If the UK is to become the number one destination for fintech there needs to be one single policy vision for fintech, coordinating open standards, enhancing regional engagement with support for talent development and greater access to capital for Fintech businesses.
The UK is already well-established as a world-leading financial and business services centre, and a global hub for fintech.
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But in an increasingly competitive global market, there is a need for the UK to establish a single and consistent position on fintech which will enable the sector to market itself more effectively as a good destination for fintechs and as a source of fintech services.
This is the main finding in an outstanding report published by KPMG, The Value of Fintech.
The report argues that additional steps could be taken to improve policies and regulation, for example by clarifying the perimeter between regulated and unregulated activities and building upon the successes of sandboxes with further regulatory support.
There is also considerable scope to identify and assist UK regions to become regional hubs and enablers of the growth of the wider fintech ecosystem. Further improvements to infrastructure, support for talent development, and promotion of the UK as a global fintech hub will contribute to the continued success of this vibrant and valued sector.
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By GlobalDataKPMG’s report notes numerous examples of how fintechs enhance the role of financial services firms and help them provide products and services more effectively and identifies five principal themes: improving financial inclusion, enhancing customer experience, increasing transparency, improving security and compliance, and providing support and guidance.
The five principle themes:
- Improving financial inclusion:
Fintechs enable provision of new products and services to customer groups who haven’t been able to access traditional financial services. These are made possible through the provision of simple products at lower costs (for example, Cuvva, Transferwise).
Helping the underbanked with innovative solutions (for example, αire, Doreming) and providing small and medium sized enterprises (SMEs) with funding access (for example, iwoca).
- Enhancing customer experience:
Empowered by new technology, fintechs are able to offer personalised services and communicate interactively with customers, significantly enhancing customer engagement and experience.
Simplified solutions for SMEs include examples such as those provided by iZettle and Tide.
- Increasing transparency
Trust is the foundation of the financial services industry. Fintechs enable financial services companies to increase clarity of services and products, and provide transparency on fees and charges.
The following examples illustrate fintechs which help improve transparency and increase trust: — Simply Business and Bold Penguin in commercial insurance brokerage; Pension Bee in pensions and savings management and Brolly in retail insurance
- Improving security and complaince
Retail and SME customers are vulnerable to fraud, cyber attacks and other online risks. For example, 74% of UK small businesses reported a cyber security breach in 2015 and financial fraud losses across payment cards, remote banking and cheques totalled approximately £770m in 2016.
There are multiple fintechs which help businesses to detect fraud (for example, Ravelin) and manage risks and compliance issues (for example, Trulioo, Covi Analytics).
- Providing support and guidance
Navigating complex financial services and products can be difficult for end users. Fintechs, through the use of technologies such as Artificial Intelligence (AI) and big data analytics, provide tailored customer support and guidance in a cost efficient way. Examples include Neos in insurance for risk tracking, Oval in banking and Nutmeg in asset management.
Fintechs have received close to $1.5bn in investments into banking, insurance and asset management each year since 2014. The growth of fintechs has been primarily driven by four factors. —
- Technological evolution: fast pace of technological developments combined with reduction in cost of technology;
- Emerging customer expectations: customers now demand digital services and experiences similar to other sectors;
- Availability of funding and capital: funding into fintechs has increased significantly in the last several years, and
- Support from governments and regulators: both governments and regulators recognise fintech as the evolution of financial services and proactively support them.
KPMG estimates that the largest share of fintech investment has been in banking, with payments and lending being the dominant area comprising approximately 65% of all banking fintech investments.
Personal finance, peer-to-peer (P2P) services, money transfer and trading platforms are other growth areas.
The UK financial services industry has revenues of approximately £200bn, making up approximately 11% of GDP, providing a significant market for fintechs. Additionally, the UK market has a high proportion of consumers with digital skills.
The UK has good availability of capital for early-stage companies through a strong seed funding landscape and the supportive environment created by the Government.
However, the UK has limited growth capital to support late stage start-ups.
The UK Government is perceived as very supportive of fintech growth. The Government has been proactive through initiatives such as the newly established the FinTech Delivery Panel, the Financial Services Trade and Investment Board (FSTIB) FinTech Steering Group and enabling Fintech Bridges.
UK regulators are global leaders
The UK regulators, the PRA and FCA, are seen as global leaders, providing a regulatory environment that is amenable to fintech growth. Such initiatives include the FCA Project Innovate and regulatory sandboxes, and the PRA/FCA New Bank Start-up Unit. The industry believes that the regulators can further enhance fintech growth through additional initiatives.
