H2 2023:What to expect from the UK fintech fundraising landscape

Funding into UK fintech has experienced a well-documented drop over the course of 2023 as cautious investors grapple with high interest rates and an uncertain economic outlook.

The latest data from Innovate Finance adds to the relatively bleak picture, revealing that cash raised by UK fintech firms slumped by 37% during the first six months of 2023 compared to H2 2022. Likewise, a survey conducted by the business advisory firm FRP found that 41% of UK fintechs encountered greater difficulties in securing funding over the past year,

While UK fintech investment is in no doubt in a rough patch, downturns can often lead firms to change their business models to become more resilient and adaptable, and may even lay the foundations for more steady, long-term growth.

Here are some of the key fundraising trends across the UK fintech landscape we’ll be keeping an eye out during the second half of the year..

1. Falling valuations, rising M&A

Tech valuations have endured stark declines this year after reaching eye-watering levels in 2021 and 2022.

Molten Ventures recently de-valued its holdings in Revolut by 40%, the firm’s third write-down in four months, whilst payments giant Stripe cut its valuation to $50 billion in March this year; well below its peak of $95 billion back in 2021. With venture capital firms such as Tiger Global writing down venture investments by a third and struggling to raise capital for new funds, valuations are likely to continue falling.

Many fintechs are subsequently seeking alternative means of securing funds; primarily, selling to bigger companies. As reported by the Financial Times [paywall], recent weeks have witnessed a flurry of  tech startups being purchased by big buyers. Thomson Reuters paid $650 million for legal services AI group Casetext, while Robinhood bought credit card startup X1 for $95 million.

The trend is likely to follow in the UK. It has been widely reported that the open banking specialist Snoop is considering a sale after multiple takeover offers, whilst former UK fintech gem Railsbank is also exploring the possibility of a sale due to mounting financial difficulties.

As VCs become far more selective about which firms they support, more fintechs will likely seek sales to bigger organisations.

2. Growing international competition

For all the concern and pessimism, the UK remains a major global fintech player. According to Innovate Finance, the UK was second to only the United States in terms of global capital investment into fintechs and attracted more fintech funding than the rest of Europe combined.

What’s more, even though the UK fintech landscape is experiencing an investment slump, capital invested in H1 2023 was higher than pre-covid levels, being 35% up on the first half of 2020. 

Speaking about the data, Janine Hurt, CEO of Innovate Finance, said: “Our latest report shows that the UK is still receiving more investment in FinTech than all of the rest of Europe combined, which is a testament to our amazing community of innovators and entrepreneurs.”

The biggest source of competition facing the UK is from Asia. For the first time, 4 of the top 10 investment markets are from Asia, with China in 3rd place attracting $1.7 billion, Singapore in 4th position with $764 million, India 5th with $729 million and South Korea in 9th position attracting $390 million. 

Looking ahead, Asia will likely pose the biggest challenge to the UK as a major hub for fintech investment.

3. Looking beyond London

The UK’s fintech ecosystem is intrinsically linked to London, with the capital being a key driver behind the country’s fintech success story. London has the highest concentration of financial and professional services firms, and in 2020, accounted for 94% of all UK fintech investment. 

Heading into the second half of 2023 and beyond, however, we can expect more attention to be paid to areas outside London.

Greater Manchester, for example, has a thriving fintech scene with 147 fintechs in the region – up 133% from three years ago. Belfast is also emerging as a key fintech player and was ranked in the top tech cities in the UK in a new report by the UK’s Digital Economy Council.

More recently, Leeds was chosen as the headquarters for the newly launched Centre for Finance, Innovation and Technology (CFIT), which will aim to draw on expertise to set a national strategy and drive growth across the country’s fintech sector.

There’s no doubt that London remains the core engine behind the UK’s fintech scene, but investment in other cities and regions is likely to grow throughout 2023.

4. Not all doom and gloom

Headlines like UK fintech funding tumbles have become somewhat of a staple fixture in 2023, but does this paint an overly pessimistic picture?

Investors are still supporting fintechs that they believe will be successful int the long run. In July, the challenger bank Tandem secured £20m shortly after reporting its first full year of profit. Investment platform TreasurySpring raised £23m in June, whilst payments provider Volt also raised £47m for its Series B. This is not to mention that the major venture capital firm Andreessen Horowitz [paywall] chose London as the hub for its crypto and blockchain focus. 

The government has also recognised the need to find new ways of incentivising fintech investment. Speaking at Mansion House in July, Chancellor Jeremy Hunt unveiled plans to merge workplace pension schemes and release up to £75 billion of retirement funds for fast-growing startups, including fintechs. 

This will undoubtedly be welcomed with open arms by UK fintechs given recent fundraising challenges, and it will be interesting to see how fintechs get used to having risk-averse pension funds as investors.

Consolidation, contraction, or both?

Many will continue to point towards the fintech investment slump as a sign of a sector in decline. However, the flip side of a downturn is that there is likely to be a lot more focus on solving specific issues in wholesale and retail financial markets, with those fintechs that address a genuine market need best placed to weather the storm. 

The UK is home to some of the best fintechs and entrepreneurs, but open collaboration across both the public and private sectors will be key to staying ahead of the curve. 

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