5 min read

11:YEARS part two: first-mover advantage

Sarah Kocianski

In the second part of our series, we examine how disillusionment over the financial crisis fueled the rise of innovative, agile fintechs.

Last week, we discussed the ways in which the UK’s regulatory regime formed new bodies to tackle issues created and exacerbated by the global financial crisis. As a result of these initiatives, a new crop of digital-only banks were able to enter the market and the UK emerged as a global fintech leader.

So how did these new companies capitalise on the market conditions that formed the basis of the UK fintech ecosystem as we know it today? And why didn’t industry incumbents leverage their large customer bases, access to significant resources and well-known brands to prevent these newcomers from gaining traction?

Disillusionment with incumbents

Before 2007-8, consumers may not have thought incumbent banks were acting in their best interests, but it occurred to few that these institutions might actually be working against them.

So it’s not surprising that many felt betrayed when the financial crisis hit. With Northern Rock, the UK saw the first run on a bank in over a century. Customers no longer trusted the institution’s ability to return their deposits.

Fintechs offered customers innovative solutions at more attractive prices than banks could or would match

Banks stopped lending, leaving SMEs vulnerable; organisations that had considered themselves ‘too big to fail’ got taxpayer-funded bailouts to the tune of billions of pounds. No wonder people sought alternatives that put the customer first.

Legacy banks found themselves at a major disadvantage. With no technical/product/process debt or culture to bog them down, start-ups could move quickly and act decisively. Working with new technology in small, project-oriented teams, they launched low-cost, bare-bones products and adjusted them within days or weeks based on customer feedback. This gave them an agility incumbents didn’t have, resulting in a significant first-mover advantage.

The new players

So which firms saw opportunities after the crisis and seized on them?

Remittance firms such as WorldRemit and TransferWise and lender Funding Circle all entered the industry in 2010. Each saw opportunities to capitalise on customer disillusionment with, or abandonment by, the financial services establishment.

TransferWise et al succeeded in part because they had original ideas that eased major pain points

Avoiding branches and brick-and-mortar stores, these companies built core systems from scratch using the latest technology and tested unique new business models. As a result, they offered customers innovative solutions at more attractive prices than banks could or would match.

These companies’ earliest customers were eager for alternatives to traditional methods. Banks were unwilling to service some of them, particularly in the case of SMEs. Others wanted to express their dissatisfaction with the industry. Zopa, a consumer lender, had been founded before the crisis, but it took off once the consequences of the financial crisis became apparent.

The digital-only banks

The first fintechs to launch focused on solving one customer problem effectively, but others chose a longer game, challenging the incumbents in multiple areas.

The founders of Starling and Monzo were each disillusioned with big banks when they started their companies in 2014 and 2015, respectively. Spurred by regulatory changes, they introduced a new way of doing things.

Their fresh ideas included: digital-only banking with no branches or even contact numbers, the ability to open an account using nothing but a smartphone and ID, real-time alerts to let customers know money had entered or left their account and much more.

Budding founders can take inspiration from the class of fintechs founded in the wake of the financial crisis

Some of these offerings may have been considered or even trialled in legacy institutions, but it took digital-only banks to bring them all together.

These new digital-only banks took inspiration from companies like Uber and Spotify, which solved real-world problems in ways that suited customers’ lives.

What’s next?

Budding founders can take inspiration from the class of fintechs founded in the wake of the financial crisis. If these fintechs overcame a particularly perilous situation over 10 years ago, why shouldn’t others follow in their footsteps today?

After all, the beneficial regulatory regime outlined in last week’s post has matured into one of the world’s most supportive environments. Consumers are also now used to carrying out their daily routines on smartphones and other devices, which should work in entrepreneurs’ favour.

However, entrepreneurs should take heed before rushing headlong into a crowded market. TransferWise et al succeeded in part because they had original ideas that eased major pain points. Everything from mortgages to credit cards is being disrupted, so it may be wiser to look for a gap there than simply offering another take on the current account.

Want to know more? You can hear directly from the founders of some of the country’s most innovative companies in 11:YEARS, our new documentary that charts the rise of UK fintech.

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 Sarah Kocianski
About the author

Sarah Kocianski

Sarah is Head of Research at 11:FS, unearthing fascinating insights on diverse subjects throughout the finance and tech industries.

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