The future of UK fintech

Q: To what extent does the Kalifa Review provide the UK fintech sector with a robust “strategy and delivery model” for the future?

Phil Vidler: The Kalifa Review came at the right time for the UK fintech sector, as it steers a fresh course out of the Covid-19 pandemic and looks to build on its traditional strengths on the international stage. Specifically, Kalifa’s recommendations for creating a dedicated investment fund for growth-stage fintechs will help retain intellectual property and support strong domestic growth of exciting fintech leaders.

Together with the proposed changes to UK stock exchange listing rules, this new framework for investment support will help the best and brightest UK fintechs stay and grow in the UK, rather than looking abroad. The report’s recommendations around visas to support talent will ensure the UK continues to grow the sector. It was positive to see the chancellor, Rishi Sunak, take this on board and announce a focus on highly skilled technology roles in the 2021 Budget.

Charles Delingpole: It’s a good start in the right direction. The plan provides UK fintechs with access to what I call an “opportunity supply chain” made up of specific resources, policies, capital and advocacy, all to support their ability to accelerate value creation within this important business sector. For example, the plan would provide research and development tax credits to help offset the costs for accessing and maintaining financial data sets, which are the lifeblood of most fintech business models.

Data is expensive, and for many early-stage fintechs the cost of access creates a financial penalty right out of the gate. And, while the tax credits are meant to reduce some of the front-end financial burden, they are also designed to promote collaboration between fintechs and the larger incumbent financial institutions which own the majority of these coveted data sets. At the same time, the plan would enable qualified fintechs to offer enterprise investment schemes, seed enterprise investment schemes and venture capital trust reliefs as incentives to investors who might otherwise pass on investing in small fintech companies they perceived to be higher risk.  

Amy French: The Kalifa Review provides a five-point plan to overcome the problems associated with Brexit and Covid, as well as laying out recommendations to ensure our reputation as a global fintech hub remains bright. The review focuses on ensuring the UK keeps its global edge — especially with countries like Australia and Canada upping their game.

It’s not the time for the UK to rest on its laurels when it comes to ensuring the sector is able to remain at the forefront of cutting edge innovation. This is integral as Britain tries to build back following the pandemic, as the sector provides many highly paid jobs and encourages foreign investment from overseas. While the review provides a direction for the future, it will only be robust if the government and private sector act quickly to implement it, and turn their words into a tangible reality.  

Karl MacGregor: It has the potential to bring a breath of fresh air to the industry. It’s made some interesting proposals that will no doubt incentivise entrepreneurs and bridge the investment gap. It’s set the wheels in motion by proposing to build on existing frameworks enabling fintechs to innovate and create new market segments. But in order for the strategy to forge an effective delivery model and see the UK cement its title as the world-leading fintech hub, regulators need to move at pace, as additional admin and regulatory processes to hire from the EU and build a presence internationally are an unwanted, time-consuming addition to the already excruciating regulatory applications.

Q: What isn’t covered by the Kalifa Review that the UK’s fintechs must address as a priority moving forward? 

Ms French: Notably, the review does not address the issues of diversity and inclusion — none of the five recommendations properly dive into what the sector needs to do to fix its historically poor track record. It is a crucially important issue for the sector and one that we cannot keep overlooking. Data from Deloitte in 2019 shows that women held just 21.9% of leadership positions in financial services, while the number of females on boards was even smaller. Even though the number of women in leadership roles is expected to rise to 31% by 2030, this is not a given and we are still far off from having an equal gender split in senior roles. It is disappointing that the review did not delve into this problem or suggest solutions to change this.

Mr Vidler: Given the breadth and complexity of the UK fintech sector, the Kalifa report provided a good overview of what is needed to maintain the sector’s success, both domestically and on the global stage. That said, fintech is evolving so rapidly that we continually need to keep up to speed with the pace of change and development. The review was a wide-ranging and useful look at the sector as a whole, which now opens up the opportunity to focus more deeply on certain areas of fintech. In terms of that deeper analysis, this is just the beginning. It offers positive suggestions, a potential strategy and delivery model, but this will need constant iteration and changes as we review progress as a sector going forward. The newly proposed annual State of the City report, recommended in the recent Hill [UK listing] review, could be used as a focal point to help us keep coming back to table, and hold up the mirror to keep UK fintech as competitive as possible on the global stage. 

Q: Given London’s status as a global financial centre, is it realistic to consider the growth of regional fintech clusters across the UK?

