As someone increasingly active in LegalTech and with a long-standing involvement in FinTech, I am often asked about the parallels between these two emerging sectors. In this article I’ll discuss the journeys of FinTech and LegalTech in the UK, exploring their advancements, challenges, and the promising future they hold.
Recent years have seen the impact of technology on established sectors of the economy manifesting itself in the form of new labels, with a trend for sector names to be abbreviated and appended with the word ‘Tech’. Examples include FinTech, LegalTech, RegTech, PropTech, EdTech, MedTech, HealthTech, RetailTech, and even SpaceTech.
In the dynamic landscape of technological innovation within financial and professional services, two sectors have been making significant strides in reshaping traditional industries: FinTech and LegalTech. In the United Kingdom, these sectors have seen remarkable developments and growth, revolutionising how financial and legal services are delivered and accessed. The technology reshaping these industries is often comparable, but the evolution and adoption of business models, propositions, and use cases is following different routes.
Sector size
To compare LegalTech and FinTech, one of the first things to look at is the relative size of the two sectors. According to LawtechUK, there are estimated to be 356 LawTech firms in the UK, a number which is drawn from their highly informative Ecosystem Tracker report. The most recent estimate of the number of FinTech firms is 2500, but this stat dates back to 2021 and based on our knowledge of the sector we estimate it has increased since this time. It is possible that the FinTech sector could be approximately 10 x the size of LegalTech, in terms of the number of firms.
But these stats are only focused on firms who are purely focused on LegalTech or FinTech, and ignore the role of incumbent firms across the financial and legal sectors. The reality is that the incumbents are adopting new technologies at an increasing pace, and they have many tech-related capabilities in-house. It is also the case that there are many multi-sector tech firms who are building technology and tech-enabled services for the legal and financial sectors. So the impact of LegalTech and FinTech spans much further than the number of dedicated firms within each sector would suggest.
When Whitecap analyses tech-enabled ecosystems, we use an algorithm which accounts for incumbents and tech firms. For example, in the Leeds region we estimated the contribution of LegalTech to the regional economy to be £374m in our LegalTech in Leeds Annual Report 2023, a number that was derived from a combination of the legal sector (more than 18k workers across 1,140 firms, including 1 in 3 of the UK’s top 100 law firms), the tech sector (207k people across 6,000 firms), and the LegalTech sector, which included just 14 dedicated firms. In a report on FinTech in the same region in the same year (Leeds City Region FinTech Report 2023), the contribution to the regional economy was estimated at £700m, with 107 specific FinTech firms identified, as well as more than 60 established financial firms having an operational presence in the region.
Clearly, the make up of LegalTech and FinTech in the Leeds region is quite different. This is indicative of the broader national picture, and to explore this further we will reflect on the evolution of FinTech and LegalTech.
FinTech: Creation & evolution
Looking back at the early days of FinTech, it was a sector that was initially characterised as a competitive threat to the established financial sector. Much of the marketing activity was ‘anti-bank’ and focused on the combined benefits of speed and lower cost. Faster, cheaper, cooler… the FinTech value proposition to consumers was a compelling one, and was championed by the likes to Zopa and Funding Circle in the early 2010s. One advertising campaign that has always stuck in my head from this time had the headline ‘Bye Bye Banks’, which epitomised the mindset of the time.
But over time this narrative changed, as did the attitudes of incumbents and FinTechs alike. For the FinTechs, the challenges of scaling their customer base proved hard, with consumer apathy being a key issue. But perhaps more importantly, customers had an underlying feeling that ultimately they trusted their bank. Meanwhile, for the banks, the opportunity to use technology to provide digitally enabled services to their customer was clear, but their ability to design and deliver this kind of technology was severely limited by legacy technology and systems, as well as limited internal resources and complex decision-making processes.
What emerged from this situation was a theme of collaboration, whereby FinTechs and incumbents increasingly worked together to create better outcomes for their customers and their own organisations. Whitecap’s reports on FinTech ecosystems across the UK have consistently found that approximately 80% of FinTech firms have a B2B component to their proposition, with the target customer most commonly being a large incumbent financial services organisation like a bank. In contrast, around 1 in 3 have a B2C element to their proposition, with a small number having B2B and B2C elements.
