The impact of FinTech on the UK economy
The growth of FinTech
What was once considered a novel way of managing finance, FinTech is now used by millions of people and businesses across the world. The rise in online banking and mobile-first platforms has created an industry worth £142.78 billion in 2019 and expected to be worth £180.30 billion by 2022. But FinTech isn’t anything new.
Financial technology has been around in various forms since the early 1900s. Over the years, we’ve seen technology enable the first ATM in 1967, online banking in 1995 and PayPal in 1998. However, it wasn’t until 2008 when FinTech really took off.
The financial crisis turned the industry on its head. Highly skilled and experienced people from within and outside the sector lost faith in traditional banking and took an opportunity to reimagine finance. Technology was used to innovate banking methods, and challenger banks entered the scenes with fast, safe and competitive services.
In support of this industry swerve, open banking was introduced in 2015 and enforced in 2018; changing the financial services landscape as we knew it and opening the industry up for all. Investors’ heads turned, and venture capital funds poured in, reaching a record £2 billion that year.
Throughout this all, the UK has emerged as a leader in the field, establishing itself as the FinTech hub of the world and boasting more than 1,600 firms, including names such as Monzo, Revolut, TransferWise and Worldpay.
How FinTech is impacting the UK economy
So what does being the FinTech hub of the world mean for the UK economy? The success of FinTech start-ups, scale-ups and unicorns comes down to three key ingredients. These are:
Start-ups require investment, and UK businesses have proved themselves favourites when it comes to FinTech funding and R&D tax credits. More than a third of European VC investment has gone to London FinTechs alone, but it’s not just the capital that’s seeing all of the action. FinTech clusters have developed in places including Birmingham, Cambridge, Manchester and Leeds, bringing money, jobs and worldwide attention.
To attract VC investment, start-ups require an innovative idea that will disrupt the industry. Again, UK FinTechs have come out, using investment and research funding to develop technologies that promote the UK as both the FinTech hub of the world and the technology hotspot of the planet. In turn, this has attracted businesses and investment from all sectors to Britain.
And finally, to win investment and create technology, you require talent. There are currently 76,500 people working in the UK’s financial technology sector, demonstrating that tech talent is rife in the country.
The consequences that flow has been substantial for the UK. Investment, jobs and spending have enabled the FinTech sector to contribute more than £6 billion to the UK economy each year. Meanwhile, the innovations and exports to the wider financial services industry generated more than £132 billion while supporting a £44 billion trade surplus in 2018.
And it gets even better. UK FinTechs have helped re-establish trust in the finance sector, as demonstrated by our record of the highest consumer adoption rate in the West. Not only do more people have access to financial services, support and security, but this growth has created a redistribution of wealth within the sector, providing ample opportunity for start-ups and entrepreneurs to succeed.
What’s next for FinTech?
But it’s not time to rest on our laurels just yet. The FinTech landscape has become increasingly competitive over recent years and the full impact of Brexit is yet to be understood. Creating this technology is expensive, and with the UK business sector contracting, along with the risk of reduced investment and talent entering the UK post-Brexit, it could be a turbulent and trying time for the industry.
While the government’s Fintech Sector Strategy is enforcing a range of measures to maintain and strengthen FinTech’s contribution to the UK economy, remaining part of the industry’s success requires proactivity. Specifically:
Following the open banking enforcement in 2018, the UK’s biggest banks have taken an active stance in promoting and helping FinTech start-ups. NatWest’s FinTech accelerator is designed to help businesses of all stages start, scale and succeed, through its six-month fully-funded program. Likewise, Barclays’ Rise labs support FinTechs of any size to access the skills, services and contacts they need to create new and emerging technology.
Astute owners and managing directors are taking this opportunity to access the right connections, knowledge and technology to scale their businesses ahead of international competitors.
Investment is essential for growth, and currently, the UK is performing well. Last year, was a record year for FinTech funding, reaching £2.9 billion in six months. However, as businesses mature, investment rounds increase. Those aiming for scale-up FinTech funding this year will need to demonstrate bigger and better technology than anywhere else in the world.
Research and development into crypto assets, artificial intelligence, robotics, smart lending, augmented reality and biometric technologies is, therefore, essential.
The number of FinTech companies in the UK is set to exceed 3,200 by 2030, increasing the battle for both customers and employees. There’s no doubt about Brexit impacting the number of European workers in the country, and with 42% of current workers coming from overseas, this could have significant consequences.
To prepare for this issue, businesses are investing in talent now. Creating company cultures that attract and retain employees through learning and development, world-leading projects and competitive benefits.
R&D tax relief
Running research projects and investing in talent is costly; quickly depleting even Series A funding and leaving little for business growth. However, savvy businesses are using government-funded research and development tax relief to help. Research and Development tax relief can reimburse up to 33% of funds spent on advancing technology. This allows companies to spend more money on business growth, making them a more attractive investment opportunity. In 2018 alone, Monzo received £4.2 million in R&D tax credits, and at MPA, we typically see average sums of £63,000 being recovered by SMEs.
However, not everyone in the industry is taking advantage. In fact, a large proportion of companies are missing out, for reasons including:
- Being unaware of research and development tax credits;
- Not realising your FinTech is eligible for research and development tax relief;
- Not knowing how to apply for R&D tax; or
- Not having the time to apply for research and development funding.
But, all is not lost. If you’ve spent money on developing new processes, products or services in the past 2-3 years, you still have time to submit a claim and put your business in a better financial position for the year ahead.
What’s next for you
If you’re in the FinTech industry or plan to be, then you have a big task ahead: maintaining the FinTech hub of the world reputation and continuing to impact the UK economy positively. No mean feat. What can you do now?
- Get your accounts in order to fully understand your financial position and pinpoint the time you’ll need to raise more funds over the next five years.
- Reclaim owed R&D tax credits from the past 2-3 years.
- Alter your financial model to account for owed or future research and development tax relief.
- Get involved with local financial accelerators to meet the right people, investors and talent.
The FinTech boom doesn’t look set to slow down any time soon. However, if you sit still, you may get left behind.
How we can help your FinTech business
With so many plates to spin running and scaling a FinTech business, your own finances can be the last thing on your mind. At MPA, we’re dedicated to helping your business grow by accessing free government funding, such as R&D tax credits, that make your start-up funding go further. With the aim of innovating and growing sectors, research and development tax credit can help you to make an even bigger impact on the UK economy.