Mr Delingpole: The idea of regional fintech clusters might be an attractive aspiration for politicians seeking to democratise access to financial services jobs; but in reality, London is a global financial centre. Even though the pandemic has normalised remote working, London’s gravitational pull eclipses all other cities in the UK. Therefore, any specialisation is limited to servicing the needs of London, rather than being a specialist cluster in its own right.

Mr Vidler: One of the great strengths of the UK fintech sector is its regional diversity and an approach that isn’t purely London-centric. In recent years, regional ‘unicorns’ such as Atom Bank and FNZ have proven just how successful regional fintech hubs in the north of England, Scotland, Wales and Northern Ireland can be. There are obvious benefits to setting up and scaling fintech in these regions, such as access to a diverse talent pool and lower running costs.

London, however, remains a global fintech hub. With proposed improvements to infrastructure, as well as the impact of Covid-19 bringing flexibility into the way we work, it should be possible to enjoy the best of both worlds. London’s continued success does not come at the detriment of the regions. Rather, it offers an access point to a global financial services network and route to market for growing regional fintech, providing them with opportunities on their doorstep that companies in other countries could only dream of.

Ms French: For the UK to remain a leading fintech player we need to scale its success across the country, not just London. Regional clusters will be vital for maintaining and accelerating growth of this sector, as each region brings its own perspective and specialism. Scaling regional clusters is also vital so that the sector is able to tap into talent where it is.

The London fintech landscape is significant in its place alongside the financial services sector and it will likely remain the jewel in the crown. However, London isn’t for everyone and we are now seeing fintech companies and entrepreneurs look to the likes of Manchester and Leeds for a new base, with access to talent, world-class universities and a lower cost of living. Making fintech more inclusive and accessible will drive the sector forward, diversifying and strengthening the landscape. 

Mr MacGregor: There’s a reliance on the capital and an expectation to have a presence there in order to meet the right partners, investors and to be seen as the leading-edge. But for start-ups looking to scale quickly and efficiently, the benefits of basing operations outside of the capital can be a fruitful strategy.

Outside of London, businesses run on lower operational costs and cheaper office spaces; some of the UK’s largest household names benefit from headquarters outside of London — Experian, THG and Boots to name but a few. I’m glad to see that the review will encourage development of the regional fintech clusters. But the fact remains that the UK, and its clusters, can only remain as the ‘global financial centre’ if it provides seamless access to other, international and internal markets — something that is noticeably missing to date.

Q: In what ways, if any, can the wider fintech sector benefit from the UK’s departure from the EU?

Mr MacGregor: The freedom to build closer relationships with countries outside of the EU could help fintechs scale to wider target audiences, faster. As the government is forging closer relationships with the likes of Australia, New Zealand and the US, the ability to conform to product and regulatory assessments could enable more businesses to reach other countries faster than in previous decades under EU legislations. The EU’s regulations are a great foundation — one that the UK should expand and build on to allow for more innovative, superior services and products to emerge.

The ability to passport products and services to new markets, which the UK could not previously reach under EU constraints, is advantageous. But fintechs looking to expand internationally need to have transferable propositions and services that are attractive to wider cultures and target audiences. For example, it’s unlikely that consumer-focused fintech products built for UK audiences would be more attractive and value-creating in New Zealand than they would across the whole of the EU. 

Mr Delingpole: Departing the EU will create any number of challenges for the UK fintech community on its own. For example, the loss of passporting and the denial of equivalence for financial services is deeply problematic for UK fintech after Brexit. Therefore, economically, it is absolutely crucial for anything that can be done to be done to resolve the situation.

However, Kalifa’s recommendation of revising the current ‘Fintech International Action Plan’ could be very helpful in allowing the UK to maintain its distinction as a top international fintech destination. Specifically, his plan suggests launching an international fintech portal, including a clear overview of the UK fintech scene, contact info for local regulators, case studies of previous success stories and details about the support and grants available to international companies. As a leading fintech destination, the UK must continue to build strong trade relationships with previously untapped markets, focusing on the expansion of services tied to Bitcoin and crypto, risk and compliance, payments and remittances, and open banking.

Ms French: The effects of Brexit will trickle through over time and there are some obvious issues that need to be rectified — especially in the financial services sector.

On the brighter side, we have the autonomy to implement our own regulation following Brexit, and this will provide us with the ability to continue to be an innovative force spearheading the sector. We currently don’t have the regulatory framework needed for emerging technologies, like Bitcoin and other forms of cryptocurrency, to thrive — we can now change this. Brexit has provided the chance to stand out from the rest of the world, so it’s important that government and private sector companies lobby to implement a framework that can allow fintech to flourish — especially the emerging verticals. 

