By Yvonne Dunn, Partner at Pinsent Masons
Financial Conduct Authority chairman John Griffith-Jones has recommended that firms set out their vision for the best way forward for UK financial services and the economy more generally in an industry strategy following the referendum result.
It is an opportunity for UK-based fintechs to lobby the government and regulators to maintain regulations in line with EU rules in the short term to allow for a period of practical equivalence between the two legal and regulatory frameworks that will exist when the UK formally exits the EU.
Such an approach would establish a stable regulatory environment to continue business as usual, as far as is possible, and avoid double regulation of firms. It would help retain the attractiveness of London as a base for European and international financial services operations.
In the longer term Brexit offers the UK the freedom to adopt business-friendly approaches to regulation to support innovative new products, services and business models, and build on existing initiatives the FCA has already developed to facilitate the rise of fintech.
The UK could also position itself as a leader, working alongside countries such as Singapore, Australia and the US to influence the EU’s strategic direction in relation to financial regulatory matters. This could include, for example, taking the lead on developing a global system of ‘passporting’ that makes it easier for fintechs to expand into international markets from their base in the UK.
The FCA has already developed strong ties with sister regulators in non-EU markets, such as Singapore and Australia, on fintech authorisations as it expands its Project Innovate initiative in both its scope and ambition.
One longer term opportunity might be for UK legislators and regulators to cherry-pick which EU regulation to apply in the UK and to develop different interpretations and approaches to issues from EU counterparts that might help support greater digitisation and innovation in financial services.
For example, cloud computing: at the moment EU laws require financial firms to ensure effective access to data for auditing purposes, including physical access to premises, when outsourcing services. This serves as a barrier to the adoption of cloud services by financial firms as data hosted by cloud providers is often stored on servers based overseas in multiple locations.
The FCA published draft guidance on the use of cloud computing by financial firms last autumn. It said at the time that cloud customers must ensure that they, their auditor and the FCA have “effective access” to its data as well as the cloud provider’s “business premises”, although it explained physical access rights may not be necessary for all business premises and that a regulator’s visit to cloud providers’ premises “can be qualified so that it only takes place if the regulator deems it necessary and required”.
The FCA has still to issue its final guidance. In future, with UK acting independently from the EU, it could support remote access audit rights for cloud use, cutting the cost and complexities involved in adopting cloud services.
The future for fintech in post-Brexit UK
The UK, with London as its financial capital, will remain an attractive place for fintechs to develop their business in future.
KPMG and CB Insights reported earlier this year that fintech companies in the UK raised $962 million in venture capital (VC) funding deals in 2015, up from $409m in 2014. The UK market for VC fintech investments dwarfed Germany’s, where VC deals raised $193m for fintech companies last year. The research represented increasing global confidence in the UK as a fintech hub with opportunities for innovators and investors.
Brexit has created short-term uncertainty but, whilst it may not be the result the fintech community wanted from the referendum, the UK remains well-placed to serve the interests of fintech companies and investors.
London will continue to be a major business hub for global trade and boast expertise in financial services unrivalled elsewhere in Europe and perhaps the world.
The UK also already has a deserved reputation as a financial centre with a regulator that supports innovation and the digitisation of financial services by both incumbents and new entrants to the market.
The FCA is at the forefront of fintech initiatives, including supporting the development of automated advice tools, the use of technologies that help firms meet regulatory obligations, and the testing of innovative products, services and business models in a lighter-touch regulatory ‘sandbox’ environment. The UK government is also backing the development of open APIs in banking in an initiative that goes beyond the ambitions of the EU’s new Payment Services Directive (PSD2) in opening up the payments market to increased competition and innovation.
These are solid foundations for a post-Brexit UK to build on. Together with the opportunities for global passporting and smarter regulation, there should continue to be fertile ground in the UK for fintechs to establish themselves and expand.
By Max Yevdokimov, VP of Mobile at Tinkoff Bank
Fintech has become quite a buzzword today: fintech, bioengineering, and near and deep space exploration are the most exciting tech trends at the moment. Unlike the last two which require expert scientific knowledge, fintech is a field that affects everyone who uses online banking or any kind of payments. As young people across the globe continue to move away from brick-and-mortar banking and finance, more and more start-ups, mobile apps and innovative financial solutions are popping up. However, these are mainly about altering or improving user experience and we haven’t seen any real breakthrough in fintech besides bitcoin and the blockchain.
