By Anca Thomson, a specialist corporate and commercial lawyer at Excello Law.
‘London’s fintech scene could be a winner from the Covid crisis’. So proclaimed a recent headline in the City AM newspaper. The article underneath offered a glimpse into the potential opportunities for the post-Covid economy, suggesting that the huge acceleration in technology adoption and the surge in share prices of big tech and digital infrastructure firms provide a platform for fintech to prosper and grow.
Fintech success stories have been making headlines ever since the global financial crisis (GFC), during which time London has established a global reputation as a pre-eminent fintech hub. They are based on a track record of successful start-ups in digital payments, online lending and finance – stimulated by light-touch regulation where the Bank of England acts as supervisor.
Sector insiders are certainly upbeat. Fintech will continue to flourish, confirms John Collison, co-founder of the payments giant Stripe. In a recent interview, he said that he was “very bullish” about the outlook for UK fintech firms. London, he added, outstrips the US in terms of market sophistication.
Duncan Wales, CEO & Founder of Tellimer, echoes the sentiment. In a recent comment piece, he noted: “The storm clouds of vast public debt, lockdowns, Brexit and maybe even the threat of the break-up of the UK loom above, but the rapid adoption of technology and its democratisation give the UK an opportunity to be at the front of what could be a significant 2021 bounce.”
Evidence provided by the numbers also looks good. According to KPMG, the UK is the second biggest market in the world for fintech investment, accounting for 11% of the global fintech industry. Meanwhile, 82% of global financial services expect to increase fintech partnerships over the next 3-5 years.
Although Brexit may have temporarily diminished some of London’s financial markets activity, its gravitational pull in fintech remains just as strong. The UK fintech businesses sector currently employs around 80,000 people, while it attracted £38.4bn in investment in 2019, up from £20.1bn a year earlier. In a post-Brexit world, the UK seems set to capitalise further.
Much has already been achieved to underpin London’s fintech reputation, not least the proliferation of London-based neobanks offering internet-only financial services without physical branches. Prominent examples include Revolut and Monzo. Currency exchange businesses, such as WorldRemit and Transferwise, have also become big players in the world of international payments systems.
So when did London’s fintech story begin? The GFC marks an obvious starting point. The burdensome level of regulation that ensued hit the financial services sector very hard, resulting in eye-watering fines and penalties for non-compliance. As banks became ultra-cautious, an innovation void emerged. Fintech began to fill it.
Thanks to the UK’s enormous competitive advantage in fintech, post-Brexit headlines now promise that fintech’s full potential may soon be matched by reality. This argument is predicated on the assumption that fintech is largely Brexit-proof. Despite banks in London transferring many billions of dollars to Europe in anticipation of Brexit, they moved far fewer people than predicted. In total, an estimated 7-8000 personnel have been relocated.
As the British government seeks to take advantage of its newly-established regulatory freedom, there are clear ambitions to maintain the UK’s lead over its rivals in digital finance. As Brexit continues to create uncertainty in almost every sector, the post-Brexit outlook for fintech is arguably more positive.
The Brexit trade deal provides a definitive agreement on goods – imports and exports – leaving much of the substance on other matters yet to be negotiated and agreed. To counter this uncertainty, many sectors are understandably demanding greater clarity.
Apart from access for legal services, which Prime Minister Boris Johnson lauded, the service sector has barely been touched. For financial services, the Brexit deal “perhaps does not go as far as we would like,” said Johnson. In reality, negotiations for our biggest service sector have yet to begin in earnest.
Our politicians live in hope, as must the rest of us. It seems that the UK has shown enormous generosity towards the EU in allowing European financial services companies to continue to operate in the UK on the basis of a temporary permissions regime. However, the EU has shown no sign of reciprocity. At least, not yet.
Notwithstanding Brexit uncertainty, the British economy is set to become less bureaucratic than its EU counterpart, although it is unknown whether this will lead to a bonfire of regulations. The fintech and cryptocurrency markets are already used to quite high levels of risk; indeed, they thrive on it, seeing it as an opportunity to innovate. Since they are defined by innovation, the fintech sector, and in particular cryptocurrencies, want to operate in a decentralised, independent regulatory setting.
According to a recent joint report from the World Bank and the Cambridge Centre for Alternative Finance, ‘2020 Global COVID-19 Fintech Regulatory Rapid Assessment Study’, the impact of the pandemic has fuelled a global appetite for fintech regulation. Surveying 118 regulatory authorities across 114 jurisdictions, the study found that Covid-19 has served to push fintech up the agenda of regulators everywhere.
As part of its longstanding commitment to support innovation within financial services, the Financial Conduct Authority has been supporting innovative firms who want to test their propositions in the market with real consumers. There has already been widespread piloting of regulatory and digital sandboxes that support products and services in the early stages of development.
Inevitably, fintech’s future in London will also depend upon effective regtech, where significant adoption of technology in compliance makes it cutting edge. Facilitated by the combined efforts of British legislators and regulators, fintech’s UK success story seems set to continue.