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Is fintech the key to the UK’s trading future?

30 September 2020: The UK government is setting up programmes to push UK fintech further onto the world’s stage. Does the sector see the same opportunity?

The UK government is putting a lot of chips on fintech – businesses using technology to enhance or automate financial services and processes – as a potential growth market for trade after the EU transition period comes to an end. Over the past decade, the UK fintech sector has grown quickly, with companies such as Revolut, Monzo and TransferWise making real marks on the global market.

The UK Department for International Trade (DIT) has run several programmes to push UK fintech out in the world. For example, its recently launched Tech for Growth programme aims to build relationships between UK fintech and emerging economies to help the sector gain a larger presence on the world stage. 

The programme will initially be piloted across Africa in its first year. The programme looks to establish UK-Africa fintech trade by highlighting commercial opportunities and overcoming any hurdles holding back growth in that area. The DIT wants to establish close, collaborative relationships with African governments and regulators to help stimulate the growth of the tech sector across the continent. After the first year, the programme will expand globally across South East Asia and Latin America.

“It’s good to see the UK playing to its strengths,” said Richard Anning, Head of ICAEW’s Tech Faculty. “It is a vibrant centre for tech start-ups combined with deep expertise in financial services and fintech. It will be great to see the best of the UK fintech scene making contact with and working alongside other leading tech clusters, initially in Africa and then further afield, to improve financial inclusion for some of the world’s financially underserved populations. There are some leading hubs in Africa, including Nigeria, Kenya, South Africa and Egypt that could provide initial targets for collaboration.”

Fintech companies can go from startup to giant extremely fast and from that point of view, it makes sense to nurture the sector and provide it all the opportunities to become a global powerhouse, advertising the UK as a vibrant hub for technology and innovation. But what is the reality of the market? Are fintech firms seeing the same opportunity? ICAEW Insights spoke to three companies to find out more.

The regtech start-up

Solidatus is a fast-growing regtech company based in the UK. Founded in 2017 by Philip Dutton and Philip Miller, the business has expanded into Southeast Asia and is looking to expand into new territories. 

The company provides a tool that helps organisations manage data in a way that provides good governance, in line with local regulations. With GDPR and similar data privacy laws coming into force in recent years, Solidatus’ market has broadened considerably.

The firm regularly works with the Department for International Trade and was able to expand into Southeast Asia through its involvement in trade missions within the region. 

New and emerging markets are a huge opportunity for UK businesses, particularly in service-based sectors. But reaching those markets as an individual entity can be difficult, particularly building networks. “I think the UK government is very well placed with their teams on the ground to make introductions and provide a map of how to go about landing in an area and finding the appropriate people to talk to,” says Dutton. “Even with the appropriate level to be pitching at or the messaging you're getting across, they have been very helpful.” 

Dutton sees Brexit as an opportunity for the most part. The amount of change that will occur in the UK and mainland Europe opens up avenues for fintech and regtech companies to provide more services to help businesses remain compliant and competitive. Brexit does, however, add an element of complexity. 

“We were looking at setting up an organisation in Germany or one of the other EU member states just to try to make trade easier once we had left. Singapore now has much better trade agreements with the EU, so we shouldn’t be too affected, but we're still moving into Europe.”

The fast-growing SME

Edinburgh-based cashflow forecasting app Float opened a new office in Australia this year, battling against many factors outside of their control. The country started 2020 with devastating bushfires and flooding, followed by the coronavirus. 

“It was an interesting time to be setting up an office remotely,” says Float’s founder Colin Hewitt. “One member of our team went out and braved it for us. She ended up essentially locked in a hotel for three months. But Sydney has now come out of lockdown. We've hired another two people out there and it's really starting to pick up.”

The company is less interested in expanding into Europe – not because of Brexit, but because of the competitiveness of the accountancy software market there. “We’re focusing on Xero and QuickBooks integration over the next 18 months. The European market is much broader,” said Hewitt.

Fintech companies going after the EU market are finding it difficult due to the uncertainty around Brexit. The US is also a difficult nut to crack, requiring significant investment to get the reach required. The global fintech market is full of wider opportunities, however. 

“South Africa is a really interesting market to explore,” said Hewitt. “It’s very well connected from a cellular and mobile data point of view. It’s also starting to look at things like cloud accounting; it's really an emerging market.”

Canada is also a huge opportunity for UK fintech, explains Hewitt. “It’s quite similar to the UK in terms of how it's set up. It feels much more like one country than the US does.”

Hewitt also sees a lot to praise within the UK government’s approach to promoting UK fintech, particularly the Tech Nation network and education initiatives. He would like to see more work done to build a solid foundation for the sector in the UK before the government turns its attention to the rest of the world, however. Enforcing total compliance from banking institutions around Open Banking would be one thing, and more emphasis on growing non-London fintech businesses. 

“Whatever incentives they can offer to help there would be really valuable because there are lots of ideas out there across the country – it should not have to revolve around London. Scotland especially is really well placed with its kind of financial background to bring a lot to the table.”

The EU-based lender

CapitalBox is a fintech SME lender with offices in Stockholm, Helsinki, Vilnius, Copenhagen, Perth and Liverpool. The company is looking to expand further but had to put its expansion plans on hold thanks to the pandemic. Its CEO Scott Donnelly sees the company’s European base as a massively competitive edge

“The US has some really big players. In the UK, there are a lot of businesses in the space, but they’re all small-to-medium-sized. On the continent, it’s wide open.”

The real opportunities in fintech come from targeting smaller countries, rather than large markets, says Donnelly. He believes the size of the US and UK market holds companies in those regions back from expanding globally – trading internally is much easier than trying to get to grips with multiple languages, currencies and regulations. 

“We have a bit of an edge in that our parent company (The Ferratum Group) operates in 25 countries and has a lot of experience dealing with internationalisation and understanding the regulatory environment in every country,” says Donnelly. “If you can deal with those difficulties, and they are real difficulties, there are opportunities to take. If you've managed to do it efficiently, you can have a big presence in a couple of smaller countries.”

Brexit will be a benefit for continental fintech players, says Donnelly, as it will add more regulatory hurdles for fintech companies looking to enter the market. However, this may be a double-edged sword. “It's less likely they're going to have an easy time getting established in the UK. But some will. Companies like Revolut, which seems to be everywhere, will manage it.”

Reaching out beyond the West and into emerging markets is an opportunity but will require partnerships with local businesses and organisations. This is where the UK government’s programme could be helpful.

“I think the currency risk from a fintech perspective is quite large in a lot of regions,” continues Donnelly. “There has to be some kind of funding source that is able to deal with this, with the ability to hedge. This, of course, eats into the margins, so it's pretty complex. If the UK government can connect players in the UK to large players in those environments, they could find a way to work together.”