The UK is a recognised centre for innovation. That combined with its place at the centre of the global financial system has provided fuel for Britain’s fintech revolution. Today, the UK has a 10% market share in fintech globally, while start-ups attracted $4.1bn of investment in 2020 – more than the next five European countries combined. It’s a vibrant industry that supports high-value jobs and economic growth. Yet, despite this, the UK lacks global tech leaders to rival those found in the US or China. Fintech needs a dedicated growth fund and more supportive government policy if today’s start-ups are going to become tomorrow’s global champions.
Last summer, British chancellor Rishi Sunak commissioned a review into the fintech sector in the UK. Its aim was to look for ways to cement promise in fintech, benefiting consumers, companies, employees, investors, and the broader economy. The review was led Ron Kalifa, the former CEO of payments group WorldPay, and I was pleased to lead research and recommendations for the chapter on investment.
While UK start-ups, such as Revolut and Transferwise (now rebranded Wise), are leading lights in UK fintech with multi-billion-pound valuations, in the field of creating international tech champions, Britain still has some way to go. Unlike the US and China, which together have a host of tech firms among their largest businesses – from Amazon to Alibaba – the UK’s top 10 companies by market cap is instead filled with pharmaceuticals, mining and consumer goods, among others. Even in fintech in Europe specifically, others hold the crown – Adyen which listed in Amsterdam in 2018 has a market cap of €65bn, making it many times larger than the UK’s biggest competitor.
In addition to international competition, there are other threats. Brexit risks curtailing the UK’s access to top talent, while the recovery from Covid-19 will favour jurisdictions that adapt quickly to opportunities – such as the acceleration of digital adoption among consumers. There are three core recommendations in the review to stimulate investment and ensure that fintech ideas can start up, scale up and eventually list in the UK.
1) Expanded Tax Incentives – including wider access to Research & Development (R&D) Tax Credits and Enterprise Investment Scheme funding
2) A £1bn Dedicated Fintech Growth Fund – providing emerging fintechs with more capital to scale up
3) Founder-friendly IPO Rules – such as a lower free float threshold and a separate share class with enhanced voting rights for founders
A new Fintech Growth Fund is probably the most eye-catching recommendation. A £1bn fund could deploy £200m per year into growth investments over five years, providing meaningful additional capital for start-ups without crowding out other investors. Ideally, it would be backed primarily by UK insurers and pension funds, ensuring that returns generated by the investments flow back to British savers and pensioners. But the other recommendations are no less important.
Today, the UK invests just 1.7% of GDP on R&D, lagging the OECD average, and the government wants to increase that spending to 2.4% by 2027 – and to 3% long term. Tax incentives are a valuable mechanism for driving capital towards this goal but the UK sets a high bar that excludes some critical fintech expenditure. Some 89% of investors surveyed for the review highlighted the importance of data sets to their business model. By expanding R&D Tax Credits to cover the cost of managing financial data, the UK could unlock more cash for companies to invest in R&D.
Another idea is to loosen the rules around Enterprise Investment Schemes and Venture Capital Trusts, which currently prevent these vehicles from investing in banking and insurance. This is a concern for founders whose businesses may pivot into regulated sectors as they develop. Opening these schemes up can ensure all tech and fintech businesses are on a level playing field.
At the other end of the spectrum, UK listing rules are not built for fast-growing, founder-led businesses. The proof is in the numbers – total IPO value on the LSE fell from £14.5bn in 2015 to £5.5bn in 2020, while IPO value on both the NYSE and NASDAQ increased over the same period. By lowering the free float requirement for companies to 10% and introducing a separate share class with enhanced voting rights on the premium exchange, founders could list and raise capital in London, but retain control and guard against unwelcome takeovers, particularly in the years immediately after the IPO.
Long term, I would like to see five major fintech businesses listed in London, in turn fuelling a strong cohort of new fintechs coming up through the ranks. With critical mass, the creation of an index would recognise fintech as a dedicated sub-sector and confirm the UK as a listing destination for domestic and international companies alike. To get there we need a flexible and innovative regime that supports companies as they expand. That in turn needs bold steps now from UK government and British investors to ensure that the UK’s strength in developing early-stage fintechs is not lost as they grow.