The UK and London have a good talent pool to support the growth but fintechs would benefit from more working spaces with ready ancillary services.
KPMG outline ten suggested actions for the government, financial services industry and the wider fintech ecosystem to consider.
In addition to helping the UK maintain its leadership as a global hub for fintechs, it believes that these activities would support the UK’s financial services market deliver greater value to society.
1 Secure a fintech sector deal
The UK is considered a global hub for fintechs with significant support from the Government, regulators and the wider financial services industry. KPMG recommend that fintechs, through organisations such as the City of London Corporation, Innovate Finance and other agencies secure a sector deal through which the government and the industry can collaborate to further cement the UK’s position as a global leader in fintech, help financial services sector deliver relevant products and solutions to retail customers and businesses, and engage regional development and growth.
Within the sector deal, the fintech industry should collaborate and commit to support the government in developing a single public policy, vision and strategy for fintech, driving harmonisation / equivalence of standards and regulations for fintech, and supporting fintech bridges with other countries.
Additionally, the industry should help the government enhance regional engagement and integration, and the development of talent that will support the development of fintech and the wider financial services industry.
2 Provide clarity on regulatory perimeters applicable to fintechs
The UK Regulators, the PRA and the FCA, are perceived as proactive in supporting the development of fintechs in the UK and London.
To support fintechs and the existing financial services companies investing in technology, the regulators should develop and issue fintech specific guidance on regulatory perimeter, provide further clarity on operational and conduct requirements (such as risk, data, processes and technology) and publish / share a pipeline of regulatory activities related to fintechs.
3 Build on the success of the regulators and establish procedures to support fintechs on regulatory requirements
The activities of the PRA and the FCA have firmly established a favourable environment for fintechs. The regulators should identify opportunities to simplify authorisation by further embedding the process within the sandbox.
The regulators could also broaden support by setting up specialist fintech teams focused on specific capabilities. Additionally, the PRA could start providing clarity on prudential and solvency requirements as they would apply to fintechs.
4 Identify and support UK regions to become hubs and enablers of fintech growth
The government should lead initiatives to enable the growth of fintechs across the regions. This could be driven by ensuring fintech is a priority on the agendas for regional and local development plans, local enterprise partnerships (LEPs), identifying regions and cities based on existing infrastructure and capabilities as potential hubs and providing incentives (funding and capital in development plans) for fintechs and financial services companies to consider regions for their fintech activities.
5 Support fintechs in developing partnerships with incumbents
Fintechs face significant challenges in getting traction and securing support from incumbents within the financial services industry. The government could explore opportunities to develop and implement programmes to enable fintechs to access partners. Industry incumbents should also work with Innovate Finance and similar organisations to articulate what they need from fintechs.
6 Conduct activities to advocate the value of fintechs
Narratives around fintechs have focused around incumbents and start-ups with little focus on the value delivered to the end customers. Successful fintechs, Innovate Finance and wider financial services firms should work together to demonstrate the value delivered through fintechs to the end customers. This will help drive adoption by individuals, SMEs and corporates.
7 Promote and position UK as a global hub for fintechs
Given the size of the UK financial services industry, the UK will continue to be attractive to fintechs. The government should continue to build the UK’s profile as a global fintech hub by developing a fintech policy position, vision and strategy to lead international efforts on cooperation and equivalence of regulations and standards (for example, data protection and privacy).
This will require the government to provide as much clarity as possible on Brexit and in the short-term and implement a campaign to engage the fintech ecosystem.
8 Identify and unlock sources of funding for late-stage start-ups
The UK has a good supply of capital from angel investors and venture capital funds for early-stage start-ups. To make more capital available to latestage start-ups, the government should identify and implement measures to unlock the institutional market including pension funds in its Patient Capital review, replacement funds for the European Investment Fund (EIF) by working with British Business Bank and the industry, and review the competitiveness of the existing tax regime for capital providers.
9 Review and provide critical infrastructure and ancillary services available to fintechs
The government should explore opportunities to develop a fintech cluster to further support and drive growth. The Government and industry should also review existing facilities available to fintechs in and outside London and address gaps with wider stakeholders such as property owners, City Property Association and the City of London Corporation’s own Property Advisory Team.
Fintechs and Innovate Finance should collaborate closely with ancillary services providers.
10 Retain existing talent and pipeline and implement measures to address existing and emerging gaps
Fintech is an evolution of financial services sector and will be fundamental to the UK economy. The government should review the impact of Brexit on talent and consider measures to retain and attract tech, financial services and entrepreneurial talent.
The government should also work with the private sector and higher learning institutions to develop fintech specific training and courses to boost the domestic skills supply.
