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A dangerous time to get caught up in the fintech frenzy 

Britain’s chancellor of the exchequer took the keynote speaking slot at the UK’s Fintech Week conference last week. Rishi Sunak announced a suite of measures to back the financial technology sector: principally some regulatory tweaks and a central bank digital currency project.

And he confirmed his endorsement of the recent government-commissioned Kalifa Review of UK Fintech, promising to “push the boundaries of digital finance”.

Sunak even sought to link the fintech agenda with a commercial rationalisation of Brexit: it’s all about building on the “opportunities generated since the UK’s departure from the EU”, the Treasury said. “If we can capture the extraordinary potential of technology, we’ll cement the UK’s position as the world’s pre-eminent financial centre,” Sunak told conference delegates.

You can’t fault the chancellor’s timing. Fintech is high-fashion these days, as evidenced by US cryptocurrency exchange Coinbase, which debuted on Nasdaq with a $76bn valuation this month. (That’s roughly the same as French banking behemoth BNP Paribas).

There are no British fintechs to vie with that kind of valuation — yet. But there are some cautious success stories. Revolut, the digital bank, is reportedly targeting a $10bn valuation with its latest funding round. TransferWise raised money last summer at a $5bn price tag. Starling Bank was valued at £1.3bn in a recent cash call. Even Funding Circle, the once maligned peer-to-peer lender that listed three years ago, has seen its share price jump nearly fourfold from a March 2020 low. 

In another respect, the timing of Sunak’s announcement is awkward. The last prominent “fintech” to get substantial government backing has just collapsed in a heap, triggering a broader political row about sleaze, in particular the cosy communications between government and private sector companies.

Of course Lex Greensill’s supply chain finance company was a fintech in name only: yes it was a finance company, but it was no more a technology innovator than any company doing business in the 21st century. The only boundaries he pushed related not to tech but to the credulity of politicians and investors.

A few months ago, Greensill still figured in the panoply of British fintech success stories — on a par with Revolut and TransferWise, with a projected valuation of $7bn at its last (failed) fundraising late last year.

The extent to which the government fell under the Greensill spell is embarrassing for everyone involved: he had a desk at Number 10, was awarded an NHS payday financing contract without having to go through a troublesome tender process. Sunak himself was drawn into the melee, thanks to a text exchange with former prime minister and Greensill adviser David Cameron. Unaccountably, Greensill didn’t feature in Sunak’s Fintech Week speech.

A charitable view of the farrago would acknowledge that, like any hyped, fast-evolving asset class, fintech is a challenging thing to evaluate — even for a seasoned financier like Sunak who spent years in the City.

Those concerns, and the sky-high valuations, haven’t deterred even the biggest financial giants from seeking out fintech acquisitions. Visa, the credit card monolith, had been planning a $5.3bn acquisition of Plaid, a tech platform that links payment operators — until the Department of Justice blocked the deal on antitrust grounds.

More recently Jamie Dimon, the JPMorgan boss, devoted four pages of a lengthy annual letter to shareholders to tout the merits of fintech and signal an interest in using excess funds to finance acquisitions. “Fintech is an area where some of that cash could be put to work,” he wrote. Whether Dimon will be any more successful than Visa in consummating such a deal is moot, especially as the previous section of his letter is frank in its prediction that fintechs will win “significant market share”, in part thanks to a lighter-touch regulatory regime. The idea of shutting down that advantage by buying the competition may not go down well with the DoJ.

Dimon also voices a growing concern among traditional bankers that upstart fintechs may be less of a threat than established tech giants from Google to Alibaba as they chip away at more and more of the banks’ business. All of which adds up to a frenzied atmosphere in financial technology — and an urgent need for great vigilance from government and the financial sector alike in sieving the good from the bad and the ugly.

patrick.jenkins

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