When banks first set up their branch networks, they were focused on optimising and designing their layout. Then cash machines appeared, and they then rushed to streamline the user interface for those. Now that online and mobile platforms have become mainstream, banks are obsessed with improving the interface of online and mobile banking. But the problem is that most banks approach this from within and don’t properly consider users’ needs. This is exactly why fintech start-ups have emerged because they view the personal finance universe from the perspective of the user. So, it has become obvious that what traditional banks are offering is driven either by their inside understanding of their own processes (no matter how user-friendly those are, if at all), or by their IT infrastructure capabilities. Most initiatives deal with product interface upgrades or new form factors of connected devices.
The winners are those market players who can look at their product from the user’s perspective and anticipate the service they need and the form the user wants to receive this service in. And that’s where we come in! We started off back in 2006 as the first online-only bank and are developing this model to showcase the bank’s role as a fintech disruptor. We develop web services and mobile apps to be used not just within our customer base, but also in the broader market. A good example is our Traffic Fines app, where people can sign up for notifications and pay any fines they receive directly through the app. Traffic Fines has hit more than 3.5 million downloads to date.
By Mark Tate, Managing Director UK and Ann Wong, Director Corporate Communications & Investor Relations at Opportunity Network
Like it or not, Brexit is a history-defining event that will change the landscape of our financial market and bring lasting impact to the world economy. While some individuals and companies are still stuck in shock and disbelief, many are already proactively carrying out a series of post-Brexit initiatives. Certain banks are now considering moving their European hub out of the United Kingdom; European cities are prowling for the opportunity to replace London as the Fintech capital of the world; UK businesses are hastily exploring how to retain access to the EU market and talents. While no one has the crystal ball on what lies ahead, we know for sure that sit-and-wait is not the right strategy for banks that are searching for growth and profitability.
Many banks have now embarked on the journey of digitization; for banks that are in the process of evaluating Fintech partnerships in or outside of the UK, it is important to understand the implication of Brexit to their Fintech partners’ business operations, corporate structure, tax and regulatory environment. Many Fintech companies based in the UK have a business model dependent on the benefit they gain from being in the EU, the rights to “passport” their products and services across the European Economic Area subject only to the UK regulation. The UK is for sure an important financial market that should not be abandoned, but Fintech companies should also equip themselves with the capability to expand into the EU and internationally post-Brexit. It is therefore desirable for banks to partner with Fintech companies that have the option and flexibility to co-locate or relocate business activities to a continuing EU country, which will ensure business continuity whichever way the regulatory regime evolves.
Secondly, banks should also ask themselves: “will this Fintech partner help me achieve digital simplicity and create new growth frontiers?” Brexit is adding complexity and burden to banks and their clients’ businesses, the share of mind and wallet that clients can offer to digital products will definitely be compromised although their appetite for that will not change. The geopolitical uncertainties are also causing many to retrench their business operations and put their expansion plans to a halt. In such turbulent times, it is especially important for banks to deliver digital offerings that are simple to use, enabling their employees to serve different client segments effectively, improve salesforce productivity and originate new business with speed and scale.
Last but not least, think global. As the old saying goes, “don’t put all your eggs in one basket”. Brexit has now triggered the reshaping of the entire international trade framework; banks will have to look for even more solutions to connect British companies with the rest of the world. Brexit also makes it necessary for banks to recalibrate their business risks, adjust their revenue models and diversify the systematic risk pertaining to different markets, be it within or outside of the EU. The event was inevitably a shock to the system, but we are convinced that it will not change the course of the global digital banking evolution. Banks should now seize this timely opportunity to take advantage of the adaptive nature of Fintech companies to grow the banks’ business footprint and to strengthen underserved client segments, transforming the Brexit challenge into an aggressive play opportunity.
By Paresh Davdra, co-founder and CEO of RationalFX
Millennials are the most widespread, educated and financially powerful generation that humanity has produced – they are transforming nearly all industries beyond recognition, with the world of Fintech being no exception.
