It’s a long way – at least in cultural terms – from well-appointed Government buildings in Whitehall to the somewhat funkier shared workspaces of East London, where so many of Britain’s digital startups choose to build their products. But this week, Chancellor Philip Hammond sought to bridge that divide when he laid out plans to boost one of the most successful sectors of the digital economy – namely fintech (financial technology).
Speaking at the International Fintech conference, the Chancellor outlined a strategy that will include: more help for startup companies to navigate their way through the regulatory minefield; a high level ‘task force’ to explore the potential and risks of cryptocurrencies; and – in a possible hint at what is to come in the post-Brexit future – an agreement to build bridges between the the fintech industries of Britain and Australia.
The aim, said Mr Hammond, was to ensure that Britain can build on an already strong position in the global financial technology marketplace. “I am committed to helping the sector grow and flourish, and our ambitious Sector Strategy sets out how we will ensure the UK remains at the cutting edge of the digital revolution,” he said.
The Importance of Fintech.
The Government’s commitment is perhaps not surprising. The UK’s tech sector attracted £2.99bn in VC funding in 2017, according to London & Partners, with fintech accounting for £1.44bn of the total. London remained the epicentre of activity, attracting 90% of investor cash, but financial technology businesses are springing up across the UK. Providing the right environment for these new companies to succeed is seen, by the government, as an important component in nurturing a UK economy that is fit for the future.
Challenges Facing The Sector
But Fintech faces challenges. For instance, as Brian Harris, chief product officer of international money transfer company, Currencies Direct sees it, the industry is short of two things – namely money and talent.
“Government support for young people interested in pursuing technical skills, like design and coding, would be hugely beneficial”, he says “Likewise, promoting more private investment in promising startups would help boost the sector.”
There is also the level playing field issue. As Harris points out, a small startup may be agile and innovative – and that’s where the opportunity lies – but they lack the resources to compete directly with banks. Indeed, there is often resistance from banks who own much of the infrastructure and data that underpins the financial services industry.
And even for innovators, the commercial landscape is changing rapidly. Simon Giddins, Managing Director of security specialist, Blackstone Consultancy sees a less-publicised challenge for fintech hopefuls, in the form of the rapidly evolving cryptocurrency sector that has yet to be properly regulated.
“A problem that crosses all industries, not just fintech, but specifically: the decentralisation of currency via advances in Blockchain technology -including cryptocurrencies – and the market disruption this will cause if it continues to operate in an unregulated way,” he says.
So has the Chancellor addressed these and some of the other issues facing fintech companies?
In terms of the competitive landscape, Mr Hammond sketched out plans to help businesses deal with the regulatory complexities of the financial services market. As the Chancellor pointed out, efforts to comply with market rules and regulations cost financial services companies £1bn a year. Such costs place a heavy burden on small players.
So let’s say a big hello to ‘robo regulation’ – a term that might be drawn from a sci-fi dystopia but in fact refers to three proposed pilot schemes, which will look at the possibility of building a platform that makes rules ‘machine readable’. This would make it easier to build compliant software by automating the process.
And Hammond directly addressed the relationship between fintech startups and big banks and if by flagging the creation of industry standards, which will allow new players to work with the established names of the financial services market.
There have been moves in this direction already. For instance, in January of this year, new Open Banking rules came into force requiring Britain’s biggest ten banks to share current account data with challenges. Crucially the sharing of information was enabled by common standards and a secure software platform.
The Blockchain Nettle
Turning to cryptocurrencies, the Chancellor said the Treasury, along with the Bank of England and the Financial Conduct Authority, was setting up a task force, specifically to look at how the opportunities presented by cryptocurrencies, such as Bitcoin, could be exploited and the risks managed. Inevitably the accompany policy papers pointed to a degree of regulation, a prospect welcomed by Steve Swain, CEO of cross-blockchain lending platform, Lendingblock.
“This is an extremely welcome announcement for the Government,” he said. “In order for the market to reach the next stage of maturity, there has to be greater security and stability, and that means regulation.,” he said.
According to a London Stock Exchange report around 73% of Fintech companies aspire to expand internationally and the natural assumption would be that many will look elsewhere in Europe for opportunities.
But the Chancellor was looking further afield, announcing a new initiative – The UK Australia Fintech Bridge – aimed at boosting Fintech in both countries.
“Today’s UK-Australia Fintech Bridge agreement is our most ambitious to date. It will bring together our regulators, policymakers, and private sectors to build an improved fintech ecosystem to support the growth of our fintech markets,” he said.
The Bridge is underpinned by a regulatory partnership, which according to the Chancellor connects British fintech companies with 24 million Australians.
And finally, there was a nod to the staffing issue, with pledges of extra funding for computer education and a “connect to work” scheme, co-sponsored by Barclays, which will, if all goes according to plan, help fintech companies to recruit domestically by identifying people who have the aptitude and attitude to work in the sector.
On the money side, the government is setting up a £2.5bn fintech fund within the British Business Bank, which is expected unlock £7.5bn through matching finance from the private sector.
The Proof of the Pudding
So the Chancellor has ticked many of the boxes on the industry wish list. But ultimately the biggest challenge lies in attracting customers and according to Tim Jones of True Digital, there is some consumer scepticism about fintech, particularly regarding data and how it is used. Jones cites research carried out by his company into banking.
“Only 19% of consumers interviewed in our recent study into consumer inertia strongly agree with the statement ‘I know how tech companies are using my data to improve products and services’ showing that the government and private companies need to work together to ensure the public has all the information they need about how their data is handled,” he said.
So the proof of the pudding will, of course, be in the eating and it remains to be seen how effective the Government’s plans will be. But it is certainly true that Fintech now has an honoured place at the table of Britain’s industrial strategy.