London's Fintech Boom Needs the EU

London's Fintech Boom Needs the EU

As the UK economy slows and heavy industry continues to recede, politicians of all stripes will be hoping the burgeoning financial technology or "fintech" sector can restore UK plc's reputation for innovation and wealth creation.

It is disconcerting therefore that political - rather than business - risk could strip away any real prospect of fintech becoming a mainstay of the UK economy. I refer of course to the EU referendum and in particular how fintech investors may react to "Brexit".

On the surface, UK fintech is booming. According to figures compiled by professional services firm EY, the industry employs over 61,000 people - second only to California and more than New York, Singapore, Hong Kong and Australia combined. Globally, EY values the sector at over £20bn on the back of over £6.6bn in revenues. Fintech is also a magnet for inward investment, bringing £524m to our shores in 2015 alone. And among the soup of hopeful start-ups, the likes of Monitise, Powa and Transferwise already boast valuations of $1bn.

Moreover, the UK government is firmly supportive. There have been a series of well-intentioned initiatives to support growth and as recently as November 2015 chancellor George Osborne said he wanted London to be the 'global centre for fintech'.

While ministerial cheerleaders are not without value, more important is delivering a conducive policy environment in which the sector can flourish over the longterm. This is because today's valuations and the availability of venture capital is based on projected massive scaling up of innovation and future outsized profits.

But policy and regulation weigh heavily upon fintech ambition. This is because innovations around payment, credit, foreign exchange and even currencies, necessarily throw up complex challenges to regulators like the Financial Conduct Authority (FCA).

The resulting uncertainty is a brake upon entrepreneurs, investors and larger firms from becoming involved. In response, this week the FCA opened for applications to its Regulatory Sandbox initiative that will allow fintech companies to test their ideas commercially "without immediately incurring all the normal regulatory consequences".

So what's the problem? On the face of it, both government and regulator are on the case and working with fintech to fulfil its much-vaunted potential. Not quite. For starters, the type of regulatory reform necessary for the sector to strut its stuff - and meet investor expectation - requires visionary leadership from legislators. Put simply, with the right enabling environment and protections in place, the way business and consumers pay for goods and services can be nothing less than transformed.

But where there are winners, there are losers. Not least incumbent payment card providers such as Visa and Mastercard, that currently dominate UK electronic transactions. Then there is Worldpay, that FTSE 100 company that none of our friends have heard of. As an "acquirer" that enables credit card transactions, it's hugely profitable behind-the-scenes position could be threatened if fintech start-ups develop new means of payment that bypass credit cards.

Fintech has these behemoths firmly in its sights since technology now exists for a consumer to give their permission to a merchant (e.g. Amazon) to take payment directly from their bank account. And assuming merchants don't pocket all the saving on transaction fees, this spells cheaper prices for all.

And the European Commission knows it. Which is why it devised the recent Payment Services Directive 2 (PSD2). This obscure sounding directive is how the EU will increase competition and ensure access to payment infrastructure is available on equal terms to new entrants. It's exactly what London's fintech firms need to devise and deliver payment and settlement solutions currently stifled by existing regulation.

Members of the EU have until 2018 to implement PSD2. Of course if Britain exits the EU, there is no guarantee the government will implement the directive. It would after all be naïve in the extreme to think an entire industry will just stand aside and let the competition from Shoreditch steal a march. The will to challenge the dominant and incumbent financial firms and level the playing field for fintech has thus far come from the European Commission.

This raises the very real spectre of two-tiered regulation. And there's the rub for UK fintech: investors are just as interested in the enabling environment as they are the calibre of the entrepreneurs they fund. The assumption that investors and entrepreneurs want less regulation is misplaced. As the discussions at this week's Transforming Finance conference in London revealed, the challenge is not how government can get out the way of innovators, but how they can help shape that way.

While important to question how the EU is accountable to member states when negotiating trade deals, it is just as important to understand its fairly unique role in regulating global corporate power. It was the EU, not the British government, that previously capped the charges that credit cards make to businesses, including Britain's small businesses. It was the EU, not the British government, that prosecuted Intel for its abuse of pricing power and won a 1-billion-euro settlement. It was the EU, not the British government that recently forced mobile operators to reduce charges. And it is the EU, not the British government, which is challenging Google for anti-competitive practices in the way it influences the smartphone market. It might sound technical and dull, but the result of these actions can be cheaper prices and a more competitive market for entrepreneurs.

So imagine if you are a Venture Capitalist interested in backing start-ups to outperform incumbents: where would you put your money? In a small island off mainland Europe gripped by policy uncertainty? Or in one of the world's largest trading blocs with a reputation for taking aim at anti-competitive behaviour...

Professor Jem Bendell is a Non-Executive Director with Trimantium Capital, founder of the Graduate Certificate in Sustainable Leadership and the MBA in Finance and Sustainability, offered by the University of Cumbria and Robert Kennedy College.

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