On Friday, the Kalifa Review of UK Fintech was published. The policy paper takes stock of the progress that the fintech sector has made in the UK, as well as providing five main recommendations for how it can continue to flourish. The report takes its name from its author, Rohinton "Ron" Kalifa OBE, chairman of Network International, and former CEO of Worldpay Group.
Policy paper highlights
Over the past decade, the UK has been quietly undergoing a fintech revolution - in jobs, innovation, improvements to people’s lives and in increased opportunities in global trade. 10 years ago, it took days to open a current account. Now you can be onboarded in minutes, and more safely and securely, leveraging regtech solutions and challenger bank innovation.
Back then, people had only a few options for managing their savings and pensions - using paper updates. Now there is more choice, pensions can be tailored to specific needs, easily amalgamated and they are online with immediate, accessible interfaces. Back then, if you were a new business seeking SME financing, there was limited choice of providers on the high street with slow decision-making processes. Now, there is digital access to a wide array of lenders looking to leverage machine learning and AI tools, and provide immediate decisions on a new loan or refinancing opportunities.
Fast forward to today. Achievements like these have contributed to making the UK envied around the globe as a hotbed of fintech activity - and its successive governments and regulators admired for building a supportive enabling environment that puts innovation at the top of the regulatory agenda.
The Financial Conduct Authority’s (FCA) pro-competition mandate has helped support new fintech firms and ensure a more nurturing regulatory environment. In 2016, the FCA launched the world’s first regulatory “sandbox”, which was subsequently replicated abroad by regulators looking to follow the UK’s lead in innovation. Similarly, the Bank of England and the FCA’s ‘New Bank Start-up Unit’ provides additional support and advice for firms looking to gain a banking licence. This in turn is accelerating the digital transformation of banks, asset managers, and insurers, as they strive to meet changing consumer and business demand. Big Tech is moving into this space, highlighting the value of data-led solutions in financial services. Because of the strength of our incumbent financial services sector, fintech has found extremely fertile ground. Yet it has also created opportunities to cross-pollinate into broader technology solutions, leveraging cross-cutting applications like big data, AI and quantum computing. Combined, these trends create a pivotal moment to support fintech innovation.
This catalysed the UK into becoming the fintech hub of today, coupling it with the sophisticated financial services ecosystem of London, where so-called 'unicorns' such as Wise, Onfido, Checkout.com and Revolut have based themselves. This has resulted in an impressive scorecard:
- Representing 10% of global market share and £11bn in revenue, according to KPMG and EY respectively, the UK is a dominant force in fintech.
- EY data shows the total tech spend by UK financial services firms was £95bn in 2019.
- SMEs and corporates are all keen users of fintech. UK citizens are becoming digitally active and 71% are now using the services of at least one fintech company, EY found.
- Investment into UK fintech stood at US$4.1bn in 2020 - more than the next 5 European countries combined, according to Innovate Finance.
However, the trajectory of UK fintech is at an inflection point of opportunity - and risk. While the UK’s position is well established, its future is not assured.
There are three broad threats to the country's fintech leadership position, each of which point to three opportunities that the report says must be grasped through immediate action to create an economy that works inclusively and sustainably for its citizens while securing the ambitions for 'Global Britain'.
- Competition: Overseas centres are seeking to emulate the UK’s success. Competitor jurisdictions such as Singapore, Australia and Canada are investing heavily across many of the areas we have looked at, including capital, skills and direct support for fintechs.
- Brexit: Brexit has created regulatory uncertainty in specific areas relevant to fintech. Firms must navigate the immigration system for European Union talent for the first time - while rival jurisdictions are rolling out aggressive attempts to lure talent in.
- COVID-19: The pandemic has accelerated digital adoption globally in a way that marketing or policy never could. This is creating opportunities for jurisdictions that are quickest to diagnose what’s happening and nimblest to capitalise on the opportunities for fintech.
The prize lies in three opportunities, according to the Kalifa Review:
- Jobs: Fintech is embedded across the UK with the potential to create high income tech-based employment, becoming an engine of the 'levelling up' agenda, as well as playing a part in upskilling and retraining the existing workforce. The sector’s direct GVA contribution to the economy is estimated to be £13.7bn by 2030, with job creation contributing to 70% of this, according to KPMG analysis.
