Few would argue that the financial crisis of 2008 changed the banking industry dramatically. But the change most people think of first— the sweeping regulatory overhaul and resulting consolidation — is not necessarily the most significant. Potentially more game-changing is the fact that the crisis spawned the rise of fintechs. The ramifications of that development, a decade on, continue to be felt.
As many may recall, in the weeks and months after the collapse of Lehman Brothers people were losing their homes; business couldn’t get funding or loans, and trust in the entire banking system was being eroded. But as so often happens in unstable and uncertain times, there were those who saw an opportunity — in particular, to reimagine what the financial services industry could be and do.
That realization took root outside the giant U.S. market and ultimately propelled the U.K. to its position as the leading global fintech center.
Sure, the U.S. tech titans are undoubtedly pushing consumer expectations to new heights and encroaching on financial services, particularly payments. And yes, the Chinese tech-fins are clearly winning the mass data, customer-centric play, bundling commerce, banking and payment service in a single ecosystem.
But when it comes to fintech as we know it, the U.K. has been leading the way. Not simply in terms of firms founded there, as there are plenty of non-U.K. success stories too, but because of its ongoing influence over the evolution of digital banking.
The reasons for this are more than just a historical note. They shed light on the potential for much greater impact of fintechs on the U.S. banking market — as well as other jurisdictions — should fintechs be let off the leashes that currently restrain them.
The 3 Drivers of the Fintech Revolution
Think of London as the fintech equivalent of the Galapagos islands: a place with a unique combination of characteristics that are now being studied and analyzed to understand how the fintech revolution came about, how it grew and how it continues to thrive.
Those characteristics consist of three factors that co-exist in London and enabled entrepreneurs, technologists and investors to set about solving issues that had been brought to light, exacerbated and, in some cases, created by the financial crisis.
1. Regulatory support. First of all, regulators in the U.K. really got “stuck in,” as we say here. The Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA), along with the Bank of England collaborated enthusiastically to push through changes in the financial services industry. The FCA is unusual among global regulators as its mandate explicitly includes the promotion of competition in the interests of consumers.
The FCA’s Regulatory Sandbox initiative has, arguably, had the biggest impact. It allows businesses to test innovative propositions in the market with real consumers. That in turn has reduced the time to gain authorization by around 40%.
“Since U.K. regulators offered restricted licenses, 18 new banks there have been granted one.”
Also, the PRA lowered the initial minimum capital requirements for small bank license applicants, and also offered restricted licenses, allowing new banks to operate with a restricted volume of customer deposits and therefore real customers.
18 new U.K. banks have since been granted, and held onto, banking licenses.
That success has spurred regulators in other markets to follow a similar approach. By the end of last year, there were 20 live and proposed sandboxes in countries extending from Australia to Canada, and from Abu Dhabi to Hong Kong.
[In the U.S., regulatory sandboxes have been approved by several states, but not yet at the federal level. In addition, the fintech charter proposed by the Office of the Comptroller of the Currency has been held up by court challenges.]
2. Availability of talent. The financial crisis stimulated the growth of the fintech ecosystem by unleashing talent that created innovative solutions to widespread problems. More talent was available to band together and build new things as U.K. banks were cutting left, right and center.
Graduates who might originally have gone into the large incumbent banking groups and likely stayed there for their entire careers, ended up taking a very different route. Many of them say that the financial crisis was the wake-up call they needed to realize how badly the financial services industry treated many of its customers.
3. Tax-Incented Investment. None of this would have occurred without access to funding from private equity, venture capital firms, Angel investors and corporate venture capital. These firms were drawn to the U.K. through tax incentives that encouraged investment in startups and tax credits that rewarded companies that put money into innovation, including startups that are focused on innovative technology.
These two schemes did a great deal to encourage Angel investors to add fintechs to their portfolios. The result? In 2018, the UK fintech industry attracted nearly £3 billion ($3.87 billion) in investment, according to Innovate Finance.
While financial technology firms were well-established in the U.S. with the likes of PayPal, and investors there were aware of the emerging fintech industry, they were more reluctant to hand over money when it was unclear if the firms in their portfolio would be declared illegal at any point.
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Building from a First-Mover Advantage
Given the convergence of factors just described, U.K. fintechs had a first-mover advantage. Some of the biggest and best-known fintechs there today — WorldRemit, TransferWise and Funding Circle — saw opportunities to capitalize on customer disillusionment with and abandonment by the financial services establishment. By avoiding branches or brick and mortar stores, building core systems from scratch using the latest technology, and trying out unusual or entirely unique business models, they offered customers solutions to problems at more attractive prices than the banks could or would offer them.
Monzo, Starling and others, chose a longer game, believing they could rival the incumbents in multiple areas. With no technical, product or process debt or culture to bog them down, they could move quickly, iterating on ideas and getting them straight into consumers hands.
They rapidly built products and services and adjusted the service within days or weeks, using online communities to gather and respond to user feedback.
These new banks have shown the incumbents that if you come to market with expertise and the right culture with a real desire and hunger to deliver what customers need, then you can achieve amazing things.
Collectively, these firms are now taking major chunks of traditional business lines — from international payments, transfers and FX, through to savings, retail accounts and SMB banking.
What Next for Fintechs in the U.S. and Elsewhere?
If imitation is the sincerest form of flattery, then the U.K. is clearly doing something right.
Looking internationally, countries are studying the U.K. fintech industry in depth, learning from its development, and implementing adaptations of initiatives used here in their own jurisdictions. The FCA has helped to facilitate many of those conversations, collaborating with peers to ensure that implementations are appropriate and not just carbon-copies.
We will see the establishment of many more fintech focused initiatives across the world until fintech becomes simply finance.
“Challenger banks in the U.S. have faced an uphill battle … but the U.S. will catch up.”
While challenger banks such as Simple, Moven, Chime and Varo have launched in the U.S. with the same vision, funding and talent as fintech challengers in the U.K., they have faced more of an uphill struggle because of the unsupportive regulatory environment. Should that situation change, however, a surge of innovation could result, putting additional competitive pressure on incumbents, as it has in the U.K. and elsewhere.
We do believe the U.S. will catch up. And Asia, likewise, will rapidly develop as the virtual and digital-only banks in Hong Kong, Singapore, Japan and Malaysia enter the market.
Here in the U.K. we’re proud that we helped lead the way on that journey, further pushing the fintech story forward to the benefit of customers everywhere. And that is what really matters.