words has resonated well with investors: Peter Thiel, the co-founder of PayPal and the first outside investor in Facebook, led a $6 million investment round for TransferWise in May this year. Thiel described it as offering “true innovation in banking by enabling its users to retain their wealth across borders”. It’s his first foray into Europe and an important mark of recognition for London’s tech scene. Not only that, from an investment perspective, it’s indicative of the huge potential within this sector alone: an estimated $300 billion to $400 billion flows through retail foreign currency exchanges each day, and TransferWise has only gotten started in capturing its chunk of that market, which, admittedly, banks still control a huge percentage of.

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The growth in the industry has perhaps been a long time coming. Michael Laven, CEO of Currency Cloud, a platform for international payments for businesses, says that because of the large, institutional nature of finance, it’s been resistant to the kinds of disruptive technologies that have dramatically changed industries such as music or retail in the past decade. Hinrikus says that changes in the last five years, including the fact that trust in the banks is at an all time low, has finally created “a perfect storm” for innovators to change finance. Alex Macpherson, head of ventures at U.K.-based Octopus Investments, says it also stems from what he calls the rise of “social economics” since the financial crash of 2007—suggesting that the huge amount of information now in the hands of consumers has meant that the world of finance has finally opened up to a whole new array of actors.

Though the future looks promising for fintech and London, there are still road-bumps ahead. Both regulation and limits to global expansion are areas of concern for entrepreneurs. Wonga, the short-term loans fintech firm that has attracted controversy for its high interest rates (more than 4,000% in some instances) is now facing the possibility of new regulation at home while it contemplates a multibillion-dollar public offering on Nasdaq. And inevitably banks too will play catch-up with these tech start-ups, says Stocker. He is not the only one who argues that in the long run this will be beneficial for the financial sector overall.

1 comments
armcor
armcor

While MarketInvoice is not the first receivables auction platform, they are nonetheless a true innovator in the sector and seem on track to gain a significant share of the very sizable UK invoice finance market. Bravo!