Global society has been dominated by baby boomers for the past 50 years, with members of the generation wielding massive influence over issues ranging from cultural norms and behaviour to the legal and property industries. If the 20th Century was etched by the hand of the baby boomer, the 21st Century now belongs to the millennial. It is these complex beings that will, in the same way, define the way that the world is run for the next 50 years, shaping the future for generations to come. The transition between the two generations is therefore an important process, with companies vying for the right to plant a flag in the massive potential of millennials.
The ferocity with which businesses are currently competing for the attention of the millennial generation is due to the huge market they have generated, resulting from their adaptability to new technologies. Take, for instance, the trends in the financial world at present; the lines between the banking and the digital worlds are now blurring more than ever, with banks staggering under pressure to cater to younger customers. Today, almost a third of 26-36 year olds would switch banks based solely on the strength of the mobile app. In fact, 33% believe that they won’t even need a bank in the near future, and perhaps most interestingly, 73% of millennials would be more excited about financial innovation from one of the tech giants – Google, Apple etc. – than from their bank. As a result, being out of touch with the technologically sophisticated younger generation could spell death for the banking world as we know it – cue Fintech.
There is perhaps no better demonstration of millennials’ power over the financial industry than the rise of Fintech. The main driver behind recent developments in the field has been disruption, which spawned from the generation itself. Advances in Fintech have been a microcosm of the growth of our society recently – with a generation of people lacking borders or allegiance to the established norms of the previous generation, enterprise has flourished. Millennials create demand for new, low cost financial services that place customer satisfaction on top, and in doing so, encourage the progression of Fintech. In fact, three quarters of millennials now say they want to get their advice from tech companies rather than mainstream financial firms.
Mobile technology and millennials have simultaneously grown together over the years. Smart phones are as ubiquitous as anything now, and technological advancements mean that each person now has a computer in their pocket – a computer capable of carrying out financial transactions, checking your bank balance, and even getting a constant stream of complex financial advice. All of this begs the question: why would you go into a bank to check your account, to carry out a transaction or to seek financial advice, when you can do it anywhere from a mobile device? Traditional banking is more expensive, more time consuming and less consistent.
Perhaps the only reason people use traditional banking methods is trust – how many consumers trust an app on their phone as much as a qualified person standing in front of them? The issue here is that after the financial crash of 2008, negative perceptions of banks and bankers have run riot in our society. Many of the younger generation have completely lost faith in the banking world – and who are we to blame them? They need an alternative solution, and what they understand is technology and relentless innovation – a gap in the market which Fintech has now filled.
All this means that now is an extremely exciting time to be in the financial services industry. Innovation is the name of the game, with new tools creating products every single day and inventors becoming the entrepreneurs of tomorrow. This is not a temporary change either – not a revolution to be undone, but rather a process of evolution.
The financial world has changed forever, with technology and customer satisfaction becoming more important every day. With the millennials moulding the world, Fintech is a product of evolution, not revolution, and that’s why it is here to stay.
By Joe Hall, UK Managing Director of eToro
From crowdfunders to P2P lending and mobile banking to social trading, fintech companies are levelling the playing field by lowering the barriers to entry for traditionally high-level, top of the market financial services, to the benefit of a huge array of customers.
Research that we’ve done previously revealed that millennials, those aged between 18-24, are more likely to place trust in new fintech platforms and digital services than older generations.
As children growing up against the background and aftermath of the financial crisis, millennials embraced fintech faster than the economy recovered, embracing solutions that streamline finances faster than any other generation. Smartphones became the catalyst for greater interactions with their personal finances from checking bank balances, making money transfers or paying for things.
Spurred by the success of first movers, such as Mint, a new wave of apps tracking consumption patterns came onshore, assisting with boosting savings, without the needs for constant monitoring and adjustment.
The new abundance of ways to invest, became a solution to the heavy student loan. From crowdfunding to P2P, this generation made clear that they didn’t need to settle for the bank’s BS – by which I mean, business services, of course.
And cost of entry was lower. When we look at the traditional fund management industry where fund managers and private banks routinely demand £250,000 or more to open an account with them, fintech providers like ourselves completely removed this unnecessary barrier to entry. On eToro, people can bypass highly paid fund managers and opaque fee structures and start trading with as little as $200.