- Trade: Enabling fintechs to achieve global scale and reach via access to international markets, and continuing to lead on regulation and standard-setting in fast-moving tech. The Review sees fintech as a core asset for Global Britain.
- Inclusion and Recovery: Supporting citizens and small businesses to access more, better and cheaper financial services - and doing so in a sustainable way to help “build back better”.
Building on the current position of fintech in the UK, the Kalifa Review has identified a Five-Point Plan of recommendations to deliver this approach and achieve its vision:
1. Policy and regulation
The UK has led the way globally in its policy and regulatory approach to fintech. This is exemplified in the regulatory sandbox. As businesses, technologies and solutions scale, the report stresses the need to ensure the policy and regulatory approach continues to not only protect consumers but also creates an enabling environment that encourages growth and competition. It therefore proposes to:
- Deliver a digital finance package that creates a new regulatory framework for emerging technology: The UK must prioritise new areas for growth and cross-industry challenges such as financial inclusion, and adopt specific policy initiatives that will help create an enhanced environment for fintech, such as digital ID and data standards.
- Implement a 'Scalebox' that supports firms focusing on scaling innovative technology: This would include enhancing the Regulatory Sandbox, making permanent the digital sandbox pilot, introducing measures to support partnering between incumbents and fintech and regtech firms, and providing additional support for regulated firms in the growth phase.
- Establish a Digital Economy Taskforce (DET): Multiple departments and regulators have important fintech competencies and functions. The DET would be responsible for collating this into a policy roadmap for tech and digital, in particular, the digital finance package. It would provide a ‘single customer view’ of the government’s regulatory strategy on tech and a single touchpoint for the private sector to engage.
- Ensure that fintech forms an integral part of trade policy: The UK must build upon early successes and ongoing industry engagement and further develop its global trade policy in relation to fintech, ensuring a coherent and consistent approach, as well as to secure commitments in its future trade agreements that would benefit fintech.
There is a rich pool of fintech talent in the UK, supported by a world class university system and as many as 67% of the UK’s fastest growing fintechs consider talent to be a high priority, according to an industry survey by Innovate Finance. The Review proposes to:
- Retrain and upskill adults to meet the needs of UK fintech by ensuring access to short courses from high-quality education providers at low cost: It is estimated by the Confederation of British Industry (CBI) that 90% of the UK workforce will need to be reskilled by 2030. Covid has intensified this challenge. Fintech has the potential to create new jobs and support effffective retraining and upskilling efffforts across the UK.
- Create a new visa Stream to enhance access to Global Talent for fintech scaleups: UK fintech thrives on recruiting and retaining talent from across the globe. Foreign talent represents in the region of 42% of UK fintech employees. In order to remain a global leader in fintech, the UK needs to strengthen its position on immigration or risk a significant shortage in human capital.
- Build a pipeline of fintech talent by supporting fintech scaleups to offffer embedded work placements to Further Education and Higher Education students and Kickstarters: Due to the pandemic, around 700,000 young people have left education into an extremely difficult jobs market. Fintech can provide young people with access to employment opportunities in an exciting and expanding sector. But more is needed to support students to understand these opportunities. And fintech leaders need more interaction with students throughout the curriculum.
Private funding has been crucial to the success of the UK as a fintech hub but more can be done to support firms at the later stages of funding. As such, the Review proposes to:
- Expand R&D tax credits, Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT): 97% of founders have used tax-incentivised investment schemes including EIS, Seed Enterprise Investment Scheme (“SEIS”) and VCT, 47% were concerned about their ability to qualify for such tax relief if their business models switched from being unregulated to regulated in the future, according to a survey commissioned for the Kalifa Review.
- Unlock institutional capital to create a £1bn “Fintech Growth Fund” of suffficient scale to act as the catalyst in developing a world leading ecosystem: With an estimated £2bn fintech growth capital funding gap in the UK, many entrepreneurs prefer to sell rather than continue to build their promising company. The Office for National Statistics shows there is £6 trillion in UK private pension schemes alone, a small portion of which could be diverted to high growth technology opportunities like fintech. This is likely to fall within the remit and interests of the Productive Finance Working Group.
