The UK taking on the US for investment in payments businesses may not seem like a fair fight, but our plucky David is doing very well against the Goliath of the US, according to a new report from the Emerging Payments Association.
The report, entitled Investments in PayTech, analysed the investment lifecycles of 113 PayTech companies founded or operating in key western markets (France, Germany, Italy, Spain, UK and US) between 2010 and 2015. It found that UK and US companies dominate the market almost completely, with 90% of start-ups originating in these countries.
While the US has more PayTech companies overall, the UK punches well above its weight.
5 years is a long time in payments
In 2010, The UK was home to 13% of PayTech start-ups, compared to 58% in the US. Skip five years and the US increased to 61% and the UK…more than doubled to 28%. In April 2015, the UK had 800 FinTech companies and now there are 2000 companies plying their trade in the perpetually grey weather. Not bad.
The average UK PayTech start-up received $1.8m in seed funding in 2015, more than double the $0.84m from five years ago, and is now nearly on a par with its US-based rivals ($1.8m). The UK is also now matching the US in terms of seed funding. In 2014 US seed funding averaged $1.9m compared with $1.8m in the UK.
Strong, independent UK companies
What is also very interesting is the data about companies’ independence. According to the report, the US market is a brutal jungle of harsh conditions and hungry predators. A staggering 43 per cent of companies founded in 2010 have since either been closed down or acquired. In the UK, 100% of the UK PayTech companies included in this survey are still independently active.
The conclusion one can draw from these figures, and in particular the final piece of data, is that the UK is an incredibly attractive market to set up a payments business. Similar amounts of investment, but a more stable lifecycle.
Size doesn’t matter
The US has a population of 320m, five times more than the UK’s, and yet, the UK “supports 2.5 times as many
“It’s gratifying to see the UK PayTech sector punching well above its weight – not only creating new ideas that become new companies, but also creating businesses that thrive beyond the startup phase to challenge the bigger players,” said Tony Craddock, Director General of the EPA. “While investors have recognised the potential in UK PayTech for some time now, it seems that prospective acquirers are less certain. PayTech companies and the broader payment industry needs to do a better job at showcasing the scale and scope of success in the UK.”
Deal volumes in the UK and Ireland have been increasing at 74% a year since 2008, compared with 27% globally and 13% in Silicon Valley. Between 2008 to 2013, the value of UK FinTech investment increased nearly eightfold, to $265 million in 2013 – a rate of 51% a year, nearly twice the global average (26%), and more than twice that of Silicon Valley (23%). Within Europe, London is the capital of the tech start-ups where 1,009 start-ups were launched between 2005 and 2014. It is followed by Paris with just 281 firms, Dublin with 162 and Madrid with 139 startups.
“With the unprecedented speed of evolution in payments, it’s critical that we take a breath and evaluate whether as an industry we are doing enough today to support the payment businesses of tomorrow,” said Kriya Patel, European Managing Director, The Bancorp. “The report highlights the challenges and opportunities involved with funding, an analysis of the investment trends currently being witnessed, as well as an assessment of the business and investor lifecycles currently anticipated in this growing sector. From entrepreneurial start-ups to those on recognised global indices, it’s required reading.”
Of course the most pressing concern is Brexit. A Britain out of Europe would put a big fat question mark over London’s position as the leading financial services capital not only in Europe but also the world. Payment businesses may suddenly find themselves in a country with different regulations to mainland Europe, and who knows how many will seek to change that.
However, the report does have some positives:
Whatever the decision in the referendum on 23rd June, some factors will continue to stand in favour of the UK for PayTech businesses, such as London’s strong international position in foreign exchange, for example and the health of the UK’s asset finance and investment industry. UK PayTech start-ups may also benefit from some of the general conditions to support innovation where the UK is recognised as performing well. These include competition conditions, as measured by new start-up rates and business churn, entrepreneurship and its flexible approach to regulating new businesses.
Ernst and Young recently ranked the UK as the leading global FinTech ecosystem, presenting itself as a good all-rounder in the attributes of capital, talent, policy and demand. The report cites its well-rounded FinTech ecosystem with an effective network of FinTech hubs, proximity to global financial hub offering a wealth of talent and expertise and particular competitive advantage in its government and regulatory policy.
The report also highlights the UK’s unique position of having the world’s only Payments Service Regulator, which is a very beneficial entity to have given its interests in promoting fintech innovations but also protecting users.
Another factor working in the UK’s favour, whatever the outcome of the referendum is the country’s extensive adoption of smartphones and wearable technologies as payment devices.
“On top of this the increasing demand from consumers for personalised, seamless and on-demand payment services, which is unlikely to diminish and, with many established businesses lacking the ability to provide this, the opportunity for disintermediation is considerable,” said the report.
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