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Strong start for UK fintech capital raising in 2021 despite strict lockdown

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Strong start for UK fintech capital raising in 2021 despite strict lockdown

British financial technology companies have wrapped up a number of big-ticket capital raises in the first months of 2021 despite the country being under a strict national lockdown.

These include digital lender Starling Bank Ltd.'s £272.0 million series D funding round in March, cards and payments specialist PPRO Financial Ltd.'s £132.2 million round in January, and specialist lender Nucleus Commercial Finance Ltd.'s £200.0 million raise, also in January. Challenger banks Atom Bank PLC and Monument Corporation Ltd. announced in February that they had raised £40 million and £28 million, respectively.

But it is not just the larger and more mature fintechs that have been raising money. Newer entrant Diem Group Ltd., a circular economy-focused fintech that launched in 2020, raised £4 million from alternative asset manager Fasanara Capital Ltd. and other investors in March, while insurtech Nayms Ltd., which was incorporated in 2019, raised £1.5 million from investors including U.S.-headquartered cryptocurrency exchange Coinbase Inc.

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British fintechs attracted a total of $4.1 billion in venture capital in 2020, second only to the U.S., according to figures from industry body Innovate Finance.

Fintech insiders say that rather than reducing flows of capital, the pandemic has piqued investor interest, particularly cards, payments, consumer credit and fintechs with an environmental, social and governmental focus, and that the sector is set for another strong year of fundraising activity in 2021.

Risk-on

At the start of the coronavirus pandemic, many fintech execs worried that investment would dry up. But for Robustiano Tubio, CFO at Tymit Ltd., a fintech that aims to position itself as a fairer credit card provider, his worst fears were proven wrong.

Risk-aversion kicked in when the pandemic hit, but "we're in a much better place now," he said in an email. "The macro environment is improving, and investors are becoming more optimistic, especially when it comes to fintech."

Tymit raised an undisclosed amount of money in a seed round in January.

For Nathalie Oestmann, COO of Curve OS Ltd., a fintech that allows users to consolidate a range of different cards onto one card application, capital raising is not an easy proposition at the best of times.

"It's always a challenge. You're always up against competition," she said in an interview.

By mid-2020, the prospect of raising money looked tougher than ever. Not only had the first lockdown led to an "abrupt" drop-off in activity by Curve users, but the company suffered an indirect hit as the result of the Wirecard AG collapse.

The German payments company was embroiled in a €1.9 billion accounting scandal that ultimately led to its collapse — with disastrous consequences for fintechs such as Curve that relied on it for card issuing and bank identification number sponsorship services. As the Wirecard scandal reached a crescendo in June 2020, U.K. regulators blocked the activities of local subsidiary Wirecard Card Solutions Ltd. with virtually no warning, with the result that cards offered by Curve and many of its peers temporarily stopped working.

However, Curve user activity rebounded following both the first lockdown and the Wirecard outage, Oestmann said. The fintech started testing for a new product, Curve Credit, which allows customers to pay off large purchases in installments, in June last year, and then went on to raise £70.4 million in a series C funding round, which it announced in January.

"We got hit with a double whammy in 2020," she said. "There were two black swan events ... we [could] never have expected this. That makes the raise even more hard-earned [but] despite all that we did manage to grow, and that's what [venture capitalists] are looking for."

Curve plans to put the funds toward a U.S. expansion.

ESG and payments

As well as capital raises, the U.K. has seen a number of fintech mergers in the first quarter, including PayPoint PLC's acquisition of payment gateway provider RSM 2000 Ltd., announced in February.

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The payments sector has shown an enduring appeal to investors throughout the crisis, Oestmann said.

"Payments are considered critical national infrastructure," she said. "Not only that, but ... major tech companies such as Lyft Inc., Shopify Inc. and Uber Technologies Inc. are all fueled by payments."

Buy-now-pay-later and anything to do with consumer credit also appears to be resonating with investors, according to Tymit's Tubio, who said the fintech did not struggle to raise capital at its latest funding round.

Investors also seem to be warming up to fintech with an ESG focus, according to Geri Cupi, CEO and founder of Diem.

"We are seeing a shift toward green fintech and we think that this will be a new trend in investment," Cupi said in an interview.

Diem, which styles itself as a "bank of things," allows users to see the market value of personal items such as clothes, electronics and accessories at a glance, and allows them to receive instant payment for selling them.

Cupi said that the fintech's recent $5.5 million funding round was oversubscribed and not as difficult as expected.

Investors joining Fasanara in Diem's fundraising round include Chris Adelsbach, a prominent angel investor in the fintech space and founding partner of early stage tech investment fund Outrun Venture Partners, and Ben Demiri, CEO of Platforme International Limited (trading as PlatformE), a tech platform that facilitates mass customization and on-demand manufacturing for the fashion industry.

Competitive advantage

U.K. government policies have helped to create an environment that is conducive for fintech investment, especially for small and early-stage companies, according to Andrew Aldridge, Partner at Deepbridge Capital, an investment manager.

Not only does the country have the Financial Conduct Authority's Fintech Sandbox as a testing ground for early-stage companies, but investors are incentivized to back startups under the Enterprise Investment Scheme. This provides generous tax relief for early-stage investors in growth-focused companies in fields such as agritech, biotech and fintech, and according to Aldridge, plays an important role in addressing funding challenges that startups can face between the seed round and series A stage.

The U.K. has a significant competitive advantage as it helps companies bridge this so-called "chasm of death," he said