UK fintech investment down by more than 30%

Less-established fintechs have been hit the hardest by the drop in investment capital, but there is light ahead for those that survive

Investment in UK financial technology (fintech) firms plummeted 30% in the second quarter of this year, with early startups hit hardest by the decline.

According to figures from fintech trade body Innovate Finance, a total of $760m (£590m) was invested in UK fintech in the second quarter of this year, compared to more than $1.2bn (£940m) in the same period last year.

The quarter has fallen with the global economic slowdown brought on by the Covid-19 pandemic and the subsequent economic slowdown it caused.

In the first quarter, where the Covid-19 slowdown affected the economy for a few weeks, total investment was $1.08bn, compared to $1.75bn in the first quarter of 2019.

Overall venture capital investment totalled $1.84bn in the first half of 2020, with 167 deals, compared to $3bn in 263 startups in the same period in 2019.

More established fintechs fared better, with digital payments and banking startup Revolut receiving $500m in the first half of this year, challenger bank Starling Bank picking up $123m, and cloud-based core banking supplier Thought Machine gaining $83m in investment.

But commentators expect the post Covid-19 world to be one where fintech will flourish, with consumers becoming accustomed to digital financial services after being forced to use them as a result of restrictions during lockdowns.

Charlotte Crosswell, CEO of Innovate Finance, said it is encouraging to see investors are still backing fintechs, but it is important to acknowledge the drop in investment funds. Innovate Finance found in a survey of members that 75% of smaller fintech firms are concerned about their next funding round.

“While early-stage conversations suggest capital is ready and waiting to be invested, there is still a lag in actual funding,” added Crosswell. “It is yet to be seen if the rest of 2020 sees a pick-up in activity, but in the meantime, we must help fintechs of all sizes source the capital they need to emerge from the pandemic if our sector is to grow during the crisis.”

Early in the Covid-19 crisis in April, analyst firm Forrester said the current crisis will be no different from previous economic downturns in making investment funds – the lifeblood of fintechs – scarce.

It painted a bleak picture for the fintech sector, where thousands of small companies are currently existing on capital investments alone, with revenues at a very early stage.

Jay Wilson, venture capitalist at Albion VC, said: “Anecdotally, it very much feels like we are back firing on all cylinders, and deal activity at all stages of the funnel is happening. From my conversations with other investors, I understand this is true for my peers too.” He added that the last quarter drop could be a pause rather than a long-term inflection point in fintech funding.

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