The UK is a global frontrunner in technological innovation, which has helped propel the country to achieve enviable status as the world’s number one hub for financial technology (fintech).
Indeed, at the Treasury’s recent International Fintech conference in London, Chancellor Philip Hammond emphasised the value offered by the fintech landscape, and urged businesses to seize this opportunity to strengthen the country’s economy.
Whether we’re talking about online crowdfunding, money transfer solutions, payment processors, robo advisors or mobile banking, the UK’s fintech sector is a burgeoning area: it currently employs 60,000 people and generated £7 billion of revenue in 2016.
The UK’s unique ecosystem has created a fecund environment for fintech – including forward-thinking investors to supportive government policy, flourishing entrepreneurialism and a cohesive financial sector. All of this means fintech is booming. But, as with all revolutions, we’re in unchartered territory and dangers are ever-present.
Regulation will always, inevitably, be playing catch-up with fast-moving innovation such as fintech. Speaking at the International Fintech conference, Mark Carney, governor of the Bank of England, said: “The challenge is to ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society.”
He praised fintech’s potential to “democratise financial services”, providing consumers with “more choice and keener pricing” and making banks “more productive, with lower transaction costs, greater capital efficiency and stronger operational resilience”. But he also highlighted that, without proper management, fintech could also threaten economic stability.
Larger banks, with their extensive presence, complex hierarchy, dated technology and layered structures, are less agile than smaller competitors. Which means start-ups and SMEs are typically better positioned to adopt new technologies and keep pace with fintech developments. They also face fewer regulatory hurdles.
The Bank of England is supporting this competitive environment by evolving its RTGS payments system to provide access to payment providers and authorising four new ‘mobile’ banks. However, Carney recognises that there is a fine balance between encouraging innovation and protecting existing structures to maintain financial stability. He highlights that new payment providers could impact “customer loyalty and the stability of funding of incumbent banks.” If this happens, he says the Bank of England will need to ensure that “prudential standards and resolution regimes for the affected banks are sufficiently robust” to offset these risks.
In addition, while fintech and increasing automation brings greater efficiency and lower business costs, it also creates new risks.
One example is sterling’s flash crash last October, where the currency fell 9 per cent in seconds during overnight trading. Although the Bank for International Settlements (BIS) highlighted a combination of likely factors, automated trading platforms seem to have played a part. Indeed, BIS warned that these events “have the potential to undermine confidence in financial markets and hence impact the real economy.”
However, according to Carney, overall, the risks of fintech are significantly outweighed by the benefits. This included its “potential to unbundle banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital” and its ability to “deliver significant benefits to households and businesses across this country and across the world”. Reassuringly, the Bank of England is keeping a close eye on fintech to pre-empt challenges and threats before they can flourish.