Tim is CEO of Augmentum Fintech plc, the only listed fintech-focused venture capital firm in the UK; giving businesses access to patient capital and support, unrestricted by conventional fund timelines. As well as serving on the board of leading fintech companies including Zopa, iwoca, Monese, Seedrs, and Farewill, Tim is an Ambassador for Innovate Finance, the association representing the UK’s global FinTech community. He has also served for the past eight years as a Young Global Leader at the World Economic Forum. Here Tim speaks with prepaid card provider Soldo about the challenges fintech founders face today and what the future fintech landscape might look like.
Interactive Investor has been around since the 90s, so it’s probably one of the first we invested in, back in our first fund. There are numerous examples of what now are described as fintech companies that, for good reason, take that little bit longer to get to scale, maturity and to fulfill their potential. We operate in a complex, heavily regulated environment and although consumers might want a solution, they often take a bit longer to vote with their feet than you’d think.
Zopa in particular was well ahead of its time. We invested in 2012, many years after its inception, and it was still just at its first inflection point of growth. It took 10 years for them to lend a £1bn and a further 5 years to lend £4bn more. So there’s no question that fintech businesses historically have taken more time. For the right proposition if you can be patient and ride the adoption curve, they can still become established, scaled and highly valuable businesses. So the average fintech business takes longer than a traditional disruptive tech business, but the outcome should be more valuable because of the size of the market it’s attacking. But there is no question that the adoption curve is accelerating, so the speed to get to scale will reduce considerably relative to history.
That’s right. There’s a statistic that says you’re more likely to divorce your partner than change your bank account. And I think it’s extraordinary because, when you look at any other industry that’s been disrupted when consumer satisfaction has been as low as it is in personal finance, consumers have voted with their feet and with their wallets and moved.
But there’s a real inertia with finance, particularly in savings and investing. Consumers don’t want to engage. Even though the average Net Promoter Scores of the Big Six traditional financial services companies is around 10, and the emerging fintechs often have phenomenal NPS of more than 70- almost unheard of not only in financial services but in any industry; consumers just feel that it’s easier to stay where they are.
However, the driver today is that we’re now seeing an emerging demographic who are switching much more rapidly. We know that Millennials are more promiscuous, and they’ve fuelled much of the growth of the emerging neo-banks.
However, often, they’re not using them as their primary salaried accounts. Most of the time they’re secondary or even tertiary accounts which they use for a specific reason or functionality. Trust is a really important factor here: even though many consumers don’t like their banks, the trust is still there relative to emerging players. That’s why we always work with our portfolio companies to focus on building trust and credibility as a key commercial commodity; and it takes time. You can’t build a company which expects to be entrusted with people’s money overnight, even if you offer them a better service with lower costs and you’re going to deliver better returns. People want to see proof, which takes time and they want comfort.
There’s a statistic that says you’re more likely to divorce your partner than change your bank account. When you look at any other industry that’s been disrupted when consumer satisfaction has been as low as it is in personal finance, consumers have voted with their feet and with their wallets and moved.
It’s evolving. Three years ago, we would have talked about fintech being the unbundling of the bank. Early adopter fintechs would attack a very particular vertical – lending, mortgages, insurance, current accounts and so on. Now, though, we’re seeing a rebundling of the banks through services like Revolut who attack with one product. Monzo, too, is creating a marketplace for their own and third party added services.
Now, that’s essential because no-one makes money out of a current account unless they charge for it. And consumers aren’t prepared to pay for current account services, unless it’s a focused player like Monese who originally offered an account for people who can’t get a bank account, for example expats and immigrants who didn’t have 3 months of address history.
But in the mainstream, banks need other services in order to build a sustainable business, and that means selling other products like savings and lending where there’s a margin.
So the challenge for the neo-banks amongst other fintechs is that their success is predicated on cross-selling the consumers that they’ve acquired, to buy other propositions until over time they become their core banking proposition
That looks like a challenge for the newcomers, but let’s paint a different picture. I can see a world where traditional banks might become just a repository of capital. With the advent of Open Banking, customers can use their traditional bank as a vault, after which they then have real choice as to whose services they then want to use. Eventually the role of the bank becomes fundamentally different; and this, I think, poses a significant threat to the incumbents over the next five years or so, not to mention the incumbents significantly higher cost base.
