According to a report by the United Kingdom’s fintech industry body, Innovate Finance, the sector attracted more than double the amount of venture capital investment last year than in 2016. UK fintech companies raised a total of $1.8bn in 2017, an upturn of more than 150 per cent from £530m. Innovate Finance’s CEO Charlotte Crosswell says this happened “despite Brexit” – and in contrast with an 18 per cent dip in fintech investment worldwide. It means the UK has now overtaken China to occupy second place in the league of total fintech investment, with only the United States attracting more capital.
Having previously worked as head of international business development for the London Stock Exchange and president of NASDAQ Europe, Crosswell has watched for some time as the UK’s “resilience” and “fantastic regulatory ecosystem” allowed it to “rub shoulders” with global superpowers. While she doesn’t deny that Brexit “presents multiple challenges for the UK”, the foundations for a thriving fintech scene “were already in place before [the vote happened]”. Still, she urges the UK government to “guard against complacency” and strive for the best Brexit deal possible – “one that addresses the issues of sustained inward investment and maintains access to a high-quality skills pipeline”.
The appetite for fintech generally, Crosswell explains, was “catalysed by the global financial crisis of 2008”. Changing consumer demands, alongside the needs of banks and businesses to cut costs made technological solutions more attractive. “The financial crisis gave banks an incentive to find ways of cutting their costs. As revenue dropped, they faced a challenge to become efficient. But there was also a more general theme, at the consumer level, of people wanting financial services that were quicker and more convenient. Internet and open banking took off because people wanted to be more flexible with their payments.”
Crosswell says the UK recognised the potential of fintech earlier than most. “This was something being talked about as far back as the 1990s. And so that’s been reflected in how we regulate fintech over here, looking to encourage innovation rather than stifle it.” In 2016, the UK’s Financial Conduct Authority (FCA) found itself singled out for praise by Microsoft as it urged the US Treasury’s Office to emulate the UK regulator. In particular, Crosswell notes, it is the FCA’s sandbox that has captured people’s imaginations. “The sandbox is a way for companies to test products in the real world, which makes it easier for younger companies to go to market with more clarity.” The sandbox is part of the FCA’s Project Innovate, which advises companies about the regulations they need to bear in mind when developing new products.
London already has the advantages of “massive financial and tech sectors” but its regulatory environment, Crosswell says, also has an “active mandate for competition”. Following the “lessons of the financial crisis” and episodes such as the LIBOR rigging scandal, the FCA’s oversight has, she says, paved the way for a sub-market for “regtech” – compliance products used by financial services companies or regulators. Far from impeding growth, she argues, the new rules actually stimulate it.
“The UK’s progressive regulatory environment has been a driver of the capital inflows,” she says. “Last year was important, with the industry preparing for numerous new regulations including PSD2 and Open Banking, MiFID II and GDPR. This has created an environment that encourages competition and innovation across incumbents and start-ups.”
It is “not enough,” however, “to just assume that this [trend] will continue”. Innovate Finance was set up to “co-ordinate fintech companies, policymakers and influencers alike, and add some colour to the UK’s evolving fintech landscape”. Entrepreneurship, she claims, can be a “lonely journey”. An industry body dedicated to supporting start-ups with “policy reports, expert advice, roundtable discussions and showcase events” can help “change the culture around fintech”, and speed up its mass adoption. “Fintech is clearly an area of strategic importance to the UK. Innovate Finance brought together 50 members when it started, and that number is now 250. We’re trying to collate multiple voices as one so we can lobby government and the bigger organisations to adapt to fintech.”
Brexit is, she says, the most obvious concern for the sector, “particularly within the contexts of skills and foreign direct investment. A lot of the investment in the UK’s fintech sector has come from outside of the UK.” The UK’s “access to an international workforce” has been a big part of the country’s success in fintech. “The UK has been a magnet for skilled immigration. We have relied for a long time on overseas skills to help our science, technology, engineering and mathematics [STEM] sectors. We’ve seen a natural progression of international students taking up further qualifications here, such as an MBA or a PhD, and those students stay on over here. They’ve been a key part of the fintech innovation boom. As technology causes financial services to change and develop, we are going to need to retain our access to talented graduates from around the world.”
All the same, “it’s possible to turn a challenge into an opportunity.” Most fintech companies, Crosswell suspects, have “international ambitions”. Complying with international standards – particularly the EU-mandated privacy directives PSD2 or GDPR – should, Crosswell says, represent a priority for all UK firms post-Brexit. “They have to, in order to stay competitive.”
How should the UK’s fintech scene look five years from now? Croswell says fintech will progress from the “low-hanging fruit” of consumer level and that growth will be found in larger business-to-business projects. “A lot of the existing banks or big companies are going to be looking at how technology can enhance their services and databases. I think what you’ll find is that 2018 is the start of even more collaboration between banks and fintech.” Where previously rivalry has existed between banks and disruptive start-ups, Crosswell suggests there could soon be a chance to partner effectively. “Banks might draw on fintech’s technology, while smaller fintech start-ups can draw on banks’ superior resources to deal with a 100-page legal or compliance document.”
Innovate Finance’s role in all this, Crosswell explains, will be “to serve as the facilitator for a better fintech ecosystem in the UK”, which she hopes will not be “too rooted in London” and will enable industry to help steer government policy on regulation and education. “I’d want to see a knowledge exchange between UK fintech companies. There are around 1,500 fintech companies here and we’ve got 250 across our membership. Of course we’d like to grow that and show how in convening around the table together, we can lobby government and learn from each other.”
“The internet has made geographical location less of an issue,” she points out, and hopes that the benefits of the fintech industry will soon be felt “outside of the capital and the South East”. While fintech “is certainly not a silver bullet” for the UK’s economic sustainability post-Brexit, Crosswell thinks “it is definitely our best chance, so we have to make sure we have the ecosystem in place to support it.”
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