The e-banking boom is here

Fintech firms have read the script
September 18, 2018

A star of the UK “fintech” scene—technology-based financial companies—is about to go public on the London Stock Exchange, valued at around £1.5bn. At that price, Funding Circle, which allows individuals and institutions to lend directly to small businesses via its website (so called peer-to-peer lending) would rank as roughly the 350th biggest company listed in London. Not bad for a firm that’s only eight years old.

In the credit crunch, lending to smaller companies largely dried up, creating an obvious gap for peer-to-peer to fill during the subsequent upswing, while the internet made marrying individual borrowers and lenders easier than ever before.

Funding Circle’s flotation is a landmark moment in the maturing of the industry. Sceptics, however, will worry that the model is yet to be tested in a recession—the moment when more small firms will struggle to repay their loans. The doubters also point out that Funding Circle is still running at a loss; its plans rely on ploughing big money into marketing and then reaping the rewards years down the line.

These are good grounds for caution. What strikes me about Funding Circle, however, is how international such next-generation finance firms have become and how much scope they have to grow.

Lending to the smallest companies across the developed world is dominated by well-established local banks, yet Funding Circle has growing operations in the US, Germany and the Netherlands alongside the UK. For a young finance business, this kind of reach is rare: a reminder of how technology is transforming opportunities.

Funding Circle is not alone. The online small business bank Oaknorth is growing fast in the UK by using a largely automated system to assess loan applications and has now licensed this to 10 banks overseas. The global potential of its technology has pushed Oaknorth’s valuation to a staggering $2.3bn.

A healthy dose of scepticism is justified. But it’s also worth remembering that the biggest companies in the world are now tech companies.

The fintech firms have read the script.

Read Ruth Lea's economics column on the WTO