UK fintech deals accounted for 10% of all global activity in 2021 -- will a rate hike put the cat among the pigeons?

UK fintech deals accounted for 10% of all global activity across the sector after a storming 2021, recording $37.3 billion of activity  (up from $5.2 billion in 2020), as well as the biggest fintech deal globally, and five of the top 10 fintech deals in EMEA, according to KPMG’s Pulse of Fintech report this week.

The UK reported 603 fintech deals in 2021, up 28% from 2020.

The world’s largest deal was London Stock Exchange’s $14.8 billion acquisition of Refinitiv in 2021, more than half as large again as the second-biggest deal, Nexi’s acquisition of Denmark’s NETS, worth $9.2 billion.

Some commentators have used this news of the UK’s fintech dominance to suggest the supposed negative effects of Brexit are a fiction. But observers – including Ron Kalifa, author of the UK Government’s Kalifa Review into fintech – have said the UK fintech sector has its work cut out to retain its leadership position.

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“While we might hold a dominant position today, we cannot and should not take this for granted. Competition is fierce from the likes of the US, Singapore, Australia, Europe and other emerging markets,” Kalifa told attendees of the Fintech Scotland festival last month.

Karim Haji, UK and EMA head of financial services at KPMG, said in a press release to accompany the Pulse of Fintech report: “The UK remains at the centre of European fintech investment with British fintechs attracting more funding than their counterparts in the rest of EMEA combined. Fintechs remain strategically important for the UK’s economic growth prospects and its vital that the ongoing work to nurture them continues if the UK is to remain a magnet for investment.”

Crypto, BNPL and core banking replacements are top trends

As well as the detail on UK fintech deals, the report pulled out the dramatic growth of crypto and blockchain, surging interest in buy-now-pay-later platforms, and a growing move to replace legacy banking systems with more up-to-date platforms, highlighting JPMorgan’s transition to UK-based Thought Machine.

“Globally, financial institutions are under significant pressure to reduce their reliance on legacy infrastructure and improve their core banking systems in order to facilitate better customer experiences leveraging the cloud. Over 2021, there has been a surge in interest in fintechs able to help with such activities, particularly from Tier 1 banks,” the report noted.

BNPL saw a lot of activity as well, with the acquisition of Paidy by PayPal, and Klarna’s $1.2 billion VC fundraising. One to watch for 2022 will be Block’s acquisition of Australia-based Afterpay, which should be worth $29 billion when it closes this year.

Crypto-focused fintechs snagged $30 billion in funding, more than five times up on 2020’s $5.4 billion.

See also: Boston Fed, MIT open-source their Central Bank Digital Currency software — but it’s not based on blockchain.

“Increasing activity in the space has also sparked further action from central banks, some of which are considering the development of digital currencies in the footsteps of the digital yuan in China. It has also sparked increasing scrutiny from regulators; in H2’21, China completely banned crypto mining and trading, while India made the first moves to follow suit. Other countries, meanwhile, have continued to highly support development and solutions in the space,” the report said.

A few more highlights from the report:

• Global investment in fintechs totalled $210 billion across 5,684 deals
• VC investment made up $115 billion of this
• The ESG-focused sector has potentially the highest growth trajectory in fintech

David Jarvis, CEO and Founder of Griffin (an API-first, full-stack Banking as a Service provider) noted in an emailed comment to The Stack that the Bank of England's recent decision to raise the base rate to 0.5% (with many on the monetary policy committee pushing for more hawkish activity still) could have some unforeseen impact on the UK fintech world: "[The rate rise] comes at an interesting time. The banking world has been undergoing a dramatic shift, as businesses and consumers navigate a new landscape of challenger banks, incumbent banks, and a vast community of fintechs in between.  Most non-bank fintechs are FCA-regulated Electronic Money Institutions (EMIs), which are prevented by the regulations from paying interest on funds held in their accounts.

"Although most banks have yet to raise the interest rates on their accounts, the rise in the base rate is likely to trigger raises in the interest rates that current account holders receive. For most of the last ten years, both interest rates and inflation weren’t factors when deciding where to bank. But this rise in interest rates may change that calculus. Raises in the amount of interest bank accounts pay will lead to a material split between interest-paying bank accounts and non-interest paying EMI accounts. The difference between a “real” bank account (of the type offered by Monzo or Starling) and a “digital current account” (of the type offered by Monese or Anna) will translate into an actual impact to the customer’s bottom line. This obviously isn’t the intent of the Bank of England, but it may well be that higher interest rates and inflation give a weapon back to the banks in their fight against fintechs (or at least those fintechs that don’t have a bank license!)”

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