UK well placed to lead transformation in financial services through global leadership in Fintech
by Inline Policy on 29 Mar 2016
The world of financial services is changing fast. The implications of blockchain technology or decentralised ledgers may not yet be a hot kitchen table topic but has the potential to utterly change the worlds of banking, insurance, asset management, and access to finance. In short, it could transform the economy around us. Though the US remains the largest base for investment in FinTech companies developing peer to peer finance and smart payment mechanisms with over $12bn investment in FinTech startups in 2015, more than doubling year on year growth, the UK is the fastest growing global market. With over £3.5bn annual investment in the sector in the UK, it is Europe’s FinTech leader over competition from Paris and Frankfurt.
Blockchain-led transactions made either through Bitcoin or other digital currencies have the advantage of leaving an indelible mark on either public or private ledgers, rendering them less open to fraud, and facilitating direct transfers between parties without the need for an intermediary, bypassing traditional payments systems dominated by the traditional banks. Traditional payment systems have been described as a spaghetti junction of jumbled connectivity. Blockchain technology untangles that complexity. It creates regulatory challenges but also provides huge opportunities for asset ownership and crowd-funding. Smart contracts which are self-executing and self-maintaining become possible through Blockchain, with immense potential efficiency savings. Development of Blockchain could soon lead to it becoming a key element of the finance industry’s IT systems. The financial services sector has concerns, however, with a recent PwC study finding that 57% of firms were unsure or uncertain about how to respond to Blockchain, and 22% of asset management and insurance work being potentially subject to FinTech competition by 2020.
The relatively accommodative regulatory stance adopted by the Financial Conduct Authority (FCA) in the UK has contributed towards this sharp growth in FinTech. The UK Government Treasury published an analysis from Ernst and Young for FinTech week last month demonstrating the UK’s overall sectoral strength on policy, capital, demand and talent compared with competitors in New York, California, Germany, Singapore, Hong Kong and Australia, but warned of the risks of stagnation unless a proactive policy agenda was adopted, with a delivery body to bring together various pipeline initiatives on Open API access, and mandatory referrals from banks refusing SME lending applications.
The FCA’s Regulatory Sandbox means that new start FinTech companies will now be evaluated while managing actual clients’ payments or investments. The British Business Bank is open to supporting FinTech companies via venture capital funds. The launch of the Innovative Finance ISA will provide a major catalyst to boosting UK peer-to-peer lending, which doubled in the year to the fourth quarter of 2015, with the public able to invest tax free through these new vehicles from 6 April. With rates of return on 10 year UK gilts currently around only 1.40% and some traditional easy access ISAs below even that, these new ISAs may prove very attractive to small investors. If the monopoly of the larger banks on access to the payment system is lifted, as the new challenger banks and FinTech companies seek, then peer to peer payments and lending capacity could grow extremely rapidly.
FinTech growth is also a key instrument in achieving completion of new sectors of the EU’s single market and increasing weak SME lending - a barrier to stronger growth across the EU. This can be achieved in the context of the putative capital markets union through expanding access to digital supply chain finance; easing online and mobile commerce by harmonising payment standards; and enhancing availability of risk finance for innovative small firms. Overall, moving towards a single area for financial data will support the Eurozone in its moves towards stronger banking union, expand the potential for capital markets union, and bolster financial stability. The recently adopted Payment Services Directive 2 due to be implemented by national Parliaments by 13 January 2018 will greatly liberalise the EU payments market to newcomers, by requiring banks to share customer information with new payments providers, one of four scenarios envisaged by Deloitte in a recent study. This is turn will require major changes in strategy among traditional banks, which otherwise risk becoming utility institutions earning low margins.
Setting bold and deliverable policy goals for FinTech growth in the UK, together with efforts to boost market harmonisation at EU level, is a strategy which is right for Government and the industry to adopt in tandem. FinTech directly supports 61,000 jobs in the UK, but its potential is even greater. If the UK makes it a political and business priority, the economic benefits will follow.
Photo via Flickr (CC BY-SA 2.0)