The FinTech Dilemma: When to scale up your business?
The UK is home to some of the world's most exciting and successful FinTech start-ups. From cross-border payments, to alternative lending, InsurTech disruptors, to digital banks, London has been the birthplace of great FinTech start-ups, as identified in our report for the Global FinTech Hub Federation.
But the UK cannot yet claim to be a natural home for FinTech scale-ups.
A commonly-shared description of the shift into scaling is that a start-up becomes a scale-up by proving its business model.
The start-up phase is all about honing the product to perfectly fit the market, bringing acquisition costs below customer lifetime revenue, and getting those first revenue-positive customers in the door.
Then you can start scaling.
So far, too few of our FinTech darlings can truly claim to have entered scale-up mode.
This is not a FinTech-specific problem. The UK struggles to support firms in nearly all sectors into and through the scale-up period of their life-cycle. We have all heard the stats that anything between 50% and 90% of all small businesses fail.
Given the productive nature of scale-up businesses, it's a problem the Government is keen to solve. In his recent Budget, the Chancellor announced Treasury backing for a multi-billion programme of support targeted specifically at scale-ups.
So what can the UK's FinTech sector do to help companies transition successfully from start-up to scale-up?
Our recent Power Up: UK business report on the scale-up challenge identified increased collaboration between high growth start-ups and large corporates as a potential solution.
In the FinTech space, small amounts of collaboration have been happening for some time; most notably between banks and alternative lenders. But now is the time to think more seriously about the benefits both parties can receive from collaboration. In Insurance, the collaboration goes a stage further – most notably because of the cost of capital and access to regulation.
The Power Up report identifies eight models for start-up collaboration with big business, from low cost and speculative options such as running a hackathon programme, to acquisition which requires significant investment and commitment. The key is for businesses to be clear about what they want to achieve and pick the right model to meet specific objectives.
The early stages of FinTech have been characterised by start-ups bringing single products to market that attempt to offer significantly better value and experience than the equivalent product at a financial services institution.
Where these institutions have offered multiple financial products and services, in many cases little attention has been paid to relatively niche areas of their offering. This created a clear opportunity for disruption from start-ups.
It hasn't been too hard for start-ups to beat banks on pricing and user experience in areas like retail FX, or small business loans. Where the start-ups find it tricky is in both customer acquisition and distributing their product. Early-adopters have flocked to these products, but breaking through into the mainstream takes considerably more effort. For a new bank or Insurance offering, what’s the magic number? 10,000 customers 100,000 customers? In China for example, a new bank launched and secured over 800,000 customers in just 4 days. A huge feat when you look at it out of context.
The average person doesn’t want individual providers for each of the financial products they use, they prefer the ease of a one-stop shop, such as a bank.
And therein lies the potential for collaboration. Much in the same way a supermarket owns the shelf space upon which the products of other companies sit, the bank can provide the metaphorical shelf space for new, innovative products created by start-ups. A concept explored in our Open Banking report.
This enables the start-ups to dramatically increase reach, cut costs of acquisition, and get into scale-up mode.
At the same time the institution can offer a better user experience, enhancing the relationship with their customers at a time when big tech companies might start treading on their territory.
Of course, it's not all so easy when it comes to the nuts and bolts of collaboration.
Big financial services institutions have very different cultural norms to start-ups. Start-ups might be suspicious of a bank or insurer stealing their ideas, institutions might not see the immediate benefit of handing customers off to a potential rival. The start-up might agree a deal with one part of a bank, but then find ten more people need to be convinced as well. The institution might not be certain the start-up will properly protect its customer, especially when the start-up is the subject of only light-touch regulation.
The ability of start-ups and institutions to overcome these barriers will play a crucial role in their survival and success, which is why we recommend the below ‘to do list’ for business.
- Corporates should seek to collaborate with aspiring scaleups who can complement their capabilities and help stimulate the innovation that they are unable to achieve in-house.
- Corporates should streamline the processes that early stage businesses are subjected to during procurement and other functions to make it easier, cheaper and therefore more appealing for young businesses to engage and work with them.
- Aspiring scaleups should target partnerships with corporates who share their vision, can help them develop their offering and are able to connect them to bigger consumer networks.
- Scaleups should equally hold traditional business to account – work with the ones that deliver on the promise of engaging at the right pace and level. The worst possible positon for some of these is too many badge collectors or POC hell.