How and why the UK government is plotting its ‘big bang’ fintech strategy

Despite having a well-developed economy further along the road towards digital transformation than many, why the UK has never produced a true tech giant is a common point of debate and discussion. But we’re not alone. None of Europe’s major economies has proven itself to be a tech start-up breeding ground capable of nurturing a Facebook, Google, Amazon or Apple.

Really, only China has produced technology companies on a vaguely comparable level to the behemoths from the USA that now bestride the world, earning vast sums of consumer cash from broad ecosystems of products and services. With the exception of Bytedance’s viral video-sharing app TikTok, even China’s tech giants don’t have anywhere near the same kind of international penetration as their U.S. peers.

Money, and lots of it, has been pinpointed as the one big advantage U.S. tech start-ups have over their international rivals. The USA has by far the world’s most developed venture capital and private equity industry, with a particular concentration of capital to be found in and around Silicon Valley.

The mindset of deep-pocketed U.S. investors is also considered by many to be as important as the access to their capital. They are ready to not only take risks by backing start-ups, most of which either fail or are swallowed up by larger companies, but do so generously. America’s tech investors understand better than anyone that building a high growth technology giant able to take on the world means funding that growth potential to the hilt.

And they do it – often taking expensive hits on multiple start-ups on the understanding that only a small percentage of them will come off. Once growth rate starts to take off and the opportunity crystalise itself, more money is made available.

We only have to look at U.S. tech companies to have gone public in recent years like Uber and DoorDash to see how little huge losses and cash burn concern investors in U.S. technology start-ups, as long as growth rates maintain their trajectory. It’s an expensive business but the rewards when it comes off are staggering.

Another bonus that contributes to the USA’s record of raising tech giants is being blessed with world’s largest economy as a domestic market to cut their teeth with before international expansion. A relatively laissez-faire approach to personal data rules and other forms of regulation compared to what tech start-ups in other economies contend with is a further factor worth mentioning.

But none of that means other countries, including the UK, can’t and won’t produce technology giants in the future. We just need to learn from how it’s done in Silicon Valley and the wider USA. And successfully adapt that to the context of our own culture, economy and strengths.

And even if it doesn’t immediately result in technology companies that can be compared to the very biggest that have come out of the USA, a thriving tech sector with its own champions shouldn’t be an unattainable mid-term goal. Especially if those companies are focused on parts of the UK economy that are our strengths.

Financial services is arguably the UK economy’s single most important sector

One of those strengths is financial services. By value, the sector was worth £132 billion to the UK economy in 2019, adding up to 6.9% of the country’s entire economic output. It’s London’s largest sector, with half of all the UK’s financial services value generated in the capital. As of Q1 2020, there were 1.1 million active financial services roles in the UK, accounting for 3.2% of all jobs.

We exported financial services worth £60 billion, importing £18 billion worth for a trade surplus of £41 billion.

The UK is not the only global financial services hub. The USA is still the world’s biggest market for the sector, even if its huge population is a deciding factor. Hong Kong and Singapore are Asia’s two big financial services hubs. But the UK is up there among the global financial services leaders. Even in the context of concerns how Brexit will impact the City of London, we are expected to maintain a leading role internationally.

The UK Fintech sector

The UK government’s strategy to develop the post-Brexit economy places significant emphasis on a healthy, growing tech sector. Plans voiced to offer promising British technology start-ups improved support and access to capital were enthusiastic enough to become a tough point of negotiations in the eventual Brexit agreement with the EU. Europe insisted on rules it hopes will limit ‘state aid’ giving the UK’s start-ups an unfair advantage over continental peers.

But within the confines of what has been agreed with the EU to seal an ongoing free trade agreement with the bloc, the UK government does plan to increase support for the technology sector. And the fintech sector, digital ‘disruption’ of traditional financial services, is a particular focus.

We already have a strong fintech sector. The first wave of major fintech start-ups to come out of the UK included digital banks like Revolut, Monzo, TransferWise and Starling. Several have already expanded internationally and it’s one part of the tech sector the UK can realistically claim to have a head start on the USA. Revolut and others have already expanded into the USA and Silicon Valley looks to the UK to headhunt fintech talent.

