The UK is a very natural home for fintechs, because it has held the position of a global, and entrepreneurial finance powerhouse for several decades. According to Innovate Finance the UK is still very much front and centre of mind when it comes to attracting fintech VC money, with $4.1 billion in investments coming into play in 2020. The UK also fared well amongst its European counterparts, through attracting just under half of the fintech investment across the overall region, followed by Germany, Sweden, France, and the Netherlands.
The key to understanding why it is so critical for the UK to remain attractive in the fintech segment is two-fold; positive impact on incumbents in the financial services market, and the ability to ideate, to drive economic growth through developing new markets. There is also a more invisible benefit, in that a lot of these mini organisations result in making finance more inclusive for the masses.
A recent study undertaken by KPMG examined the number of fintechs per sector. Lending, wealth, insurance, and payments represent the top four areas where fintechs are growing in number. Players like OakNorth, Wealthify, BoughtbyMany and Klarna play a key role in creating new, more innovative solutions to support consumers and SMEs beyond what some more traditional banks can offer. Quite often having much easier and simpler application processes, and a better design, helps to make the product/service more accessible. Hence, the value fintechs bring to the customer experience is significant on a quantitative as well as qualitative basis, and really helps support economic health.
Top 5 reasons why fintechs help the economy
- Stimulate demand for new offerings, technologies, and ways of working – Just think what happened to Zoom and Bluejeans during the pandemic to support remote working. Helping to enlarge the working day and make it more flexible for workers to deliver more “outcome based work”. Their ability to also extend market segments into newer areas such as robo-advisory for entry level wealth clients, is opening the advice arena beyond high-net worth or private clients
- New domestic jobs and extending the talent pool – According to the Independent Newspaper (14th September 2020), the sector currently employs more than 75,000 workers across c. 1600 firms, and supporting £7 billion in direct economic value. Due to the innovative nature of the segment, talent can also be nurtured in some of the emerging technology areas, helping with overall shortfalls in qualified engineers. All these opportunities help grow the UK skills base in digital engineering, web, UI/UX, and API banking
- Thought Leadership & Inclusion – In a number of cases fintechs are able to develop solutions that can help solve existing industry challenges in a more agile way e.g., creative solution for underwriting, or developing lending offerings that allow disbursements in a handful of hours. These offerings also allow more SMEs to benefit, because it gives them more options for more diverse, and non-traditional funding. Fintechs in this regard bring liquidity to markets, where most larger institutions may be constrained by ROEC thresholds for lending. Additionally, the UK is one of the more progressive markets when it comes to driving innovation, where consumers have one of the highest fintech adoption rates globally; in 2018 research undertaken by Globalcity showed UK fintech adoption rates of 71%, demonstrating why this market is such an attractive proposition for new entrants
- Re-setting benchmarks for traditional providers – to better support consumers and SME businesses – Fintechs tend to spring up when latent financial services issues just haven’t been tackled well enough. There are still many frictions that damage the customer experience when it comes to applying for banking products; being approved for those products, and then receiving funds/debit cards/credit cards etc. These examples are particularly showing up in Asian markets, through either providers like AliPay, WeChat or hyper-scalers like Amazon and Google. The new gold standard for loan approval is now China’s Tencent’s WeChat offering, where unsecured loans of up to $30k can be approved in under a minute. This is all enabled through the creation of new, more open source, non-traditional underwriting data, that enables the sales funnel to be opened responsibly. Again, funds approved are also disbursed within 24 hours. In most traditional banks in the UK, this process can take anywhere from 3 days to 7 weeks depending upon the complexity of the business seeking finance
- Digital Payments and Transactions – support broader economic goals and growth – With end-to-end digital payments and transactions, the ability to keep a better audit trail of how funds move, is improved in comparison to other more traditional methods. Developing newer forms of entry level banking, such as M-Pesa did several years ago in Kenya, is needed to raise overall economic growth, as well as being able to service customers with a thin credit file. Hence, making banking more accessible to the c. 1.7 billion across the globe who still have no access to a bank account.
In summary, fintechs are not just things of fashion or disruption, they play a vital role in supporting forward looking economic growth, across dimensions of job creation, investment inflows, innovation, thought leaders, and creating the foundation for digital talent. Hence, there is a collective need to ensure that from an economic policy, and investment opportunity perspective, the UK remains an appealing option for emergent fintechs. Other political and regulatory factors, such as a supportive regulatory environment, R&D structures, tax concessions etc, need to be preserved to ensure that the region remains an attractive investment destination.
This consideration is now even more essential as the UK examines its post Brexit operating position, as any agreements under this banner need to be aligned to attracting talent into the regions, which is the primary step needed for successful innovative through fintechs. A comprehensive view on the required action required to keep the UK at the top of the fintech leader board is summarised in the recent Fintech Review, undertaken by industry veteran Ron Kalifa. The review cites 5 action areas that need to be progressed to sure up the region’s relevancy: Policy & Regulation, Skills, Investment, International and National Connectivity. These 5 core competencies coupled with a healthy dose of mindset shift, and energetic leadership, can really play a role in keeping the UK market vibrant.