Where are the UK fintech game-changers? Why the industry must innovate before Google buys a bank

A recent magazine produced for London Technology Week featured the top 25 London startups, as selected by investors and venture capitalists. Half of them were in fintech — companies looking to take a tiny slice of the unimaginably large global financial markets, and still be worth millions themselves.

Fintech is booming in the UK – and when we say UK, let's be honest, we mean London. Of the £8.9bn ($12bn, €10.8bn) that was invested in fintech globally last year, the UK took £647.5m, according to fintech lobby group Innovate Finance. Fintech in London accounted for almost one pound in every four raised by the capital's tech companies.

But even without the massive complications thrown up by the Brexit vote casting doubts about London's continuing role as the fintech capital of Europe, is the sector in danger of being all mouth and no trousers? A lot of talk, but nothing much to show for it.

One leading investor who certainly believes that is Mark Tluszcz, co-founder and CEO of Luxembourg-based Mangrove Capital Partners. Being the author of a recent article attacking London's Fintech scene made him as popular as a rattlesnake in a lucky dip, but Tluszcz is unrepentant.

"London has made far too much of fintech," he says. "For the last five years, all London has talked about is fintech. Unfortunately, when you look at it today, it has produced very little success."

Fintech startups often claim that banks are unable to innovate. But, says Tluszcz, what was the last major innovation in financial services? Mobile banking. Who delivered that? The banks. Who delivered the one before that – internet banking? The banks again.

"They have proven that they can do stuff if they want to. The reason they do not want to, and this is true of every industry, is because innovation kills margins. If you don't have to innovate, why would you?"

'Where is the WhatsApp or Skype of fintech?'

This is Tluszcz's biggest beef with today's fintech companies – they just aren't very innovative. This lack of innovation is the reason that banks can continue to do what they do. After all, who is going to stop them?

At heart, what most fintech companies do is to take an existing financial product or service – currency exchange, remittances, lending – and just do it a little better, a little cheaper or with a better app. That's not to say these companies are not building decent-sized businesses and generating real revenue, but where is the WhatsApp or Skype of fintech – companies that shattered the existing systems? To use a very, very overused word, where are fintech's disruptors?

Not a man to mince his words, nor to shy away from shouldering blame, Tluszcz says the investment sector must hold up its hand and admit it has got fintech badly wrong.

"We have kind of approached financial services like every other industry," he admits. "Big industry, a lot of fat – let's go for it. Because of that, we have poured in huge amounts of euros, dollars and sterling."

"We looked at the sector and said 'Let's deconstruct banks and start financing subsets of financial services.'" That approach was way off-target. The problem, says Tluszcz, is that you end up with a lot of pieces, none of which are actually worth that much.

What the UK fintech scene needs

"We, the investors, have created potentially good businesses, but we have not created disruptors in any of the niches that we have funded as an industry. We have funded businesses that were, with their business model, no different from what the incumbents were already doing."

As a result of a lack of innovation, says Tluszcz, the banks can ignore most of the startups. "If I were a financial service, would I be worried by startups? The answer would be no."

Today's crop of startups lack scale, muscle, brand and resources. The darling of London's fintech scene is currency-transfer company TransferWise, whose backers include US venture-capital royalty Andreessen Horowitz and Peter Thiel's Valar Ventures, alongside Sir Richard Branson, among others. Founded by two Estonians based in London, the company recently landed a $26m round based on a valuation of $1.1bn. To put that into some sort of context, HSBC, the UK's largest bank, has an estimated $2.6tn in total assets.

That isn't to say that the banks aren't worried. But it isn't fintech minnows that cause them to sweat. "They should fear Google or Facebook in the West, and Baidu and the other big Chinese players, in the East."

The Bank of Google

"It wouldn't surprise me if Google decided to buy a bank itself." Why them? Because the value in banks lies not in charging for financial services, it lies in the vast amount of data that they have about each and everyone of us, says Tluszcz. "They know everything we buy, everywhere we go, what we like, what we spend our money on."

Both Google and Facebook already know a lot about us and have built huge companies mining that data, but access to our actual spending habits would be the Holy Grail of advertising information. And internet users, while bemoaning the two internet behemoths, have nevertheless shown they are more than happy to share their most intimate details freely.

So don't be at all surprised, says Tluszcz, when Facebook starts offering remittances and payments inside its Messenger service. "Look who they hired to run that." David Marcus, who is in charge of Facebook's messenger service, is a former president of payments company PayPal. "That isn't a coincidence."

Is there anything that London's fintech companies can do to compete?

Yes, says Tluszcz. Be truly innovative. "We missed an opportunity because we were not creative enough on our business models. A little bit cheaper never works to build world-beating businesses.

"London has a great role to play, but largely driven by people like us, we have funded niche players that can never be big. The current crop are not disruptors, and that is a fact of life. That is sad, but there will be another generation of companies that will come up, and one of those will be a disruptor."