Islamic Fintech Startups in UK

The Islamic Finance Industry holds much promise, with assets expected to reach $3.9 trillion by 2023 according to Thomson Reuters, however, Islamic Fintech is at the very beginning of an exciting, transformative journey for the industry, one still dominated by largely domestic and OIC-based financial institutions. A young, digitally native Muslim demographic that is on average younger than the worlds non-Muslim population, is driving the growth of Islamic Finance.

The large established financial institutions are embracing the change, with 74% of financial institutions investing in data analytics, 34% in Industrial Revolution – Wikipedia (AI), and with 77% expecting to adopt blockchain by 2020.


DinarStandard – Growth Strategy Research & Advisory

UK Market-Based Finance

Ultra low rates, new regulations and the need to invest in updating their businesses mean many UK and global banks are struggling to make their cost of capital. This will drive changes to firms’ business models as they look to improve efficiency, resilience and customer experience. Technology is enabling unbundling of activities which historically were done under one roof.

While a more distributed model has many advantages, it is a far more complex system to oversee. For instance, many players which have historically not been regulated or held to the same standards are becoming active in core financial services processes. The Bank, and others, will wish to ward against this to realise the benefits.

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Source: Synergy Research Group

Major Players In Fintech Ecosystem

Expansion, disruption and competition are the defining themes of our respondents’ outlook for 2019. The race is most definitely on. “It will be the year when more digital banks and platforms come of age, driving more competition between traditional high street banks and amongst themselves,” said one leading fintech. “Big banks will start stepping up and competing with the challengers,” said one investor.

As there had been “a concentration of investment” into challenger banks and alternative lending and financing platforms in 2018, noted one investor, the disruption of traditional financial services sectors would continue and would be driven in 2019 by factors such as open banking and the growth of the regtech and insurtech segments.

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Transforming Financial Services in the UK

The UK is viewed as a leading location for FinTech thanks to its position as both a top financial services jurisdiction and one of the highest ranked global technology hubs. It cannot rest on these laurels, as there is competition from Asia, the US and increasingly from Europe.

Global expansion is essential for scale and profitability of FinTech businesses. The global FinTech market is set to be worth approximately $305.7bn by 2023, expanding at a CAGR of 22.17% between now and 2023 (14). The expected impact of technological change on overall UK trade with the rest of the world has the potential to triple by 2050 (16). Much of this addressable market will be led by businesses incubated in leading FinTech hubs and Financial Services jurisdictions – this is the UK’s opportunity.

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VC Funding Fintech in UK

We expect fintech businesses to take longer than some traditional startups to reach profitability. They prioritise reinvestment in order to scale as their business models often rely on volume in order to achieve profitability. Financial services is a heavily regulated industry with a large legacy technology and transactional infrastructure. Both these challenges need to be addressed for a fintech business to be successful.

Only a few companies in our sample have been able to move on from operating at a loss, with many companies reporting losses for at least the first five years while others take longer to achieve revenue growth to counter outgoings. Critically for investors, however, this does not appear to be resulting in business failures: Only two companies in our sample have failed or gone into administration, or have begun restricting investment from a diversifying set of funding sources.

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Fintech Recruitment in UK

Recruitment into fintech, as a result, is soaring. Where the total amounts of jobs being created in the sector are still small compared to banking, the rate of growth is significant. For context, the sector created 61% more vacancies in 2018 compared to 2017, making it the fastest growing sector in the UK economy. The growth is also felt at a regional level, where job creation increased by 18% last year.

When looking at fintech and its relationship to the traditional financial services institutions, it is worth remembering the impact of the Global Financial Crisis (GFC). As a result of the GFC, employment in the industry dropped by nearly 7% (100,00 people), leading to a period of stifled innovation, with banks understandably focussing on their balance sheets and profitability.

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Global Analysis of Investment in Fintech

Over the past year, insurtech matured significantly as a sector, with insurtech companies attracting larger and larger funding rounds globally. On a global level, there were 13 insurtech deals over $100 million during 2018, including a $375 million raised by Oscar Health Insurance in the US and $200 million raised by PolicyBazaar in India.

Insurtech solutions expanded rapidly over 2018, although claims management and the unbundling of insurances services and processes continued to be key segments of investment. The focus of many insurtechs also shifted to platform-based models, with companies looking for ways to plug into different distribution networks or payments systems, work with different insurers, or offer white-label products and services. Traditional insurers have generally embraced this platform-model — seeing it as one way to embrace innovation across their value chain without developing solutions independently.

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London’s Emergence as a Fintech Location

In the early days of fintech, much was made of the potential of start-ups to disrupt the retail banking industry winning over customers on the virtue of improved user experience and capitalising on a decline in levels of confidence in banks following the Global Financial Crisis (GFC). London proved to be a remarkably fertile ecosystem for the emerging sector on account of three major factors: talent, regulation, and funding.

All tech start-ups require capital, but none so much as fintech start-ups, particularly those in the lending space. While the UK may have relatively low liquidity in comparison to China and the US, it does boast a strong funding ecosystem, with most activity concentrated in London and the South East.
The capital has long been Europe’s top venture capital hub and over the past two years the UK has almost attracted twice as much VC than France, its closest rival in terms of tech funding2.

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Global Analysis of Investments in Fintech

Corporate VC investment in fintech for 2018 of $23.1 billion nearly doubled the previous high of $11.6 billion seen in 2016, with the number of corporate fintech deals growing for the eighth successive year. Increasing corporate participation highlights fintech going mainstream as well as a competitive response to the emerging threat of Fintech companies that have scaled, with both traditional financial institutions and a broad range of companies outside of the financial services industry participating through investments and acquisitions, including some of the world’s largest technology companies and payment platforms.

The growing maturity of the sector has also led some more advanced fintechs to make their own investments as part of their drive to expand either geographically or on a product basis and in some cases, partnering with/taking investment from financial services incumbents. There is expanding interest in partnering with fintechs to provide services, in addition to increasing interest from corporates with homegrown fintech offerings to provide B2B services to corporate clients and other financial institutions (e.g. Open banking, regtech, cyber, etc.).

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Fintech is an Evolution of Financial Services

Fintech is a radical evolution of the financial services industry, driven by a combination of technology advancements and changing customer expectations. Fintech has grown significantly in recent years. Investments peaked in 2015 , with a total deal value of $60 billion globally. Banking has led the growth of fintech with insurance and asset management beginning to catch up.

Fintechs face significant challenges in getting traction and securing support from incumbents within the financial services industry. The Government could explore opportunities to develop and implement programmes to enable fintechs to access partners.

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