Q: To what extent has the Covid-19 pandemic influenced the development trajectory of the UK’s fintech sector?

Mr Vidler: No one would deny that the first few months of the pandemic hit the fintech sector hard, just as it did the rest of UK industry. What was interesting was how fintech and the greater financial services reacted. Thankfully, fintechs tend to be agile companies and so could cope with the changing work demands. We saw a lot of this attitude permeate the larger institutions too, which underwent a sea change while retaining the trust of the customer, from moving entire trading floors to remote locations, to providing branch support to customers over video.

Now we’re seeing money moving back into the sector. In particular, venture capitalists have doubled down on existing fintech within their portfolios, so these have benefitted from very successful funding rounds. We have also seen limited partners becoming more active and investing more into funds. As for financial institutions, they have doubled down on their IT and transformation spend, and are keener than ever to work with fintech partners to adopt innovative solutions.

Most of these organisations have taken the view that, in the same way they had to adapt after the 2008 crash, a new wave of technology is on its way. They recognise the need to spend on technology transformation, and this is laying positive groundwork for fintech going forward. So, overall I’m confident that the sector has the resilience to develop and lead the UK economy coming out of the crisis. 

Mr MacGregor: The pandemic has affected fintechs both positively and negatively. Personal finance management tools, for example, have seen their user base grow tenfold as consumers financially impacted by furlough and redundancy search for support to better manage their bills through switch and save financial management apps. Many money remittance apps have seen volumes grow as people started to send more money to families and relatives abroad or in their home country.

On the other hand, business-to-business fintechs had to adapt to the new market and, in some cases, release products founded from the need caused by Covid. As office-reliant enterprises and merchants quickly shifted to remote working, call centres came to a standstill. Seeing this as an opportunity to encourage the adoption of more digital services, fintechs released digital income and expenditure tools, quick simple digital payment methods and no-contact payments. 

Q: In an operating environment characterised by heightened political uncertainty and rapid social, economic and technological change, what are the greatest long-term challenges facing the UK’s fintech sector?

Ms French: A big issue facing our sector is talent, and we’re going to have to work hard to fuel our talent pipeline — not only from abroad, but internally in the years to come. Brexit has provided some short-term hurdles to acquiring talent. This is concerning as many European entrepreneurs pick London as the place to settle and scale their business. It was encouraging to see the announcement of new visas in the budget — this was a step in the right direction and I am eager to see how much impact it has.

It is also worth noting that the Covid-19 pandemic and travel restrictions have somewhat delayed our ability to predict how much impact Brexit has had. It will be interesting to see the appetite for those coming to the UK once Covid-19 restrictions have been lifted. A longer-term challenge will be our home-grown talent pipeline. As a nation, we need to do more to encourage young people to take up STEM subjects (science, technology, engineering and mathematics) at school, as currently we have a massive digital skills gap.  

Mr Delingpole: The first long-term challenge that our industry faces is our collective ability to keep pace with the volume, velocity and complexity at which policies and regulations change, and how these changes may or may not impact growth opportunities for fintechs.

The second long-term challenge is how fintechs can best manage their risk profiles as it relates to money laundering, terrorist financing, synthetic fraud and other financial crimes. The more ubiquitous fintech services become, the greater the threat from criminals and crime syndicates looking to use these services for nefarious purposes.

The third long-term challenge is how to best create models that are flexible enough to withstand any future global events — economic, political or otherwise. If anything, the Covid-19 pandemic should offer all of us a lesson on the importance of being prepared for the unexpected and the need to build businesses that are resilient. 

Mr Vidler: The UK is already the global hub for fintech — not just due to our domestic success, but our reach across the globe as we facilitate international business and inspire regulatory change. To ensure the world continues to look to us as a guiding light, we must keep the momentum going and continue to do better, especially as the ecosystem matures.

The two key elements to focus on going forward will be talent and capital. Here, we can look abroad for inspiration. What we see in the US is entrepreneurs being able to raise capital, successfully grow their business to listing stage, then put their talent and skills back into the sector by angel investing and working with new start-ups, as well as becoming second-time entrepreneurs. If the UK, as mentioned in the Kalifa Review, can build a more attractive environment for fintech to scale, then we will start to see those opportunities here and begin to close the skills gap. We need to create a culture of success, and a funding infrastructure that supports that into the future, while ensuring new fintech entrepreneurs can learn and receive support from those who have gone before them.