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5th June 2018
NatWest

A bright future for fintech

The government has made no secret of its desire for the UK to maintain its status as a hotbed of fintech (financial technology) innovation, regardless of any challenges facing the country’s financial sector as we leave the EU.

Support for the fintech ecosystem – including recruitment into the sector – was a key pillar of the government’s Investment Management Strategy II, published at the end of last year, having also been addressed in November’s Industry Strategy.

Already this year, the Treasury has published a fresh commitment to the sector in the form of March’s Fintech Sector Strategy, subtitled Securing the Future of UK Fintech. The message to domestic and international entrepreneurs and investors who are interested in the sector is clear: the UK is open for business.

“I believe Brexit also has a huge and positive potential: it can provide overseas investors with more opportunities than before to enter the UK fintech market”

 Dr Johnny Hon, chairman, Global Group

Government figures highlight the importance of fintech to the UK economy: it is worth £6.6bn a year and employs more than 60,000 people in around 1,600 businesses.

“London is a major historical financial centre that is renowned for technological innovation, and it provides the perfect intersection of finance and technology,” says Dr Johnny Hon, angel investor and chairman of conglomerate Global Group. “Silicon Roundabout in the Old Street area is a fantastic example of how the capital is a hotbed for fintech start-ups. But throughout the country, there is a real drive for technology, entrepreneurial spirit and celebration of start-up culture. In fact, Edinburgh was recently named start-up city of the year.”

Dr Hon says that, while he increasingly sees large corporations introducing technology such as blockchain and artificial intelligence (AI) into traditionally tech-averse industries like banking, he believes small and medium-sized businesses will be the driving force behind the wider adoption of fintech. “Smaller companies tend to be significantly more nimble than their large equivalents when it comes to decision-making and innovation.”

Wealthtech

While fintech is a broad church, ranging from challenger banks to payments services to currency-exchange platforms, much of the focus in the government’s investment strategy was on the area known as wealthtech – using technology to help individuals and organisations manage their investments more efficiently and/or at lower cost.

According to the investment strategy: “Fintech offers solutions across all parts of the asset management value chain, from reducing inefficiencies to better allocation of capital. The government is committed to maintaining an environment in which fintech can continue to thrive.” Further on, the strategy document says that wealthtech “encompasses technologies derived from wealth management firms, research tools that generate investment solutions, and platforms that support financial advisers”. It adds: “The most visible players in this fintech sub-sector are online wealth managers, commonly known as robo-advisers.”

Lester Petch, CEO of TAM Asset Management, says that this is largely down to rules from 2013 – known as the Retail Distribution Review (RDR) – which restricted the ability of asset managers to offer advice to their clients. “It is well documented that the RDR created an advice gap,” he explains. “Robos have developed partly to fill it with low-cost advice. But the advent of hybrid robo – robos hiring human advisers to supplement purely digital services – suggests this purely digital model is struggling.

“Investors of all shapes and sizes, it seems, want to speak to humans, which we feel creates a huge opportunity for independent financial advisers (IFAs) equipped with the right tools. Large swathes of previously unprofitable investors can be managed by IFAs using new automated digital investment solutions.”

Good returns

While the larger incumbents in the asset management industry are starting to embrace this technology, their focus can often be on their existing, often wealthier, clients, says Ola Abdul, CEO of automated investment platform Fundment. “Some of them are doing the best they can,” he says. “I saw the strategy document of one major player: they know technology is going to be important and they are trying to develop their own platform. But they are focusing on where they can get the best returns quickly, in other words the affluent customers who already have an investment portfolio.”

Abdul says that the cost efficiencies offered by his service and those like it mean that it is possible to provide wealthtech solutions to younger people who perhaps do not have as much money to invest.

“We can bring our solution to more people and democratise the long-term saving system,” he adds. “Our cost base is very low and we don’t have heavy legacy IT expenses so we can deliver our solution faster and at much lower cost. But of course the larger firms have the advantage of recognition and credibility.”

One of the biggest question marks over the UK’s fintech sector and financial services in general is what impact – if any – Brexit is likely to have. “The posturing from the EU to create issues with the right to passport is obviously the core concern for the smaller entities in the UK market,” Petch says.

The benefits of Brexit

“There seems to be some more positive comment that in transition through to 2020 the right to passport is maintained. That takes us on for another two years but doesn’t really give us clarification on the final solution.” He adds: “The dark clouds look to be clearing but we still have to await real substance. Most prudent financial businesses with a serious European element, like TAM, have been Brexit-planning for the worst but hoping for the best.”

Dr Hon says: “There are palpable fears that, following Brexit, foreign companies will invest money, resources and talent elsewhere. However, I believe Brexit also has a huge and positive potential: rather than leading to prolonged uncertainty, it can provide overseas investors with more opportunities than before to enter the UK fintech market.”

Certainly, the government has been making significant efforts to forge fintech links with markets beyond Europe. Already, ‘fintech bridges’ with Singapore, China, Hong Kong, South Korea and, most recently, Australia have been established. These are agreements that create links between regulators and reduce barriers to entry – both for UK firms overseas and foreign businesses looking to move to the UK.

As the strategy states: “The strengths of the UK’s global position in fintech are not dependent on EU membership.”

Dr Hon explains: “At the onset of Brexit, there was a negative mindset, suggesting that numerous jobs would be transferred to Frankfurt, Paris or Dublin, but now we see that those estimates have been scaled down considerably. Global business attitudes are changing, but I believe the UK will remain the financial and fintech capital of Europe.”

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