The UK has long held a much sought after position when it comes to financial services. There’s a huge strength of talent, access to capital, regulation and demand from consumers to high end corporations. So it’s no surprise that the UK has a strong fintech sector that is growing, innovating and changing the face of banking as we know it. At the heart of most new fintech achievements is mobile.

What is Fintech?

Fintech can more generally cover financial services companies using technology to change the world of banking. But is more accurately applied to the technology startup scene. A scene that is watched with great anticipation as it sets about dramatically changing and disrupting the financial sector in particular around mobile apps, mobile payments, money transfers, loans, fundraising and even asset management. And fintech is big news in the UK, it’s reported more than £3.8bn of investments were made in the fintech industry between July 2016 and January 2016 (Let’s Talk Payments).

Already there are some big names in the UK including the likes of Atom, the UK’s first mobile only bank to be licenced in the UK and now offering bio-metric face and voice security. Crowdfunded Tandem Bank who opened the app to co-funders in waves of 10,000 at a time, seeking to improve the app as it grows – a great example of MVP (Minimum Viable Product). NoviCap who provide a platform that allows professional investors to invest working capital directly into businesses. Or Onfido who deliver intelligent background checks for businesses. TransferWise who are reported to send over £500M every month around the world in cross border payments and DoPay who has a platform that allows business to pay employees directly without a bank account. The UK is teaming with fintech companies at the moment and there are so many more that could be mentioned but as you can see from these examples, fintech is not limited to bank account alternatives for consumers. Consider all aspects of financial transactions and there will be a fintech working on it.

Why Fintech, why now?

It can’t come as a surprise to anyone; traditional banking as we know it has evolved over the years but nothing dramatic. There’s an argument that the ATM is the most innovative thing to happen within financial services over the 3 decades leading up the the late noughties. Of course, that’s not fair and many overlook the complexity of the services and systems that traditional financial services organisations have had to manage and maintain for decades.

Significantly more has changed to allow the rise of fintech including regulation changes like SEPA (Single European Payments Area) standardising payment products and technical standards, which of course includes faster or real time payments. Something like faster payments goes hand-in-hand with the with the spread of smartphones and electronic commerce. All leading to changes in customer habits, who can now easily make purchases and transact anywhere, anytime. Even online banking still chained customers to some degree to their desk but mobile banking was the big transformational change. In a previous article we did with Adam Warburton from Travelex we discussed that “UK smartphone adoption rates were up around 75%”. The trends towards mobile is clearly irreversible, how new and traditional companies are responding is key to their future success.

PSD2

It would be hard to talk fintech without considering the impact of PSD2 (Payment Services Directive, version 2). PSD2, again designed within Europe, is reported to “break down the bank’s monopoly on their user’s data”. In theory it suggests that other organisations including retailers and fintech’s – other ‘merchants’, will, with your permission, be able to retrieve you account data from your bank. It could mean we finally see aggregated account views (not using screen scraping) for people who have more than one bank account, like Mint offers in the US. In essence, this means a standard process for regulated sharing of data for the purposes of providing better services to customers.

It also outlines procedures to stop the use of non-transparent pricing methods for international payments, often bundled up in exchange rates. PSD2 states that consumers should know all the costs and charges involved in a transaction. The UK government will be responsible for deciding what is in and what’s not within the implementation of PSD2, it’s not sure if these hidden charges will form part of the legislation.

The idea sounds pretty straightforward right? Practically it isn’t going to be that easy. There is no current standard to the API’s, so whilst there may be access, each bank would present their own set in different ways. Naturally, there is some opposition from traditional banks with regards to opening up their customer data to ‘merchants’ so these ‘merchants’ can then access the data they need to improve their businesses, to ‘cherry pick’ off the best but leave the complexity of running the holistic banking to the banks. That said we believe it will happen, but may take longer than desired, and in many cases be circumvented by discrete transactional services like peer-to-peer (P2P) transfers.

The UK government has a keen interest in seeing the successful rise of fintech, keen of course to retain its market-leading position as a global financial services capital. Some initiatives include creating a fintech “delivery body” to drive high impact policy initiatives. Building on the FCA’s position as the most progressive regulatory body globally. Delivering practical support, including the establishment of tech hubs, and help connect fintech’s to international opportunities and advice.

The race for traditional banks

Citi GPS talk about European and US banks being on the brink of an “Uber moment”, as the explosion of fintech disrupts the industry and leads to massive job cuts over the next decade. It suggests that if these regions see the same trends as China it won’t be long before fintech companies have as many customers as the major banks. China already has the largest e-commerce system and P2P lending in the world according the report. They conclude it’s a matter of innovation and scale. For banks to remain competitive they need to get innovative before the fintech’s are able to scale and it’s fair to say many in the UK are already well down this path and taking innovative new approaches to banking services, including Barclays incubator (Barclays are also behind DoPay among others), Santander has a fund to invest in fintech companies and Visa Europe has launched an accelerator program. Where many have decided to invest in external fintech firms, some like Clydesdale bank have created their own offering.


Futures for fintech

Many of these innovative start-ups will come and go, but without a doubt some will grow and prosper. The impact of fintech will mould the future of banking – providing an injection of innovation and shaping the experience that customers will expect. However, acquiring customers isn’t easy, no matter how successful new fintech’s are they will have the battle to achieve brand recognition, customer acceptance and then be able to scale to be profitable. Some will prosper on their own, some will form partnerships with traditional banks, some will be acquired in order to give the banks a quicker lower cost way of delivering new services.

The future is clear, fintech’s are driving an agenda of innovative change in the financial environment. This is inspiring traditional banks to innovate and improve experience while regulation is continually opening new opportunities for competition. It’s a healthy competitive environment that will use technology to change the world of banking.