A Clear Ambition
Harriet Baldwin MP, the Economic Secretary to the Treasury, recently stated the Government wanted London to be “…the leading FinTech centre in the world”.
The drivers for this are evident. The digital financial revolution continues to gather pace and is projected to be a profound transformation of the industry. Given the scale of financial services within the UK, being at the heart of FinTech is seen as a critical aspect of maintaining our competitiveness in the global economic race.
The Treasury shares the widespread view of the industry that digital finance, enabled through an innovative FinTech sector, should make customer transactions easier, save time and inconvenience through new product designs, eliminate significant operational cost and enable new business models such as crowd-sourced funding, peer-peer lending and mobile payments.
According to a recent Treasury report, London is currently in position as the world’s pre-eminent FinTech hub, so what needs to happen now for these UK firms to embed domestically and then expand internationally to become world leaders?
Building the Foundations
UK FinTech Week 2016, at the end of February, followed hot on the heels of FinTech Week 2015, held only last September. It commenced with a speech from Harriet Baldwin to the ABI and concluded with a Pitch10 event at Downing Street. The level of government and regulatory support for this progressive and dynamic sector is unequivocal.
Treasury and FCA support (through Project Innovate) are coupled with an established level of financial and legal knowledge, available capital and a technologically sophisticated workforce to provide London FinTech start-ups with an environment in which they can thrive.
The established banks are also investing very heavily in the transformation of their legacy, physical products and have typically established their own technology incubator labs to foster relationships with the FinTech community. The digital bank of the future will have a very different business model, technology capability and operating platform to the physical bank of today. Operating siloes will evolve into technology-based ‘modules’ supporting capabilities such as user experience front-ends, customer analytics, adaptive risk models, cyber resilience functions and blockchain gateways.
Both established and emerging digital banks will need to make use of these capabilities. So will the new crowd-sourced and peer-peer funding platforms. They are all in a race for the next generation of digital age customers and this is driving demand from across the industry for the services of the FinTech community.
Of course, more can be done. London is not the only FinTech centre and digital banking has progressed further to date in other geographies such as Eastern Europe and Australia. mBank from Poland has offered unsecured lending, where the customer will receive funds in a matter of seconds, over its mobile banking service for some time now. Data analytics are more advanced and more embedded in the US and regions of Europe than they are currently in the UK. California remains the largest pool of talent for financial software related development.
John McFarlane, Chairman of TheCityUK believes that there is a real need to eliminate the current disadvantages in taxation, levies, regulation and infrastructure that are threatening the UK’s long-term attractiveness. In November 2015 he called for the UK to be open to the brightest global talent, to establish a business environment that achieves financial stability without stifling innovation and growth, and for the UK to play its natural role in leading a reformed Europe.
Managed correctly McFarlane believes that the UK can “…look to a future of greater certainty, innovation and hope”, in a number of areas including FinTech, digital and global cyber services – for the industry and customers alike.
Talent is a key factor in the digital race. So is regulation. Overcoming the complexity and multiplicity of current EU regulation will be key for enabling UK FinTech firms to build out from their domestic market and exploit the scale of EU wide opportunity.
This is the focus of the EU Digital Single Market and will remove a disadvantage currently faced by European FinTech firms compared with their US counterparts. The initiative was launched in May 2015 and has ambitious timelines. Achieving these timelines is both important and we can also reasonably expect it to be very challenging across the 28 member states of the EU. The implications of Brexit on this process is one of the many considerations of the June vote that have yet to be worked out and so represents a material risk to the international ambitions of the FinTech community.
A topical example of a current regulatory hurdle is the EU Prospective Directive which requires a prospectus to be prepared for any fundraising over €5 million. Mondo, an emerging digital bank, recently raised £1m in less than two minutes using the CrowdCube platform, but its access to further funding through this highly efficient route will very shortly be exhausted.
The challenge posed by regulation has also led to the creation of agile regulatory technology or ‘RegTech’ firms. The objective of their products is to automate important, but commoditised, activities such as Know Your Customer (KYC). Firms offering this service, such as Onfido, are already forming part of the low-cost, modular operating platform of a digital bank like Mondo.
The myriad EU regulatory landscape represents a tactical opportunity for RegTech players, but the success of the broader suite of FinTech offerings from the UK will ultimately be served better by the rapid success of the Digital Single Market and a UK government that remains within the EU and so empowered to support that.
The government would be helped in this objective by rationalising the current plethora of trade bodies and lobby groups that exist to promote London as a progressive centre of finance. Along with TheCityUk are (amongst others) the BBA, the City Corporation, Innovate Finance, The Center for the Study of Financial Innovation (CSFI), Tech City UK, Tech UK, Tech London Adovates and Digital Shoreditch. Streamlining the activity and clarifying the message from all of these bodies into a coherent structure is now a pressing need in light of the pace of change in digital finance.
Looking Further Ahead
Digital innovation is not constrained to the re-engineering of financial products and their interaction with the customer. The industry infrastructure has built up over decades and is a complex and costly network of central counterparties and bilateral reconciliation processes. There are few hotter topics across the industry at present than blockchain technology and how this could be adopted to replace numerous institutions with a network of computers and shared algorithms that provide the necessary trust.
The UK and the US are currently the dominant centres of thinking and research for how best to adopt this next generation of market infrastructure capability. Both the timeline and the outcome is the subject of a continuous debate but it is unlikely that some form of practical application will not emerge over the medium term.
Many factors are at play as to who will emerge with a successful blockchain solution; talent and imagination are amongst the most important of these. London has an excellent talent pool to build on, but the stakes are high and I concur with TheCityUK view that now is no time to rest on laurels.
The UK FinTech sector is already estimated to generate £20 billion in revenue annually and the future opportunities are immense. By building on its strong position today through attracting the best talent, removing barriers that exist to investment, organising its message effectively and delivering on the promise of the EU Digital Single Market, London has everything to play for.
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