The State of Fintech in the United Kingdom.
Observers in London see a paradox at the heart of today’s financial technology sector. If Fintech is all about playing the cutting edge and disrupting the mainstream, how come so many Fintech players and commentators obsess so openly about the need for a solid-state, steady environment in which to get on with their business?
It may not be fashionable for the major players in fintech to crave certainty, but that was the dominant subtext in many of the conversations and presentations at the recent Economist conference in London: Collaborate or Die? Finance Disrupted.
London, for years the dominant player in mainstream financial services, appears to have been going through something of an identity crisis following the Brexit vote in June last year.
As Nicolas Véron of Bruegel, the Brussels-based economic policy institute and the Washington, D.C.-based Peterson Institute for International Economics, put it at the conference:
“London has a financial services crown, but a Fintech crown is debatable.”
Stability and certainty, freedom of movement and flexibility in employment – and how that environment might be affected by the UK’s almost certain exit from the European Union – were the elephants in the corner of the debating room.
Those issues are, if anything, even more prominent in the light of the Trump administration’s subsequent pronouncements on immigration – coming a few days after the London conference. A quick poll of conference attendees revealed that half of those present were born outside the UK, and it’s estimated that some 40% of CEOs of Innovate Finance, the UK government quango tasked with promoting fintech and innovation, are not UK nationals. And the status of non-UK nationals is, like so many things in a post-Brexit, Trump-dominated, alternative-fact world, really quite uncertain.
A quick poll of conference attendees revealed that half of those present were born outside the UK, and it’s estimated that some 40% of CEOs of Innovate Finance, the UK government quango tasked with promoting Fintech and innovation, are not UK nationals. And the status of non-UK nationals is, like so many things in a post-Brexit, Trump-dominated, alternative-fact world, really quite uncertain.
In the light of all this, a number of issues present themselves for discussion for London-based Fintech players.
- What’s the state of Fintech in the UK, and where’s it going?
- Which sub-sectors will thrive?
- What effect will Brexit have? Specifically, how will immigration control affect staffing and expansion plan? How will regulation play out?
- How is the UK and its chief regulator the Financial Conduct Authority (FCA) doing compared to Asian domiciles such as Singapore and the competition of countries remaining in the EU’s single market of goods and services?
In London right now, all conversational and commentary roads lead to Brexit, usually via a quick Trump-inspired detour. Fintech players’ best guesses as to the effects of Brexit – whose two-year negotiation process may or may not be triggered by the UK government’s target date of end March – naturally determine their ideas of the future. But the feeling ‘right here, right now’ was that things were pretty good.
In a panel discussion ‘Is London set to lose its Fintech crown?’ at The Economist’s Finance Disrupted event, few speakers, other than Nicolas Véron, cited above, challenged the premise that London was the Fintech leader, that it had a crown to lose. The UK capital is seen as having an ability to attract talent and capital. But as for the future, “the uncertainty is definitely not helpful,” said Eileen Burbidge, a venture capitalist at Passion Capital and a special envoy for fintech for the UK Treasury.
The UK capital is seen as having an ability to attract talent and capital. But as for the future, “the uncertainty is definitely not helpful,” said Eileen Burbidge, a venture capitalist at Passion Capital and a special envoy for fintech for the UK Treasury.
New York-based UK national Oren Bass, CEO and co-founder of Pave, a Millennial-targeted P2P lending site, sees a strong industry with a particularly positive future for P2P:
“I think the UK government has done some things that will encourage the long term viability of the P2P lending industry in the UK – specifically, the ability for P2P investments to qualify for beneficial tax treatment for investors via the Individual Savings Account tax-free wrapper.”
Reshma Sohoni, co-founder of equity platform Seedcamp, believes;
“Fintech in the UK is poised for further breakthrough. The UK is one of the earliest adopters in tech and it’s also a leader in financial services. These two overarching trends continue to push fintech towards the mass market. We have some of the most forward-thinking regulation, political support, and consumer desire for change.”
Virraj Jatania, CEO and co-founder, Pockit, a next-generation banking start-up aiming at those excluded from mainstream banking, argues that;
”London is undoubtedly a Fintech hub.” Moreover, it’s “a brilliant time to be a founder in financial services… When I look around, there are so many exciting things going on. The competition within the space which is very healthy and forces companies like mine to be innovative. I’ve attended various events with other Fintech companies recently and the ambition is palpable.”
Eileen Burbidge acknowledged London as a dominant Fintech hub, but sounded a note of caution, noting that London might conceivably lose its crown, but adding that this would not occur “overnight and it might not be directly related to Brexit.” Ms Burbidge cited Fintech growth in Southeast Asia as a competitive threat.
Lawrence Wintermeyer, CEO of UK government quango, Innovate Finance, cited London’s “open collaborative environment” as a major asset for the city, and an attraction for global workers.
The gloomiest view of the current state of affairs – and the darkest prognosis – was offered by Nicolas Véron. He stressed London’s undoubted supremacy in mainstream finance, but was unsure of its position in Fintech, and underlined the need for the UK to maintain its “culture of openness”.
Which Fintech subsectors will thrive?
There’s a natural tendency for industry players, whether at a conference or not, to talk their own book. Nevertheless, insurance (Insurtech) and Blockchain, aka distributed-ledger technology, attracted most cross-sector support.
Reshma Sohoni of Seedcamp sees a strong future for her own equity crowdfunding sub-sector;
“Fintech will now have to prove it can scale, given it has all the external forces in its favor. Startups will have to continue to be stable stewards of the trust bestowed on them by users and regulators, which scaling massively in user adoption and building strong business models.”
