How a British unicorn was spawned by a mundane idea

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As Paul Taylor prepared to leave Google in 2013, he was looking for ideas for his next startup: something basic that was scalable, but that seemed mundane and had been overlooked. He ended up with a completely boring-sounding answer: banking software.

Eight years later, the company he founded in London, Thought Machine Group Ltd. JPMorgan Chase & Co. among its global clients and has just been valued at $2.7 billion in a funding round led by Temasek Holdings Pte., a Singaporean state-owned fund. Its success refutes the notion that the UK is lagging behind in innovation and startups.

These criticisms are unjustified: over the past decade, the UK has absorbed almost a third of all venture capital invested across Europe, is home to a third of Europe’s technology exchanges and has produced almost half of the region’s fintech companies by value, according to data from Pitchbook, a California-based research firm.

Total VC investment in the UK is only about a tenth that of the US (which has a population five times larger), but there’s no market like America: it even surpasses all of Asia by those numbers. In Europe, Britain punches above its weight.

Thought Machine has found a niche that is likely to benefit from a long investment spree by banks that isolates them from rising interest rates that are undermining high-tech growth stocks. Its software for managing bank accounts, lending, and payments runs in real-time as a cloud-based infrastructure. While this sounds so simple it must already exist, banking technology hasn’t changed much in decades, and most lenders still rely on giant, old-fashioned mainframes. But moving to the cloud has become a priority for banks in recent years to make systems cheaper to run, more adaptable to new products, and fitter for a world where people are increasingly doing their finances on their phones.

Taylor, a software developer, is in his third startup company. He sold his second, a language software provider called Phonetic Arts, to Google in 2010. He was lucky, he told me in an interview last month, because Phonetic Arts was just beginning to gain traction when Google fretted over Apple Inc.’s launch of Siri and Inc. is developing Alexa.

He spent a few years making his capital at Google, studying what made the company successful and how the cloud computing it relied on could be used in other areas. A key advantage of the cloud over mainframes is that computing power can be scaled up or down quickly—and you only pay for what you need. This cost flexibility can bring smaller businesses to profitability faster.

When the UK government called for more competition among retail banks after the 2008 crisis, regulators found they had to embrace the cloud to give small lenders a chance. Now the UK has a number of new banks and financial companies including Starling Bank Ltd. and Monzo Bank Ltd.

“I didn’t want to start a bank because I don’t know anything about banks,” says Taylor. But he found designing a core banking system fairly simple: Basically, it’s just a ledger that keeps track of money coming in and going out, he says.

Redesigning core banking IT from the ground up with no integration into legacy software or mainframes allowed Taylor to simplify its systems. Large banks were quickly impressed and have been among his most important investors along with venture capital funds since the beginning. The UK’s Lloyds Banking Group Plc has been an investor since 2018 and Sweden’s Skandinaviska Enskilda Banken AB joined in 2020, while the Netherlands’ ING Groep NV, JPMorgan and Standard Chartered Plc invested in 2021. Her VC backers include New York-based Nyca Partners and France’s Eurazeo SE.

Many of these supporters are also customers. JPMorgan uses Thought Machine for cloud-based bank Chase UK, which it is building in the UK. The project is a proving ground for new systems and products that JPMorgan plans to use as a launch pad for other markets and eventually its giant US retail bank. Thought Machine charges subscription fees for its software based on the number of accounts it serves: A full US launch of JPMorgan would be extremely lucrative.

The company’s $2.7 billion valuation comes from a just completed $160 million capital raise led by Temasek, with new investors including Intesa Sanpaolo SpA and Morgan Stanley. Intesa will use the software to build its new digital platform Isybank. Existing supporters also attended. Thought Machine’s value has more than doubled since its last funding round, which closed as recently as November.

Thought Machine doesn’t own the field. Traditional banking software groups like Switzerland-listed Temenos AG are trying to sell their own cloud-based systems. There are other startups, too, including Dutch rival Mambu, which works with a long list of fintechs and smaller banks and was valued at about $5 billion in its latest funding round late last year, according to Pitchbook.

Meanwhile, some big banks are doing the work themselves. Spain’s Banco Santander SA, which employs 16,500 software engineers, announced last week that it had moved most of its core systems to the cloud, running its own software. His system, called Gravity, could be licensed to other banks in the future as another competitor of Thought Machine.

Taylor says being independent will help his firm retain a broad list of different banks as clients, so he prefers to eventually go public rather than be bought by a big financial firm. If he manages to get listed in London, the UK could really show its true prowess in tech.

More from the Bloomberg Opinion:

• SoftBank’s arm best returns to London: Chris Hughes

• Jamie Dimon’s British startup is truly a global story: Paul J. Davies

• Elon Musk misses the big picture on lithium mining: Anjani Trivedi

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He was previously a reporter for the Wall Street Journal and the Financial Times.

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