FinTech

Fintech: London’s economic supercharger

Andy Morgan Andy Morgan

The UK’s fintech sector remains seemingly untouchable. Despite a turbulent year for the economy, the sector has sustained strong growth through a mix of innovation, commercial and financial deals and market moves.

The sector attracted more than double the amount of venture capital investment in 2017 than in 20161. The UK government remains committed to building on the growth of the sector, unlocking £20 billion for innovation in financial services over the next 20 years2. Despite this boost, operators need to seek and build the next disruptive technologies to keep the sector thriving.

In April, we held our annual fintech dinner for the fifth year in a row. The event brought together industry leaders to look at ways in which the sector is sustaining London’s reputation as a great place to do business.

ICOs: A new way to raise capital?

Funding for new and innovative business models is challenging at the best of times. The inception of Initial Coin Offerings (ICOs) for blockchain-backed businesses has resulted in a considerable amount of interest and hype at the same time. Tony Xhufi, Cryptopreneur and adviser at BlockWay Ventures shared his views on what makes or breaks ICOs and what, if any, are the safeguards investors should apply while considering ICOs.

It was highlighted that the core set of investors in ICOs tend to be a small but growing community of savvy investors, with Tony characterising the process as an ICO to acknowledge the community-like nature involved in fund-raising. While investors expect to see the benefit of blockchain technology being used to create operational efficiencies in business models, entrepreneurs and shareholders alike expect to benefit from a relatively new way of raising funds without selling a stake in their business or taking on debt. Investors in ICOs buy tokens using mainstream cryptocurrencies, typically Bitcoin or Ether. They receive tokens which rise or depreciate in value depending on the uptake and success of the underlying blockchain-based business model.

Despite the recent surge in ICOs, the first ever ICO, a project called Mastercoin actually took place back in 2013 and raised USD$7 million. While the market remembers this deal as 'disastrous', it clearly positioned ICOs as a viable funding option for innovative businesses. Since then, its popularity has grown rapidly. The ICO market recently increased from USD$324 billion to USD$385 billion thanks to the rising price of Bitcoin3.

While they are non-dilutive, ICOs are relatively expensive and require a lot of road-work. Tony Xhufi explained that costs add up as one reaches out to the investor community, collectives and funds that focus on the market. As with IPOs, costs involve not only the legal and marketing aspects, but also banking, and blockchain technology adoption aspects. Post-ICO, considerable investment goes into promoting the business and the business model, and growing adoption. The big advantage of ICOs is how quickly a business can raise funds. ICOs often take three to six months of preparation work, with millions being raised in just a matter of hours.

Google: A new kid in the cloud?

Tom Grey, Head of Cloud Solutions Architecture EMEA at Google discussed their recent entry into the commercial cloud services market, what that means for the corporate sector in a world dominated by Amazon with AWS and Microsoft with Azzure, and what this means for fintech.

The idea of having one central infrastructure has become mainstream over the last five years. It therefore made business sense that Google, as one of the world’s largest providers of hosted services, shared the economies of scale these bring, to the benefit of the business community at large. Tom explained that the new offering is driving a whole new economy of scale for the business; not just their own buying power, but also that of businesses like Spotify and the big banks.

Challenge the status quo to succeed

Both these advances have profound implications not only for the fintech sector but also for the financial services and technology sectors at large. Businesses in the sector need to challenge the norm, looking for more agile business models to succeed and drive the future of the industry.

Tony Xhufi says: "those who take the time to understand how ICOs work stand to gain the greatest reward". While the big numbers can make ICOs seem like an attractive option for those who want to make money through cryptocurrency, he warns that the market is extremely volatile and unregulated. As such it should be approached with extreme caution. “Before starting an ICO, investors and business owners should step back and ask: does this project really need a blockchain? If the answer is no, then don’t do it or invest in it,” says Tony.

Tom Grey challenged the lack of flexibility and portability in the cloud services market. Could cloud providers enable cloud-switching, like bank switching to move large amounts of confidential data from one server to another quickly and easily with no interruption to service? While Tom was confident to support a service like this, he noted that it could only work if businesses demanded a cross-industry solution.

Continued innovation is needed to keep our capital thriving through the tricky economic climate ahead. From demystifying the ICO process, to sharing the knowledge and skills from the tech industry’s biggest players, it is clear there are a wealth of opportunities that will continue to drive the sector to greater heights and challenge the status quo.

For more information about how fintech is fundamental to shaping a vibrant economy, please contact Andy Morgan or Atul Monga.

References

  1. Venture investment in UK fintech more than doubles, Financial Times, 7 February 2018
  2. UK Government - Autumn budget 2017, 22 November 2017
  3. South Korea’s Bitcoin Price Premium Returns as Crypto Market Climbs to $385 Billion, CNN, 22 April 2018