But the demand for equity funding elsewhere in Fintech leads her to see the strength of growth elsewhere;
“We do think the insurance space will play catch-up and we’ll see faster expansion than we have to date. Blockchain is a core tech that’s not limited to Fintech and we foresee we’ll see further general adoption across multiple sectors. We think that upstart brands that have become early leaders across P2P, currency transfers, etc will extend their leadership further. We are also starting to see startups that come to us with solutions addressing more back-end complexities – across payments, business intelligence, processes, etc.”
Jeremy Wilson, vice chairman of corporate banking at Barclays Bank, would endorse the Blockchain optimism. Speaking in a conference session on the future of Blockchain, he said:
“In my simple mind, it strikes me that Blockchain is a new operating system for the planet.”
The consensus view was that Blockchain was an “enabler” for investment firms – driving down costs, producing efficiencies in back-office process, and enhancing security against fraud.
Virraj Jatania of Pockit believes: “
“Blockchain is going to revolutionise the way financial services work. It will take some time but it’s set to hugely reduce the cost of transacting and provide a ledger with accuracy far beyond the legacy systems we have today.”
Looking further ahead, Jatania is “certain that Artificial Intelligence will increasingly change the way we manage our finances. The evolution of AI is going to deliver a personalised user experience which will, with time, revolutionise the entire financial industry.”
What effect will Brexit have? Specifically, how will immigration control affect staffing and expansion plan? How will regulation play out?
Brexit is a highly charged and divisive issue. Nevertheless, there is a consensus to be found: the general view is that most Brexit fans like it for political rather than business reasons.
Eileen Burbidge alluded to Brexit as a challenge, and said that the Treasury was aware of the labour problem posed by immigration control.
She added that the UK government was actively seeking a bilateral deal with regard to foreign workers in the UK. The flip side of this coin was the position of UK citizens working in the EU. She said that there already were visas for non-EU citizens, designed to facilitate the settlement of technology professionals in the UK, and mooted this as a possible ready-made solution to the problem.
“Britain has always been supportive of bringing in highly skilled workers for all industries. This is a valuable trend when looking at talent in financial services in light of Brexit,” she added.
Oren Bass of Pave argues that Brexit must not jeopardise the competitive Fintech advantage that the UK currently has, namely;
“a clear set of regulations that provide a framework for fintech startups to operate within. This combination of tax incentive and regulatory clarity are missing here in the USA and have made it much harder for startups to prosper.”
Reshma Sohoni of Seedcamp argues that;
“the factors that have made the UK and London such an attractive centre of gravity for fintech have been a result of decades of the right elements coming together. That won’t change overnight. That said, if the uncertainty continues for too long on what role the UK will play going forward, then we will certainly lose our position.”
Ms Sohoni sees smart regulation as a key competitive tool in the UK’s armoury;
“The FCA’s support for fintech has been globally leading. It’s a way of working that’s getting emulated across other countries. What we’d like to see is strong enforcement of PSD2 [payment services directive] when it comes down the line. And continued focus on how businesses can deliver value to consumer and business users in a fair and cost-effective way.”
Virraj Jatania takes a sanguine view of Brexit:
“There’s been a lot of talk about Brexit in recent months which is understandable but it’s still far too early to say. Until we have a better idea of the implications, particularly regarding financial passporting laws, it’s impossible to know how Fintech might be affected. One thing I truly believe, though, is that the best businesses are resilient. Whatever the outcome, Fintech will go on.”
As for regulation, he sees the FCA doing a good job, but one that, as a Fintech player, he’d like to see done slightly differently:
“If there was one element of regulation I’d change it would be KYC requirements. Currently, a large proportion of customers are left marginalised by the mainstream financial services system because, for example, they can’t afford to have a drivers’ license or Passport. It’s an unacceptable hindrance for companies like Pockit who are trying to address the issue of financial exclusion.”
How is the UK and its chief regulator the Financial Conduct Authority doing compared to Asian domiciles such as Singapore and the competition of countries remaining in the EU’s single market of goods and services?
The consensus view is that the openness of the UK’s culture and the enlightened, pro-innovation view of the chief regulator, the Financial Conduct Authority (FCA), have been key factors in promoting Fintech growth. But concerns are prevalent and, were expressed in the conference, that political change (Brexit, again) and competition from Europe (assuming – as seems likely – that the UK will have to leave the European single market and customs union) could damage London’s position.
Jo Hill, director of market intelligence, data and analysis and competition at the FCA, argued that “Regtech” can make day-to-day banking operations more efficient and effective, ultimately resulting in better experiences for consumers and enabling access to financial services more broadly. However, she added that the barriers that regulatory compliance and risk management could throw up when trying to serve the non-textbook consumer, could result in financial institutions simply deeming some customer segments too costly or risky to serve.
Eileen Burbidge dealt with concerns over the potential loss of EU financial passporting rights for UK companies; some delegates argued that this could significantly harm London’s Fintech sector.
Ms Burbidge said that only around 20% of London’s Fintech firms actually needed financial passporting rights; these companies were mainly to be found in the foreign exchange and money transfer sectors.
“Technically speaking, only a very small proportion of fintech companies need a passport,” said Ms Burbidge. She did, however, express concern that competing Asian locations, such as Singapore, could have significant attractions for Fintech businesses.
Ravi Menon, Managing Director, Monetary Authority of Singapore, at Singapore FinTech Festival gave a keynote speech at last November’s Fintech conference, and highlighted the administration’s commitment to a light, fintech-friendly touch.
There was some talk of the attractions of Sweden as a startup-friendly location, but the overall mood in the market and at the conference seemed to be that no-one was going anywhere far from London anytime soon. But the Brexit process, which could change all that, has not yet even begun…