Over recent years, the rise in the number of successful UK-based fintech companies has been incredible to watch. A range of staggeringly popular startups have manage to leverage their products and become household names in a finance industry that was once seen as completely shut off to SMEs and new developments.
However, over the past year things have not been quite so rosy; worldwide events have caused problems for fintech startups. And now as the world begins to emerge from the worst of the pandemic, UK fintech SMEs are having to look for ways to maximise their profits and grow again.
Here we take a look at what UK-based fintech SMEs need to do in order to regain the kinds of success that we had seen in the recent past.
The challenge of Covid-19
First, we need to consider the effect of Covid-19 on fintech. 2019 was a bumper year for fintech businesses. All in all, 24 financial services startups were able to reach a valuation of more than $1 billion across the course of the year. The industry has been booming as customers had been willing to move away from traditional financial services providers.
However, this incredible period of growth has been slowed significantly by the Covid-19 pandemic. The industry is not unique in this regard – almost every sector has faced a slowdown with regard to the pandemic. But given that fintech was seeing unparalleled levels of success, it is important to acknowledge it.
Perhaps the more serious challenge is in achieving the levels of investment required. Fintech startups often need continuous investment as they go through the early cycle of innovation. SMEs need to find creative ways of getting this investment if they want to maximise their profit.
Pass from startup to scale-up
As we have seen from fintech businesses such as Klarna and Revolut, companies in this industry can achieve incredible growth in a very short amount of time. To do so, however, they need to pass from being a startup and begin moving into the scaling up phase of the business model.
The startup phase for fintech SMEs has been described as ‘all about honing the product to perfectly fit the market, bringing acquisition costs below customer lifetime revenue, and getting those first revenue-positive customers in the door.’ It is only once this has been achieved that fintech SMEs can start scaling up and making the most of their products.
Consider collaborating with large businesses
One major challenge for fintech SMEs has traditional been customer acquisition. There are always early adopters who will be interested in utilising the services of fintech SMEs, but to truly grow and become profitable, fintechs need to achieve mainstream success. Given that trust is such an important element of customers choosing financial institutions, it can be very challenging for startups.
There is where it can be hugely beneficial to consider collaboration with larger, more well-known institutions. Most people would prefer not to have individual providers for all of their fintech services, but rather get it all from one place. Using the recognition of the larger brand can actually help a fintech startup be more successful in the long-term.
Find the possible tax situation
It is important for fintech SMEs to make the most of their tax situation. Of course, most UK businesses like to remain in their home country, but if it is the difference between profitability and loss, it can sometimes make sense to move the business abroad.
Gibraltar tax law specialists Hassans explain: ‘Gibraltar’s new Financial Services Act creates an attractive regulatory framework for the fintech industry, attracting both major players and nimble new start-ups from around the world which are eager to reap the multitude of benefits provided by this exciting and forward-thinking jurisdiction’.
Some of the benefits of being based in Gibraltar include a corporation tax rate of 10% as well as no capital gains tax or ort inheritance tax. Additionally, Gibraltar is an English-speaking country which makes it easier to work with from the perspective of UK SMEs. Of course, this won’t be right for all businesses so it is important to talk over the ramifications of moving the business elsewhere with a professional accountant.
Final thoughts
Fintech SMEs have faced a difficult period over the past year, but there are now many opportunities to grow and maximise profit. These companies need to make smart decisions and attract the right investment to be as successful as possible.