Innovation nation: FinTech in the UK
As one of the world’s leading financial centres, geographically well-positioned between America and the Far East, London is very much a global city. It is perhaps unsurprising then that it also attracts businesses looking to provide financial services worldwide, writes Alex Macpherson of Octopus Investments.
The financial services industry has a significant impact on the UK economy generating 15% of GDP. This is an industry sector that cannot be ignored. However, it has suffered over the last few years with the banking crisis and poor economic conditions, which has resulted in a lack of investment both internally and externally.
The recent lack of investment over the years has inevitably hurt those businesses that provide technology to financial services companies – FinTech businesses, as they are more commonly called. But times are changing and there is now an exciting opportunity for innovative FinTech solutions. There are numerous legacy technology systems that exist within large organisations that are creaking under the pressure of increased data flow, content production and user demand. During the last few years we have seen a fundamental shift in the way in which individuals consume information. The days of paper and hard copies are coming to an end as we all increasingly find information via the internet or email on our computers or mobile devices, like the smartphone or tablet. What’s more the interaction and response rate to information and data has exploded with the rise of social media and online communications.
The financial services industry is in the process of responding to this shift in data consumption, but it is easier said than done. Changes to structured processes built around legacy software will not happen overnight. One only has to think of NatWest and Royal Bank of Scotland’s issues with client accounts in June 2012 to recognise the scale of the problem when processes go wrong.
It is perhaps inevitable then that at a time when the UK is building its reputation for entrepreneurialism and innovation we are witnessing an increased interest in FinTech. The market is huge and encompasses many different sectors within the financial services industry – from banking to electronic payments to insurance to foreign exchange operations. However, there are three areas where, to my mind, the drivers for change are resulting in innovative FinTech companies developing solutions that dramatically alter the way business is conducted.
Peer-to-peer lending and crowd funding
At a time when savers are receiving paltry interest rates from the banks on their deposits and small business borrowers and individuals are finding it difficult to borrow at sensible rates, it is not surprising to see a growth in peer-to-peer lenders who connect these two groups of dissatisfied customers. Funding Circle, for businesses loans, and Zopa, for individual loans, are two examples of these sorts of businesses which provide savers with an opportunity to lend their money across a spread of loans, to earn interest at a rate that is much more attractive than those being offered by the banks on deposits. The borrower on the other hand is able to access funds at commercial rates. Providing funds to others is not without risk and it is important that the platforms used enable those savers lending money to diversify the risk across many borrowers.
This is potentially a problem for the platforms that provide equity investment opportunities through crowd funding. The theory of many individuals investing into a business to diversify the risk of investment is sound, but the risk of making an equity investment into a small growing business is still there and not insignificant. We are seeing the regulator, the Financial Services Authority, starting to take action in this area, and it is good to note that crowd funding businesses, such as Seedrs and CrowdCube, have or are in the process of gaining regulatory approval.
Automatic processing & electronic exchanges
There is opportunity in all areas of processing financial trades to remove human intervention and the risk of human error that comes with it. Over the last years we have seen the decline of open-outcry or face-to-face exchanges in favour of the electronic trading platform. This has been applied across product categories, most recently with the introduction of platforms for listed securities and high yield bonds, which has seen the likes of Goldman Sachs, Icap, Chi- X and Vega Chi bring innovate solutions to the market place. Human intervention will continue to play a role but the reduction in errors and the associated cost savings that automatic trades and electronic exchanges bring should be regarded as a positive outcome for the financial services industry as a whole.
Innovation can also be seen in the middle and back offices, where FinTech companies are helping to reduce the cost of doing business. The mutual funds industry has for a number of years existed with numerous different systems and little connectivity between them. Calastone is now providing a global transaction network for the industry, helping make the overall market more efficient. Meanwhile, for those seeking to transfer money, abroad or home, the foreign exchange market has been a struggle to access at anything approaching market rate. Currency Cloud is helping to facilitate payments for individual transfers, providing a competitive offering to businesses that interact directly with the client. It could be argued that FinTech companies of this nature are putting in place the foundations or plumbing that will enable others to build their product base on.
The shadow of the financial crisis continues to loom large over the industry, and the proliferation of regulation is just one side effect. Again this provides opportunity to FinTech businesses in many different areas, which are finding ways of helping companies meet an increasing number of regulatory requirements. Semafone, for example, aims to support PCI DSS compliance, ensuring companies meet standards for the handling of cardholder payment information. Meanwhile advancements in technology are also putting pressure on regulators – the FSA, for example, has introduced laws about recording work-based mobile conversations. Obsidian Wireless, which has since been purchased by Truphone, was set up specifically to support FSA-regulated businesses with voice recordings of conversations held on mobile devices following the introduction of the new regulation. Semafone and Obsidian Wireless are two very different businesses addressing very different markets and end customers, but they have both evolved out of the need to solve a problem.
It is this constant change to technology, business practice and the way data is consumed and shared that creates opportunity for the entrepreneur. With many areas of the financial services industry still trying to catch up, let alone keep pace, and great advancements in technology, there has never been a more exciting time for FinTech in the UK. If London wishes to maintain its place as one of the world’s leading financial centres then investment into FinTech will have to be at the heart of its efforts.