We do. Most Venture Capital funds are generalists, so they have limited bandwidth. Because we’re a specialist fund, this is all we do, live, breathe, eat and sleep, 24/7. We focus on areas where Europe, and the UK in particular, are the centre of gravity for innovation and IP development. And in our view, that’s not just banking and lending.
If you look at asset and wealth management, for example, there are a raft of innovative businesses such as [our propositions] BullionVault, Whisky Invest Direct and Seedrs; alternative ways to access what we think are asset classes which were previously inaccessible to the retail consumer. These businesses truly democratise access at the lowest possible cost. Asset and Wealth Management has been an industry that has offered limited choice, at high prices often via low tech solutions. There is a long way to go in terms of disruption here.
And we also can’t rule out the propositions which are helping to solve problems for the big incumbents. They have spent around half a trillion dollars per year at last analysis on innovation, most of which is just propping up their legacy stacks. OnFido, for example, uses cutting-edge tech to onboard customers at scale; which is incredibly compelling. RegTech compliance is a huge pain point, not just for fintechs, but for incumbents as well. Platforms like Thought Machine, 10x and Mambu are providing 21st Century tech to platforms that were lost in the 1970s, for incumbent banks which would ideally close for three years and start all over again. So, I think you’re going to see some really important and valuable businesses predicated on allowing the incumbents to remain competitive and efficient. In order to keep up with changes in the market, there’ll certainly be some casualties along the way. But I think the recent Gartner report saying that 80% of incumbents will be extinct in 10 years is a little provocative. I don’t believe that will be the case. Incumbents with significant balance sheets are making major acquisitions in order to stay competitive. In other words, they’re going to buy the competition rather than compete with it. Visa, for example, recently acquired [banking aggregator] Plaid for $5BN. The biggest players will pay whatever it takes to get disruptor category leaders into their hands, and that is going to be an ongoing trend.
In order to keep up with changes in the market, there’ll certainly be some casualties along the way. But I think the recent Gartner report saying that 80% of incumbents will be extinct in 10 years is a little provocative. I don’t believe that will be the case. Incumbents with massive balance sheets are making significant acquisitions in order to stay competitive.
Well, each company has its distinct challenges; but I think a common thread is Brexit. You can’t ignore it – it’s certainly a headwind. I think it’s a bigger challenge for some of the big incumbents alongside all the other challenges that they are facing; and we can’t underestimate the impact and uncertainty that it brings. A particular squeeze is talent; not only because of the changes in immigration laws, but also simply that these businesses are growing at a rapid rate and there is a shortage of engineering talent in London, so that expertise has to be imported. Distributed development is a typical area where, increasingly, businesses that are scaling very quickly can’t recruit enough talent in London or it’s just too expensive. And if talent cannot be scaled quickly, or the cost becomes prohibitively high, then fintechs will simply look to locate elsewhere. Paris, Berlin and Stockholm will all be only too glad to accommodate leading fintechs.
With hyper-growth comes many challenges; and in fintech they are amplified. You can’t drop any balls on infrastructure, compliance or RegTech. There were a couple of high profile examples last year (not in our portfolio!) of fintechs which had grown at an extraordinary rate and let compliance slip. But when you’re in a regulated industry, you can’t play fast and loose. The regulator won’t hesitate to throw the book at you if you continue to misstep.
It doesn’t change the nature of our business, but it’s definitely a different approach. As the only publicly listed fintech fund in the UK, we’re a benchmark of one – we have no other peers. One of our motivations was to create a closed-ended vehicle with patient permanent capital but, at the same time, investors recognise that these are long term, risky assets. We believe we’ll be able to deliver a compelling return, but it’s going to take time.
We don’t put our eggs in at the very early stage. We won’t do seed funding, we invest at Series A for really compelling opportunities, but also we’ll invest at much later stages. Interactive Investor, Zopa and BullionVault are profitable, established businesses that are arguably closer to exit than some of the others in our portfolio. I’d like to think that we have some businesses in the portfolio that are on the path to exit because they’ve gone through the journey, they’re profitable. Ultimately we’ve got to demonstrate to the investment community that we can deliver meaningful realised returns. We just need patience from the market to continue to believe in what we’re doing and then I think the rewards will be there as we are providing public market investors balanced exposure to an asset class they simply won’t be able to access directly.