Growing-up around the social spheres of Facebook and Myspace, millennials are naturally drawn towards the digital land of online information sharing. They are the generation of globalisation and are the future leaders and consumers of this world. As the internet brings to life the opportunity for international investments, the basic ISA platter on offer at the local bank loses appeal in comparison to the global financial markets now open to investment.
As part of the finance industry and the fintech ecosystem, we need to keep the future consumers at the heart of what we do. New innovative offerings attract attention, but it is only those that meet customer needs that cut the cheque. eToro defines every new innovation with such purpose.
So why would millennials trust the shiny -suited asset manager, hiding behind a closed portfolio, when transparency is possible? Why deal with a greasy salesman, when they can see the best deals on comparethemarket? Why settle for the low cash ISA rates, when crowdfunding options are on offer with higher returns?
The customer is always right. Millennials know the way to invest.
By Charles Green, thought leadership director at Belatrix Software
Amidst the chaotic economic and political aftermath of Brexit, and a shifting landscape for Fintech, it’s easy to get caught up in the events of today, and lose sight of the fundamentals underpinning the Fintech revolution. So in this blog I want to examine the methodologies that enable nimble, disruptive Fintech firms to run rings around their banking and financial service competition. Is it just that they have a different mindset and a lack of legacy systems to contend with? Or are they using and applying technology and software in fundamentally different ways to meet the needs of customers and drive innovation in their businesses?
Traditional banks benefit from scale, experience, strong brands, and a broad product portfolio. For Fintech upstarts to challenge these banks, they simply can’t do things in the same way. Successful Fintech firms rely on a different set of strengths such as their disruptive mindset in order to compete. But they also apply methodologies such as Agile software development, Design Thinking, and strong user experience capabilities to differentiate themselves from the competition:
- Agile development and continuous delivery drive flexibility and responsiveness to customers. Agile development and continuous delivery provide the frameworks to iterate rapidly, and release software constantly to keep up with changing customer demands. Meanwhile creating great software requires attracting the best developer talent, and today’s developers expect not just to work with the latest technologies, but also with modern methodologies such as Agile.
- Design thinking brings the customer to the fore. Traditional banks may have the scale, experience, and expertise, but all too often the end customer was placed too far down the list of priorities. Fintech start-ups with their disruptive mindsets, have looked to Design Thinking to change this. Ultimately Fintech is about human-centric design, and using that design to provide powerful, seamless customer experiences. It reflects the shift to what Forrester Research calls the “Age of the Customer” where customers, armed with information, have greater power than ever before to decide on which products and services they use. Design Thinking involves the use of a range of techniques such as customer journey mapping, rapid prototyping, storyboards and personas.
- User experience and design skills to deliver powerful customer experiences. Mobile is a key driving force underpinning the need for better experiences – indeed for many organizations the only interaction point they have with their customers is via their mobile app. To create this next generation software, leading Fintech firms have prioritized investments in UX and design. And to deliver this level of consistent UX, design skills also need to be complemented by technological expertise in DevOps, microservice architectures, Agile, and continuous delivery.
To give an example of this in practice, Belatrix Software worked with a leading financial services organization aiming to develop new ways for customers to withdraw cash. The brief was to reimagine the ATM and how customers withdraw crash. Via a combination of Design Thinking, Agile development, and UX skills to rapidly create prototypes, Belatrix created a mobile app which could be used instead of a credit or debit card at an ATM – so-called “cardless cash”.
Many traditional banking and financial service organizations, from Barclays to BBVA, are trying to catch-up with their Fintech competition via such methodologies and frameworks. However, what is clear as we move forward through 2016, is that to serve ever more demanding customers, thriving Fintech firms will continually develop innovative product development strategies and use specific methodologies and frameworks to foster this innovation.
By Andrew Firth, CEO at Wealth Wizards
In both the US and UK markets, our mutual appetite for transparency and real-time information has given life to a vibrant and rapidly expanding digital ecosystem, altering the way we store, consume and use financial information.
Moving far beyond the accessibility of day-to-day banking and payment apps, the fintech industry is growing swiftly with robo-advice at its core.
The term is used to describe automated services for investment, asset, pensions and insurance management, robo-advice allows individuals to tailor their financial products via online tools and mobile apps.
Obstacles of traditional advice in the UK
Robo-advice is a convenient and lower-cost way of accessing advice and investment expertise for the masses, who have been largely priced out of the UK advice market.
