Financial services technology – fin-tech – is currently the most exciting tech sector in terms of innovation and oppor- tunities for investors. The sector is driven by the inertia of legacy financial instructions and banks that are unwilling or unable to capitalise on new technology.
A systemic lack of innovation and complex regulatory requirements have combined to create a huge gap in the market that fin-tech firms are exploiting. By virtue of being nimble start-ups, these firms are able to outperform the banks in terms of speed, agility and attracting the best talent.
Where legacy institutions have missed opportunities or have been hamstrung by a culture of decisions made by committee, fin-tech start-ups have pressed on with creat- ing exciting products or services that have
the potential to disrupt major areas of the financial services industry.
Everything from mobile pay- ment to customer service and management has the potential for disruption. Crucially for inves- tors, the products that fin-tech companies create have the capacity to become profit-
able very quickly. This is in part due to the fact that the level of revenue these compa- nies can generate is usually significantly higher than other market segments.
The number of regulations that fin-tech companies need to navigate has helped to prevent the sector from becoming flooded with inferior start-ups. In short, the quality of start-ups and the potential for profit is generally much higher in fin-tech than in other technology segments, such as e-commerce or dig- ital marketing.
In the European fin-tech scene, London leads the way. The burgeoning tech scene around Old Street – London’s Tech City – is close to one of the world’s leading financial centres. This has created an environment few cities can match. Europe’s other leading tech centre, Berlin, does not have a sufficient number of financial firms. Investors there also have less experience of the fin-tech sector than their London-based counterparts. Culturally, consumers in London currently have a much greater appetite for innova- tive fin-tech products and services. This means UK-based start-ups can scale much more quickly than their Euro- pean rivals.
While there is obviously great potential for a good invest- ment in fin-tech companies, would-be investors need to be aware that some of the rules governing the assessment of start-ups are not applicable to fin-tech companies. For many start-ups the youth of the chief executive or management team is a blessing. However, in a fin-tech company a freshly- minted graduate, no matter how talented, will not have the required level of insight into financial processes. Observation of regulatory issues is key. If a company breaks compliance rules in the financial sector it will be caught by the regulator and probably shut down.
Most fin-tech start-ups also require significantly more capital to launch and run than companies in sectors such as consumer or mobile. International expansion has to be on the agenda very early in the process, as the majority of fin-tech opportunities need to be global to be worth the investment.
As with any market segment, there are challenges and risks. However, the potential of fin-tech companies to earn substantial returns, and the capacity of the financial industry to be disrupted, marks out this space as one of the most attractive investment opportunities currently available.