- Improve the listing environment through free float reduction, dual class shares and relaxation of pre-emption rights: Out of the 3,787 initial public offerings (IPOs) at the world’s major stock exchanges between 2015 and 2020, the US alone accounted for 39% (via the NASDAQ and the NYSE), while the UK trailed with 4.5%, according to KPMG analysis.
- Create a global family of fintech indices to enhance sector visibility: Once enough UK fintech companies have listed and formed a sub-sector, a UK index could become a bellwether for all UK fintech stocks and cement the country’s reputation as a listing destination.
Building on the success of the UK government sponsored Fintech Bridges, and future digital trade opportunities, taking additional steps to strengthen the international operational support offered in the UK and targeted overseas markets would make a big statement about the international openness of the UK in a post-Brexit environment. The Review therefore proposes to:
- Deliver an international action plan for fintech: The action plan represents a combination of public and private sector priorities and identifies sectors and markets with the highest potential to scale and build leading positions for UK fintech companies.
- Drive international collaboration through the Centre for Finance, Innovation and Technology (CFIT), and launch an International Fintech Taskforce: Led by Government with the purpose of gathering fintech and industry input to achieve progress against the ‘international plan for fintech’.
- Launch an international “Fintech Credential Portfolio” (FCP) to support international credibility and increase ease of doing business: Led by CFIT, the FCP will help fintechs demonstrate an international sign of quality, resilience, trust and standing to participants in international markets.
5. National connectivity
The Review notes that there is an abundance of fintech talent spread throughout the UK, supported by the Fintech National Network. To maintain the UK’s position as a fintech hub, the report says the sector must focus on scale and supporting regional specialisms - particularly the significant intellectual property being created in universities. Therefore the review proposes to:
- Nurture the high growth potential of the top 10 fintech clusters: Each cluster should produce a three-year strategy to support growth, foster specialist capabilities, and enhance national.
- Drive national coordination strategy through CFIT: To ensure future fintech competitiveness and growth across the UK connectivity.
- Accelerate the development and growth of fintech clusters through further investment such as in R&D.
The Review stresses the need to combine the best of government and policymaking with the innovative flair of the people who have built and lead UK fintech. This means building public-private coordination to ensure strategic focus and an official government mandate to pursue it.
A major recommendation in the Review is the previously mentioned 'Centre for Finance, Innovation and Technology' (CFIT), mandated and supported by the government, but led by the private sector to coordinate targeted fintech policies that aim to scale the sector. CFIT will build “execution capability” against all three of the opportunities identified above:
- Future jobs, nationwide: Build a skills platform that will deliver short-courses from approved providers for upskilling and re-skilling and an exchange to place higher/further education students into work placements in the sector.
- Trade and global leadership: Alongside DIT, support the execution of the international plan for fintech and align the UK’s strengths in fintech with trade agreements and developing markets.
- Inclusion and recovery: Industry wide coalitions on key issues like financial inclusion, SME lending, Open Finance and Digital ID. These would bring together banks, Big Tech, data providers, fintechs and policymakers to solve the challenges of scaling solutions and creating economic benefits.
Technological change has arrived in financial services and with it, an abundance of threats and opportunities. Threats to the UK’s competitive position, but also opportunities to innovate and grow. Threats to consumers and labour markets, but also opportunities for job creation and supporting the development of a digitally capable citizenry. To succeed, efforts must be comprehensive and collective.
The report stresses that, one year from the launch of the Kalifa Review, both the public and private sector must come back to report on the progress they have made to deliver the recommendations in the Review. It also says that the government should consider appointing a fintech ‘business champion’, to support fintech and deliver this strategy.
“We are seeing technology companies increasingly performing roles that have historically been done by financial institutions themselves," commented Mark Leaver, financial services technology leader at PwC. "Opening up the legacy platforms of financial institutions, letting in more agile technology-led organisations and enabling incumbents and new entrants to collaborate will help the industry to better serve customer needs and become more efficient. At the same time, as industry and consumers navigate an increasingly digitised world accelerated by the Covid-19 pandemic, while competition from around the world is on the rise, it is hugely encouraging to see the recommendations in the Kalifa Review of UK FinTech published today. Building on the strong foundations that the UK FinTech sector has laid, we look forward to working with the industry to support the proposed Centre for Finance, Innovation and Technology in the delivery of the five-point plan.”
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