Can the UK keep its fintech crown in the age of AI?

The UK remains the biggest financial technology startup market outside of the US but investors, including banks, need to do more to make sure it can retain that position in the age of artificial intelligence, VCs and corporate VCs have told Global Corporate Venturing.

London, for centuries a global finance hub, was at the forefront of fintech innovation in the last decade as a number of neobanks including Monzo, Starling and Atom Bank sprung up alongside startups specialising in payment technology and alternative lending. London-based fintech companies raised hundreds of millions of dollars in venture funding as apps disrupted the financial services industry.

But the 2020s have brought a new wave of fintech entrants from Web3 based companies that operate in without traditional headquarters and seek the lowest-tax jurisdictions. At the same time, a wave of artificial intelligence-based financial services startups is emerging where raw technology trumps being part of any particular ecosystem.

“AI is going to be the topic theme for the next decade,” says Tom Filip Lesche (left), a partner at European venture firm Speedinvest who focuses on fintech.

Fintech AI is still nascent, he says, but developing fast.

“You aren’t getting AI-based neobanks or whatever, it’s currently pure-play AI. The foundational models and infrastructure are built, and then you will have certain application layers on top that will serve the financial technology sector,” he says. “In five years, there will be a lot of fintech AI startups.”

Lesche warns that the UK still has a lot of work to do if it’s going to retain its place at the top of Europe’s fintech ecosystem in this incoming AI world. The US is the clear world leader in AI right now, and in Europe, France is increasingly dominant in this field.

“If I think about AI in Europe, I think about Paris,” says Lesche. “The French market and the Paris ecosystem is really catching up. It’s become much more dominant over the past year.”

One key factor is the support from French president Emmanuel Macron, who is determined to make the country an AI leader, and who co-chaired the large-scale Artificial Intelligence Action Summit in Paris in February, announcing a $400m AI asset creation fund at the same time. Europe’s largest generative AI startup isn’t a British company, it’s Paris-based Mistral.

UK advantages

The UK still has some advantages when it comes to fintech.

“I think any thriving ecosystem requires a few different facets,” says Joshua Lloyd-Lyons (left), a vice president at financial services group Fidelity’s London-based strategic investment arm, Fidelity International Strategic Ventures (FISV).

“It requires a thoughtful regulatory environment, which I think we have, and a high concentration of talent, which we absolutely have, from universities and large financial institutions as a global financial centre.”

While Brexit has had a devastating impact on the UK’s export market, fears that it may affect the country’s ability to attract or retain talent have not been realised. In contrast to much of the European Union, the UK’s regulatory environment tends to focus on benefits rather than risk.

The UK’s AI talent base is boosted by several universities with strong AI research departments, including Oxford, Cambridge and Imperial College London, as well as DeepMind, the London-based AI research hub for Google owner Alphabet.

UK progress so far

The country is starting to create more AI-based fintech companies, says Robin Scher, who oversees strategic investment for UK-based bank Lloyds. These startups are not approaching the staggering valuations that some foundational AI companies have commanded, but they are picking up funding in early-stage rounds.

“What everyone is seeing more and more is London developing itself when it comes to AI and generative AI. We’re seeing loads more companies in that space, in the UK in general,” he says.

Scher is especially excited about a startup called Aveni. Lloyds backed its series A round last year and is working with it to create a large language AI model designed for use in the UK financial services sector.

Lloyd-Lyons, meanwhile, says FISV has been spending time with a two-year old startup called Finster AI, founded by an ex-DeepMind researcher who used his expertise to build an AI tool designed to get deep insights from regulatory filings. The technology is moving quickly.

“With AI, the underlying capabilities are expanding massively,” he adds. “About two years ago, I led an investment in a company called 73 Strings which effectively works with private asset managers – the likes of Blackstone and their peers – to take in portfolio reporting information and structure that data to allow you to value those positions on a regular basis.

“Now, it is super important infrastructure, particularly as you look forward to the democratisation of private markets – being able to price things with greater accuracy and auditability and with greater frequency.”

Are UK banks investing enough?

One thing that the UK needs more of, however, is investors.

“I would say the liquidity pools are where there is probably more work to do,” says Moran Levinovitz, group head of ventures for financial services group HSBC. “The rest of the criteria – the talent, the know-how – is all there. I think it’s just more funding.”

Lloyd-Lyons agrees. “We could all definitely do more as an ecosystem. Of all the strategic deals done in the UK market over the last two years by banks and asset managers, UK institutions probably did only 25% of those overall deals.”

Part of that burden inevitably falls on the UK’s banks. The country’s fintech startups are still relatively reliant on international investors, and seven of the top 10 banks making strategic investments in the sector are headquartered elsewhere (see chart below). Barclays, one of the country’s Big Four high street banks, shuttered its Rise accelerator earlier this year.

HSBC is headquartered in the UK but makes most of its CVC investments internationally. Levinovitz says nearly three-quarters of venture investment in the first quarter of this year was US-driven and that a lot of it went to AI.

There is a pool of VC money that understands how to back startups on a global scale, he says, and the UK needs more of those growth-stage investors because UK-founded fintech companies need larger amounts to compete with their American counterparts, especially with AI supercharging round sizes for the more attractive startups.

Lloyd-Lyons has a slightly different view.

“Much has been made of the lack of late-stage funding, and perhaps that is true to some extent,” he says. “But I think it’s actually that very early-stage engagement that is really important, and where we have a lacuna relative to the US.

“I think the overall risk tolerance of US investors, particularly on the financial side, is just significantly greater. They’re willing to take early-stage risks, on companies that might even be pre-revenue or pre-product, to an extent you maybe don’t see in the UK.”

But for a bank, the answer isn’t solely equity investment in startups. Levinovitz says banks can play a sizeable role in providing finance through other channels as well.

“I think historically, the US banks have been more aggressive,” he says, partly for regulatory reasons that can make it more cost effective for banks to take part in CVC. “But it’s not just the equity investment. I don’t think banks will ever be a big chunk of the equity investment. It’s about how we can fund through other instruments.”

For HSBC, Levinovitz adds, that involved acquiring the bankrupt Silicon Valley Bank UK in 2023, when its US-based parent company collapsed. It now provides venture debt to domestic companies alongside tailored account options through its HSBC Innovation Banking subsidiary.

“So we’re now a significant player in helping these companies fund themselves at early stage,” he says. “And I think that’s significantly more impactful than the amount of dollars that can go into equity, which could be strategic for banks, but is never going to be that massive pool of funding that is needed, and which needs to come from institutional investors.”