London is about to create ‘a lot of new winners’

The boss of a US fintech heavyweight has said London boasts more innovative firms than rival cities across the pond, with a rebound in funding set to create “a lot of new winners” in the sector.

Simon Khalaf, chief executive of Nasdaq-listed card issuing firm Marqeta, told City A.M. that investors were now more selective in the start-ups they back following a drop-off in overall funding appetite on both sides of the Atlantic.

Fintech valuations broadly peaked in 2021, with the sector since struggling with interest rate hikes and higher funding costs that have stymied investment.

“Most of it was related to the overhype of crypto,” Khalaf said. “At the end of the day, good companies that have sound business models and great demonstrable product-market fit have gotten funded. I would say there’s been a lot more money going into healthier deals.”

He added: “So while I’d say the distribution of the funding has changed – more money went into smaller numbers of fintechs – the amount is still strong enough to create a lot of new winners in the space.”

The UK has been hit particularly hard, with a torrid 2023 that saw investment in the country’s fintech sector drop more than a third from the previous year, according to KPMG.

But there are hopes for a rebound, with 2024 already seeing digital bank Monzo land $610m (£490m) in new funding and savings platform Flagstone secure £108m from US private equity.

Khalaf was bullish on the UK’s prospects, arguing that London and other European hubs are naturally more innovative than their US rivals as they cannot rely as much on revenue from interchange fees.

“The main difference is that in the US, the interchange is higher than in the EU and UK, so there’s a lot more money that the fintechs have been able to grab,” he said.

“So the UK and EU-based fintechs, or the customers that are using fintechs, have had to innovate faster and smarter because they have to find other ways to generate revenue.”

Oakland-based Marqeta is expanding in these markets, with Khalaf expecting the firm’s headcount growth in Europe to outpace its hiring in the US in the near term.

The firm, which has a market capitalisation of nearly $2.8bn (£2.2bn), last month partnered with London-based bank Oaknorth to facilitate a new commercial debit card for its SME customers.

Khalaf also singled out French payments app Lydia, German Robinhood rival Trade Republic, London-based SME lender Capital on Tap, and Swedish buy-now pay-later giant Klarna as some of Europe’s most promising start-ups.

Listings crisis

The UK government has proposed a string of capital market reforms and other sweeteners to make the country a more attractive location for fintechs to launch, grow and list.

It comes after the London Stock Exchange has been hit by a dearth of big-ticket IPOs and major players ditching their listings in the capital for better returns overseas.

Some have been tempted to float in the US, which offers a deeper pool of capital and higher valuations – particularly for tech firms. Meanwhile, many of the UK’s biggest fintech unicorns are focused on expanding operations across the Atlantic for their next phase of growth.

Khalaf said the cross-border nature of financial services naturally encouraged an international approach. “The fact that it’s a global phenomenon will drive people to go to multiple markets,” he said.

“The regulatory environments are different. It is very hard to get a banking licence or a money transfer licence in the US, and it’s not worth it, while in the EU it is something that is almost a non-starter to do without. But from a consumer adoption perspective, I see strong similarities.”

He added that the “sheer size” of untapped markets in the US offered ripe opportunities for fast-growing firms.

“The US is a credit card country, while Germany is a debit country,” Khalaf said. “But you actually dig deeper in the US and you see a debit market that’s bigger than that of Germany – it’s almost double the size.”