The digital revolution is transforming the way we live and do business. Satellite navigation has made maps redundant, on-demand entertainment has replaced bulky DVD and CD collections, and online social networks are changing the meaning of what it means to be together. Another area where technological innovation is rewriting the rulebook is in financial services. Though less familiar in the public consciousness than the examples mentioned above, so-called fintech is making major inroads into the traditional territory of banks, investment funds and insurance companies.
The industry has admittedly struggled to rebuild its reputation in the wake of the catastrophic crisis of 2008. Back then, a combination of loose regulation, a highly integrated network of global institutions and gambler-like behaviour on the part of some financial sector employees, led to a collapse in liquidity and huge, taxpayer-funded bank bailouts in Europe and the United States.
Decisive measures were taken by the Coalition government – of which I formed a part – to guard against similar crises in the future, including higher minimum capital requirements and caps on bonuses. Plans were set in motion to ring-fence banks’ retail and investment banking divisions, but to my frustration these have yet to be implemented.
Yet while mainstream banking may have lost much of its allure, around the margins of the established institutions, a new wave of start-ups and platforms – from international payments provider TransferWise to peer-to-peer lenders Funding Circle and RateSetter, and cryptocurrency Bitcoin – are reinventing how consumers and businesses spend, save, invest and earn money.
When it comes to the consumers, the growing market share of fintech start-ups is as much the result of frustration with lazy incumbents as it is the product of an innate public thirst for innovation. The Competition and Markets Authority (CMA) has repeatedly criticised the UK banking sector for being in effect an oligopoly. The domination of the market by a few big players, a lack of transparency in terms of services offered, and the barriers to switching between competitors mean that consumers lose out more than they would in a genuinely competitive market.
Fortunately, fintech is beginning to level the playing field for consumers; new competitors are challenging established firms, which in turn is pushing the incumbents to introduce technological innovations that benefit their customers. Furthermore, products that once seemed out of the reach of the ordinary man or woman, such as wealth management, are being democratised by the invention of algorithm-driven robo-advisors, to give just one example.
The potential for disruption may be even greater when it comes to business lending. Not only are the new fintech players start-ups themselves, they also have a major role to play in filling the funding gap so many young ventures face. While bank lending has partly recovered since the global crisis, it still overwhelmingly favours large reliable companies over unproven upstarts, perhaps for good reason.
Into the gap have stepped solutions such as peer-to-peer lending – which cuts out the middle-man and reduces costs by connecting borrowers directly with lenders – and crowdfunding, online platforms where new or growing start-ups can pitch for funds from professional investors or the broader public in exchange for equity or in-kind rewards (prototypes, event invitations, free goodies).
It is perhaps no surprise – given the strength of both our start-up scene and financial sector – that the UK has wasted no time in positioning itself as the number one spot for fintech in the world, generating £7 billion in annual revenues and employing over 60,000 people.
That isn’t patriotism speaking, but rather the judgement of consultants Ernst & Young, Deloitte and KPMG, who single out the UK for its regulatory environment, expertise, digitalised economy, tax incentives and “government programmes designed to promote competition and innovation.”
None of this happened by accident of course. While the success of individual ventures and entrepreneurs comes down to personal ingenuity and a dash of luck, a healthy business environment is something that only prudent and forward-thinking policymaking can provide. When it comes to the success of fintech, there are a number of initiatives taken during my time in government that I see as particularly important.
As business secretary I oversaw the creation of the British Business Bank (BBB), a state-owned bank which uses public finance to leverage in private funding that is subsequently directed towards small businesses.
Beyond working with established partners such as banks and venture capital funds, early on we also recognised the potential of fintech to help us achieve our goals. For example, the BBB has built strong relationships with peer-to-peer platforms Funding Circle and RateSetter, and since 2013 has lent over £60 million – benefiting 10,000 businesses – through the former.
Other pioneering policies introduced during the Coalition years include the Seed Enterprise Investment Scheme (SEIS), a tax break on investment in early-stage companies which has encouraged the growth of innovative finance platforms, and the Financial Conduct Authority’s (FCA) fintech regulatory “sandbox”, which has enabled fintech start-ups to experiment (in a controlled environment) outside the bounds of mainstream financial regulation. Sadly, nothing of the sort has yet emerged from Theresa May’s chaotic, unimaginative and unfriendly business administration.
Despite its impressive progress, the last thing the UK’s fintech sector should do is sit on its laurels. Competition from Europe, the United States and China will continue to grow, while an extreme Brexit – by threatening financial sector passporting rights and access to EU talent – will certainly wallop vulnerable start-ups.
And if that wasn’t enough, securing skilled workers is likely to become even harder if the Conservatives have their way with pledges to double the levy companies pay for foreign employees and reduce net migration to damagingly low levels.
From the very first ATMs in the 1960s to the introduction of online banking in the 1980s, the UK has been at the forefront of every major financial revolution. Having established itself as an early leader in what will perhaps be the most important one of all, it should do absolutely everything in its power to stay there.
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