London is the best place to found and scale a fintech business — but frothy tech valuations now threaten its reputation.
As a fintech entrepreneur, there are many things that make London great: the banking ecosystem, access to talent, and trusted regulatory bodies.
The benefits of fintech to the capital are equally huge. According to the Government, fintech contributed £11 billion to the UK economy and supported more than 76,000 jobs in 2021. Fintech is the jewel in London’s financial crown.
But some of the “big name” fintech start-ups are now putting this very jewel in jeopardy by clinging on to inflated valuations.
These valuations were achieved in a very different economy: inflation was low, so there was a lot of cash sloshing around looking for good returns. Consumer confidence was high. And, there was widespread excitement about the ability of plucky fintech start-ups to reinvent our financial system.
The world looks very different today. Inflation is stubbornly high, consumer spending is volatile, and there is uncertainty about how long this downturn will last.
Even more worryingly, many of these fintech start-ups, despite years of rapid growth, have not delivered the profits that their investors were originally expecting. The secret of the fintech industry is that the biggest start-ups still cannot stand on their own two feet.Instead, many of these companies are kept alive by venture capitalists continuing to pump in good money after bad — in the hope that they will be able to turn themselves around or go public.
At the same time, many fintech founders are scared of confronting this problem themselves because it means facing the fact that their blockbuster IPO dream is no longer realistic, especially not at the valuation that they first imagined.
But, soon, these entrepreneurs will have no other option. VC money is drying up: according to KPMG, investment into UK fintech fell 56% in 2022.
In this environment, it is very possible that big fintech businesses could end up running out of money. And if they collapse, it could tarnish the whole of the fintech sector in London, including those start-ups that are successful, profitable, and built on strong business models.Fortunately, there is a very good solution to this problem on hand: a flurry of consolidation and M&A in the sector, with London’s big banks buying up the city’s innovative financial start-ups.
This would be beneficial to both sides. London’s banks are well-resourced and in a good position to put fintech start-ups on a stable footing. At the same time, the banks will benefit from an injection of innovation, energy, and entrepreneurialism.
What’s stopping this? On one hand, it’s entrepreneurs getting over their IPO pipedream and seeing M&A with a big bank as an equally satisfying exit. On the other hand, it’s going into the banking boardroom with a genuinely realistic valuation — and not a number picked from an optimistic VC pitch deck from a couple of years ago.
So, I’m calling on these fintech businesses to get one or two steps ahead, swallow their pride, write down their inflated valuations, shelve the magical IPO dream, and open up frank discussions with potential bank buyers. By going to speak with the big banks, entrepreneurs can play their part in stabilising the market.
In a time of economic uncertainty, showboating and inflated egos are the last things we need.
We need a sense of pragmatism in fintech, and admitting to the charade of over-the-top valuations is the first step towards bringing us back down to earth.
Rafal Andzejevski is founder and CEO of PayAlly
