By Karen G. Mills
Dec. 11, 2017
It’s been a roller-coaster few months in terms of predictions for the future of the U.K.’s fintech sector, with alternating reports ranging from exceedingly robust growth to Brexit-induced job loss.
Just this week the University of Cambridge trumpeted that the nation’s alternative finance industry has grown 43 percent in the last year. However, an October Bank of England report speculated Brexit would cause a loss of 75,000 finance jobs. A week before that, though, a study by Early Metrics argued that London would likely become the fintech capital of Europe “in the medium term.” And, from a sheer optics standpoint, the October convening of LendIt Europe – one of the world’s largest gathering of fintechs – once again attested to London’s central position in this dynamic and disruptive industry.
These differing signals underscore the uncertainty that has come with Brexit. But even with that, London is poised to remain a global leader in financial innovation – particularly when it comes to SME finance – based on, interestingly, its response to the financial crisis of nearly a decade ago. While other nations, like the United States, struggled to adapt their fragmented regulatory regimes to a post-crisis, technology-driven world, a number of forward-looking decisions by the U.K. government and regulators could now ensure success as a global fintech hub, even in the face of Brexit.
Since 2010, the United Kingdom has followed a winning playbook on the regulation of financial innovation – one that other nations would do well to follow. In short, they:
- Started with a single point of authority and contact at the regulator level;
- Accepted some risk for a short period of time to let innovative new firms come to market, while still protecting small business borrowers;
- Collected and disclosed industry data, so small business lending activity is transparent and gaps could be addressed; and,
- Moved in a rapid manner, with a focus on maintaining a viable consumer and small business lending marketplace for the long term.
This playbook emerged from a crisis in SME lending. In 2010, just four banks accounted for over 80 percent of SME lending in the United Kingdom, and all were in deep financial distress. Then-Chancellor George Osborne was being inundated every day with requests to fix the small business credit market. Getting capital to small businesses was critical, given how hard the credit-dependent SME sector was hit during the crisis.
That sense of urgency led to a series of aggressive steps, the most interesting of which was the creation of an “innovation sandbox,” allowing fintech companies to apply for temporary authority to execute their business models under the explicit supervision of the Financial Conduct Authority (FCA). Today, countries from Singapore to Australia have replicated this sandbox model. And, recently, the FCA reported that based on the initial successes of the sandbox, it intends to use its findings so far “to shape the future sandbox developments and the FCA’s broader regulatory work.”
Another important step was the creation of the British Business Bank (BBB), with its focus of improving the landscape for access to capital for small businesses. So far, the bank has supported the launch of over 24 “challenger banks” and led a number of innovation competitions that have supported online lenders in their market penetration activities. Additionally, the BBB collects and reports data on the status of access to credit for small businesses, an activity that is critical to knowing if there is indeed a problem, and when and how to act on it.
In these efforts, the U.K. regulatory system has remained remarkably adaptable, balancing a need for oversight and regulation with a desire to promote innovation. For example, the FCA is currently conducting a review of its regulatory approach. And a coalition of regulators is looking for innovative ways to implement PSD2, an Open Banking regime that would allow improved data sharing, while making sure that consumers and small businesses stay in control of their data.
These actions have no doubt contributed to the U.K.’s status as a global fintech leader and have created a small business finance environment in which U.K. SMEs have created 73 percent of net new jobs since the recession, and the number of new firms created annually is continuing to increase every year.
Ten years ago, the U.K. government and regulators built a playbook that made them a global hub of fintech. Now they are taking on the next big challenge: how to oversee and regulate the use of data for artificial intelligence and the upcoming implementation of Open Banking. Despite the Brexit uncertainty, if they do this well, the U.K. will remain a global leader in fintech.
Karen G. Mills is a Senior Fellow at the Harvard Business School focused on SME finance, entrepreneurship and competitiveness. She served in President Barack Obama’s Cabinet as Administrator of the U.S. Small Business Administration from 2009 to 2013.