The evolution of regulation has also been a factor. For example the creation of Open Banking regulations has been paramount in fostering competition and innovation in the financial sector, and has spurred the creation and growth of a sizeable cohort of new FinTech startups. By allowing third-party developers to access consumer financial data, Open Banking has paved the way for innovative products and services, such as seamless B2B payment solutions and personalised B2C financial management apps and features.
Today, many major countries, including the USA, UK, and China, have introduced policies to support the growth of FinTech, domestically and internationally, and FinTech is a widely accepted term, which for several years now has been formally defined by international organisations such as the International Monetary Fund, the World Bank, and the Bank for International Settlements.
LegalTech: The journey so far
In parallel, LegalTech has not yet meaningfully disrupted the traditional legal industry as a competitive threat to the established legal sector, with examples of genuine scaled up disruptors on a national or international stage hard to identify in volume.
Although there were some early B2C propositions, most LegalTech firms meaningfully entered onto the scene with B2B collaboration in mind. Helping firms leverage technology to enhance efficiency, accessibility, and affordability of legal services for their clients.
Much of the innovation is designed to streamline processes and improve client experiences, tools such as I AI chatbots and automated document authenticators for example.
LegalTech is experiencing rapid growth across the UK, with London and regional hubs witnessing a surge in LegalTech startups and investment. LawtechUK identified more than 150 LegalTech firms that had raised up to £10m in funding, with a further 63 having raised £10-100m.
In the LawtechUK Ecosystem Tracker,it was reported that the number of LawTech firms in the UK increased nearly 10 fold between 2002 to 2023, rising from 37 firms to 356.
One notable development in the UK LegalTech landscape is the emergence of online legal platforms and marketplaces, which connect individuals and businesses with legal professionals in a transparent and efficient manner. These platforms offer a wide range of legal services, from simple document drafting to complex litigation support, catering to diverse needs and budgets and increasing the accessibility and affordability of legal services. However, they are yet to disrupt the sector in a significant way and there are concerns around the ability to successfully regulate the services offered through marketplaces and similar platforms.
Convergence and collaboration
As FinTech and LegalTech continue to mature and evolve, it is realistic to expect greater convergence and collaboration between these two sectors, and across other sectors too. The evolution of new, integrated, data led developments such as open finance will see the likes become increasingly blurred between sectors, products and services.
Specifically, the intersection of finance and law presents opportunities for constructive collaboration, particularly in relation to financial regulatory compliance (RegTech), contract management, property transactions (PropTech), and dispute resolution for consumers and SMEs.
Reflections and future opportunities
Aside from the observations already made about the scale of FinTech and Legaltech, there is also a consideration in respect of the impact that has been made on the underlying financial and legal services sectors.
When you think about FinTech, it is possible to quite quickly come up with a list of technology innovations that have let to fundamental changes in business models or the way financial services products and markets work. For example, developments such as online payments, mobile banking apps, digital currencies, open banking, money management tools, point of sale credit (buy now pay later), and enhanced cross border payments have all been significant.
When you do the same exercise for LegalTech, the list of technology applications deployed into the legal services market includes things like document scanning, contract management, electronic signatures, the use of video technology in court hearings. These developments have undoubtedly enhanced the efficiency of the sector, but their impact would not appear to be as extensive at this point.
There are a number of lenses through which to view this, but the one I prefer is the view that the legal sector has an exciting future ahead as it embarks on a period of transformation and, potentially, disruption. The ever evolving potential for the application of AI within the legal sector may prove to be a pivotal moment, as is also the case for the financial sector and other sectors too of course.
At Whitecap, we will continue to play our role in the evolution of these sectors, by helping our clients develop growth strategies to help them navigate and benefit from high-growth sectors like FinTech and LegalTech.
If you’d like to discuss this blog post or share your own perspective on the topics covered, please get in touch.