The picture for UK fintech in the year after the report was published was a pretty one, as we highlighted in our blog on the Kalifa Review’s one year anniversary.
We were riding a wave of record investment (up sevenfold from the year before), while Initial Public Offerings (IPOs) raised £6.6 billion (double the amount compared to 2020). The UK was clearly seen as an attractive place to both launch a tech company and work for one.
The talk at the time was focused on not resting on our laurels and building on this momentum to ensure adoption matched record-breaking investment. So, how have we fared in the past 12 months?
Is the UK still a world-leading fintech hub?
Fintech investment suffered globally in the past year. After reaching a record $238.9 billion across 7,321 deals in 2021, total global fintech investment fell to $164.1 billion across 6,006 deals in 2022.
While the UK’s fintech sector saw investment drop $22 billion to $17 billion in 2022, this was still more than the rest of EMEA combined. Fintech investment in the EMEA region dropped from $79 billion across 2,379 deals in 2021 to $44.9 billion across 1,977 deals in 2022.
Even with a big drop off in funding and macroeconomic challenges, the UK has maintained its position as a leading fintech hub.
Laurent Descout, co-founder and CEO of Neo, echoes this sentiment, “it’s clear the foundations laid to date have helped London maintain its healthy competitive advantage.”
Eric Huttman, CEO of Eric Huttman, CEO of FX-as-a-Service pioneer, MillTechFX, believes that the Kalifa Review helped, “build resilience which has been vital during this tough period.”
What happened with UK tech IPOs in 2022?
Aside from boosting fintech funding, one of the key recommendations from the Kalifa Review was making the UK a more attractive location for IPOs. As alluded to above, the first year after the Kalifa Review was a roaring success for IPOs, with a total of 37 tech firms going public and raising £6.6 billion.
But, in 2022 this dropped off, with IPOs raising a combined £1.6 billion. Firms such as Atom Bank pushed planned IPOs back to 2024/2025 as firms that did list in London such as Deliveroo struggled, while others, like Made.com, went under.
Yoko Spirig believes that this is a key Kalifa Review recommendation that hasn’t been delivered and that, “the London stock exchange is not yet seen as a top-tier destination for tech listings.”
Is fintech still a priority for the UK government?
There has been widespread concern among the fintech community about recent government policies that appear to contradict the aim of remaining a global fintech leader and go against some of the recommendations in the Kalifa Review.
Withdrawal of Tech Nation funding
One of the most controversial recent developments was the withdrawal of crucial funding to the government-backed industry body, Tech Nation. More than £28 billion has been raised by alumni of the group’s accelerator programmes, which include the likes of Monzo, Deliveroo and Darktrace.
As the CEO of a Swiss company which set up an office in London partly due to the work Tech Nation did championing startups, Ledgy’s Yoko Spirig was, “disappointed to learn that Tech Nation will be shutting down, especially during a difficult time in the sector which has seen investment drop off, valuations fall and widespread layoffs.”
Global Talent Visa uncertainty
Tech Nation was also responsible for the Global Talent Visa which aims to bring international tech talent with fast growth firms in the UK, leaving the initiative in jeopardy. This is despite improvements to tech visas being a key Kalifa Review recommendation.
Sir Ron Kalifa himself commented, “Having Tech Nation lead the national connectivity chapter of the Kalifa FinTech Review was hugely impactful as it brought together several different constituents, from founders to academics and from investors to ecosystem regional leaders.”
The funding instead went to Barclay Eagle Labs which led many to question if it was ethical for a startup incubator division of a FTSE 100 bank to receive taxpayer funding. Barclays Eagle Labs has come out fighting though and said it is ready to support the UK tech industry and win over critics who think it’s “the bogeyman”. One to keep a close eye on in the year ahead.
Cutting R&D tax credits
Another big point of contention is the cutting of research and development (R&D) tax credits which were a lifeline for many startups. The scheme enables founders to claim back money spent on research and development as a tax relief or cash credit. The idea is to encourage experimenting and innovation to push the industry forward.
UK companies claimed £6.6 billion in R&D tax credits in 2020-21 but, in November, chancellor Jeremy Hunt cut the rebates available to small and medium-sized businesses in a bid to reduce fraudulent claims, while increasing credits for larger companies.
Research from the FSB found that 64 per cent of the firms to have earned the tax credits in the last three years would now rein in their innovation investment in light of the changes, equivalent to 50,000 small firms.
Meanwhile, half a dozen founders of early-stage British tech companies told the Financial Times [paywall] that the cuts, alongside Brexit and a slowdown in venture capital funding, have led them to look at international opportunities more seriously. They are looking abroad to places like France which has increased its R&D tax support steadily since 2004.
Increasing competition from Europe
While all of this has been in happening in the UK, Europe has been pressing ahead.
The EU is setting up an the European Tech Champions Initiative to boost equity investments and prevent its most promising high-tech companies from being bought out by foreign investors once they become successful. The initial money pot will be worth €3.75 billion, but its size is expected to increase over time.
Europe is “doubling down on tech investment in a bid to cement Europe’s position as a startup friendly tech hub,” according to Yoko Spirig. Spirig continues, “other fintech hubs like Berlin and Paris are building talent and investment capacity all the time, so the UK cannot be complacent.”
Meanwhile, fintech investment is increasing in some European countries. For example, the value of fintech deals in France grew 28% to $3.7 billion last year, while deals in Sweden rose to $3.7 billion, up from $2.6 billion.
So, how can the UK keep its place as a global fintech hub?
The UK fintech community has shown its resilience over the past year and there are some positive signs. For example, in the past year, the number of newly created UK tech firms grew by a fifth, with 46,474 new tech companies created in 2022, up from 38,240 in 2021.
While we’ve seen widespread layoffs, similar to what happened after the dotcom bust, we could see a startup boom. Those laid off with healthy financial packages could choose to set up their own firms and even compete with their former employers, leading to increased competition and disruption.
That said, there will be tough times ahead with investment drying up, valuations dropping and macroeconomic uncertainty all affecting the sector.
The message from founders is that the UK government needs to continue supporting the sector.
Ledgy’s Yoko Spirig, said, “It’s vital the UK government continues to support the fintech sector, encourage balanced risk-taking and drive innovation, if it wants to remain ahead of its European rivals.”
Eric Huttman, CEO of FX-as-a-Service pioneer, MillTechFX, believes, “Momentum has not slowed and it’s vital that the fintech community continues to work together to drive the industry forward and build trust to increase adoption among businesses and consumers beholden to legacy processes and providers.”
Laurent Descout at Neo commented, “It’s clear the foundations laid to date have helped London maintain its healthy competitive advantage and we expect digital adoption will continue to boost growth in many areas, including the payments market.”
Needless to say, all eyes will be on the UK government’s Spring Budget announcement on Wednesday, March 15, 2023.
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