And there is now a new wave of prospects from the UK’s vibrant fintech scene. Some of the most exciting new entrants to the sector include:

Marshmallow – founded in 2018 by twin brothers Oliver and Alexander Kent-Braham and their third co-founder David Goate, Marshmallow helps find motor insurance products for individuals traditional providers reject. Most recently valued at £233 million when raising new funds in 2020.

Sugar – a specialist loans fintech, Sugar offers app and video game developers access to short-term debt financing. It’s an industry co-founder Matt Frenchman says traditional lenders don’t understand. Presumably Sugar’s investors believe it does and can profitably lend to a quickly growing industry proving a blind spot for traditional banks and other providers of business financing.

Fronted – ‘generation rent’ are often happy not to be tied down to a mortgage and move every few years, sometimes even more frequently, as convenient when jobs and social circumstances change. But coming up with the initial deposit on new rental properties can be a financial burden and temporary cash flow issue. Especially when it can sometimes take a few months before a deposit paid on the rented property being moved out of is returned – often with a big dent in it to cover refreshing what isn’t classed as ‘wear and tear’.

Fronted’s business is based on financing rental deposits directly by offering a much cheaper alternative to either payday loans or credit cards. The fintech takes advantage of new open banking rules to assess applicants for rental deposit financing. If approved, the deposit is financed directly by Fronted with a one-year term against a fixed 12.5% interest rate and no penalties for early repayment.

ClauseMatch – making sure a financial services company’s activities are always in compliance with regulations is one of the most onerous and expensive demands of the sector. But getting it wrong is even more expensive with fines heavy and the risk of future restrictions placed on business activities.

ClauseMatch, which counts both Barclays and fintech bank Revolut among its clients, recently raised $9.3 million, helps financial services companies automate compliance documentation. The company’s founder, 37-year-old Evgeny Likhoded, comes from a compliance background with Morgan Stanley. He founded ClauseMatch out of “personal frustration” at the number of firms meeting requirements through the use of “20^th century tools”.

UK government’s fintech ‘big bang’

The UK government wants to see a steady stream of fintech companies like the small selection mentioned above coming out of the country. And for more of them to establish themselves as high growth independent firms, rather than being snapped up by larger, often traditional, financial services companies once they reach a certain size.

To that end the Treasury recently commissioned Ron Kalifa, the former boss of payments processor Worldpay (acquired for $33.5 billion in 2019 by FIS of the USA in what is still the most expensive deal for a fintech in history), to lead a review into the sector. The result of that review is a report which outlines a five-pronged strategy designed to catalyse a “big bang” moment for the UK’s fintech sector.

A central pillar to the strategy is the establishment of ten fintech ‘clusters’ around the UK that will act as hubs for innovation and avoid too much concentration in London. The clusters envisioned could receive funds from local enterprise partnerships which see local government and businesses work together. Locations mentioned include Wales and the ‘Edinburgh-Glasgow corridor’ in Scotland.

Other ‘prongs’ suggested by the report include the creation of a £1 billion fund that would invest in fintech start-ups, hopefully allowing the most promising to remain independent and retraining financial services professionals lacking in digital skills. A new visa structure designed to prevent an outflow of talent to other countries or Brexit putting off talented EU citizens is a further proposal of the report, which Mr Kalifa researched by consulted with major stakeholders and players in the UK’s fintech sector.

If the proposals are implemented with the necessary commitment and make the kind of impact intended remains to be seen. But the government does seem committed to giving the country’s technology sector as much support as it can, with the fintech sub-sector’s historical strength marking it out for special attention.

Ultimately, government support for the tech sector is only likely to go so far. We’ve seen in the USA that it is private capital, and lots of it, that is likely to make the real difference. But if government support helps lay a solid foundation, it should help attract more private capital.

And who knows, the UK becoming a global leader in one area of the growing tech sector could well go a long way towards stimulating greater investment and success in others. If the UK does produce a true global technology champion in the same league as today’s giants from Silicon Valley over the next couple of decades, the current government may have a legacy to be proud of. And it wouldn’t be a surprise if that UK champion is a fintech company.