UK fintech sector raises red flag amid funding challenges

The UK’s fintech sector faces an uncertain future, with almost half of firms flagging the potential risk of failure by the end of 2023, according to new research commissioned by specialist business advisory firm FRP.

In a poll of more than 250 UK fintechs, FRP found that 48% of businesses in the sector weren’t confident of their ability to trade through the next six months, as challenges relating to inflation and interest rates persist.

Featuring in a new report reviewing the future of the industry, FRP’s research identified a heightened risk among smaller businesses in the sector (52%), although concerns regarding insolvency remained high among more established fintechs – with 38% of those with at least 50 employees suggesting they were at risk. The fears are likely to be linked to challenging trading conditions, with almost a quarter (23%) seeing the valuation of their business fall over the past 12 months, as they continued to contend with rising input costs. Almost a third (32%) also expect their valuation to decline over the next year.

With a high proportion of firms concerned about their futures, the research highlights a polarisation in the market in terms of funding – suggesting a fight for quality among venture capitalists and lenders. Against a backdrop of rising interest rates, two in five firms (41%) have found funding harder to come by over the past 12 months, with similar numbers (43%) accessing finance with greater ease.

This polarisation is also apparent in firms’ plans for the future. The majority of the 250 business leaders FRP polled said that they had reviewed and amended their exit strategy in the past year. The most popular option was to seek consolidation, while a third (35%) were more bullish in seeking new acquisitions – suggesting a wave of M&A activity is maybe on the horizon.

 Midlands fintechs most at risk but female founders lead from the front

Notably, firms in regional fintech hotspots in the Midlands (58%) and the North East (56%) were perceived to be most at risk, while cities such as Manchester and Leeds in the North (42%) were more confident about their financial health. The level of London firms worried about their ability to trade through the next six months (46%) was broadly in line with the national average.

FRP’s research also delivered significant findings in relation to the sector’s perceived gender equality challenges, with female leaders more likely to be enjoying success than their male counterparts. More than half (55%) of female decision makers said their firm had grown in value in the past year, for example, while just 38% of males could say the same. A third (34%) of female fintech leaders also said that their growth had accelerated in the previous year, contrasting with just a quarter (27%) of male decision makers.

Dan Conway, partner and restructuring specialist at FRP, said: “The UK’s fintech sector remains internationally renowned. However, as with all innovative industries, it relies on the support of investors to drive early-stage growth as new products and technologies gain traction and become commercially viable. Interest rates and broader economic headwinds are clearly a challenge, with funders ultimately becoming more diligent in how and where they deploy their capital – particularly with other sectors offering potentially safer bets.

“The number of businesses pursuing M&A strategies suggests many remain in rude health and are likely to lead a market reset in pursuit of both new customers and innovative IP. For those eyeing consolidatory support, the coming months will be crucial in optimising their commercial operations and future profitability to develop the best proposition for would-be suitors or new investment.”