In 2013 the Financial Services Authority (FSA) banned financial advisers from offering free advice to customers while earning commission from the providers of the products they recommended. Since then fees have steadily risen, pricing out many with smaller savings pots.
A poll from Unbiased.co.uk found that financial advisers increased their fees by as much as 16% in 2015 alone, with the average cost for pensions advice now totalling around £1,490. Resulting from this the Financial Conduct Authority (FCA) and Treasury claim that up to 16 million people could be trapped in a “financial advice gap”.
The FCA’s Project Innovate is helping the wave of Fintech innovation to navigate the way to providing regulated services. There are a range of ‘robo-advice’ services in the UK including those offering help and guidance, investment management or personalised recommendations, with more expected to enter the market imminently.
The US market
Changing the advice landscape in the US since the mid-late 2000s, consultancy firm Deloitte found that robo advisers currently cover less than a billion pounds of assets in the UK, compared with $19 billion in the US.
According to research from consulting firm A.T. Kearney, the robo-advice industry is flourishing in the US, where there are now more than 200 platforms. It’s estimated that 1 in 5 customers that use banking services in the US are aware of automated online investment services, and research suggests engagement is high among those with small and large investment portfolios.
Platforms from Wealthfront, FutureAdviser, Charles Schwab, Vanguard and Betterment have proved hugely popular in the US, and now major institutions such as Morgan Stanley and Bank of America are looking to enter the marketplace.
The UK market
New entrants such as Nutmeg, Wealth Horizon and Money Farm are focused on helping people make and manage their investments in a similar way to many of the US robo-advisers.
Among the high street banks, Royal Bank of Scotland (RBS), made headlines earlier this year when it cut the jobs of 220 face-to-face advisers in favour of the future introduction an online service. RBS’s claims its new online investment platform will enable the bank to help a new group of customers with as little as £500 to invest. Customers with more than £250,000 to invest will still receive personalised face-to-face advice.
Following RBS’s announcement, speculation has been building that Barclays, Lloyds and Santander UK are also developing online services.
Large insurers are also interested in robo advice and one – LV= has already launched a service offering automated personalised at-retirement advice, using Wealth Wizards robo advice platform technology.
Wealth Wizards, which aims to make financial advice affordable and accessible to everyone, has pioneered the development of robo-advice in the UK. Founded in 2009, Wealth Wizards offers the leading robo advice platform in the UK.
Combining three key competencies; investment expertise, chartered financial planning and software engineering, Wealth Wizards platform can support multiple advice services.
The potential of robo-advice
A 2015 US market report from research firm Cerulli Associates claims robo-advice platforms are expected to reach $489bn (£323bn) in assets under management by 2020, up from $18.7bn.
With the London fintech scene increasingly described as a hotbed of innovation and advances made by UK robo-advisers becoming more and more sophisticated it is no surprise that the UK regulator stands firmly behind the fostering of development in the UK market. Though it may currently be smaller in size, this powerful combination may well allow the UK to take the lead.
By Jamie Miles, business development manager at Onfido
Financial exclusion is still a problem in the UK — statistics show that nearly 2 million adults in the UK still did not have a current bank account in 2015. Individuals and families with no access to financial services struggle to save up and keep track of their spending, and are unable to make online purchases as they lack a payment card, which in many cases would save them time and money. Moreover, those who are financially excluded spend an extra £1,500 every year on payday lending services, as they can’t make use of overdrafts or apply for a low-interest loan.
Included in the body of financially excluded individuals are those professional workers who are new to the country. A solution is needed for our doctors, architects and software engineers, who are some of the excluded members unable to open a bank account because they need to have their identity verified. The reliance on credit records to perform this verification is the crux of the problem. This method of verification is ineffective because those new to the UK do not have a credit record in the country. It’s a vicious cycle: you can’t have an account because you never had one, and you never had one because you never got one.
FinTech companies such as Mondo are combatting the problem of financial exclusion head-on. With the support of RegTech companies such as Onfido, they are able to use alternative methods for identification that are designed for those without credit records. Thus, those previously denied financial services are now being granted access to conveniences typically taken for granted, such as online banking or e-commerce. As these collaboration continue to emerge, the possibility of inviting everyone to our global financial system looks more realistic, which will be a world that benefits both businesses and customers.