Fintech usage among consumers increased by over 50% during the UK's lockdown, and this trend of rapid uptake seems set to continue.
In a recent survey, one in three respondents confirmed that lockdown had made them more fully aware of the range of technological solutions available, and 42% stated that they were planning to use fintech products "much more" than they had previously.
The UK has established itself as a leader in the global race to attract fintech companies and develop appropriate regulatory and policy infrastructure to manage them. Its success stems in part from its supportive regulatory landscape, including the Financial Conduct Authority's proactive efforts to engage with the sector and build related expertise, for example through regulatory sandboxes, TechSprints and thought leadership on areas including cryptoassets and machine learning.
As the sector grows – with transformative effects for the financial and payments sectors – its regulatory and policy approach must continue to develop, with a view to strengthening communication and alignment with industry and protecting financial inclusivity.
TheCityUK and PA Consulting recently produced a detailed report, recommending that regulators, government and industry should work together to support the continued strength of the fintech sector by focussing on four key areas:
In October 2019, UK Finance reported that card payments were accounting for half of all transactions in the UK for the first time and forecasts suggest that fewer than one in 10 payments will be made using cash by 2028. As cash becomes less ubiquitous, regulators and policy makers will need to consider how to strengthen and protect inclusivity.
Recent research has highlighted a divide between consumers who are comfortable with managing their finances online, and those do not have the confidence or tools to move away from cash. Disadvantaged and unbanked communities could benefit from adopting fintech platforms and digital payment technologies, particularly as a way of remitting money safely in the current crisis.
However, consumers who are less comfortable with digital finance may already have a heightened level of financial vulnerability as there is a strong link between cash use and low income. IPPR research recently found that mistrust of digital finance can be driven by negative experiences with unplanned or unseen overdraft charges or fees, and accessing financial services can at times increase the vulnerability of low-income customers by exposing them to high-risk products such as payday loans and high interest credit lines.
The government promised to legislate to protect access to cash in the March Budget. Protecting such access in practice might require creative solutions, for example:
Intergenerational differences will also affect the sector's inclusivity. The FCA recognises profound differences between generations' financial circumstances and needs, and recently emphasised the importance of applying digitisation "in a way that provides consumer benefit to all generations", including through its Innovate services, work on open finance, and medium-term business plan priority of delivering fair value in a digital age.
In particular, the FCA recently expressed a desire to support firms seeking to apply new data sources to inform lending decisions, breaking down barriers that prevent consumers from accessing appropriate credit (particularly baby boomers and millennials, who for various reasons may suffer from 'thin' credit files). Going forward, the FCA has promised to consider the impact of intergenerational differences, both during the pandemic's initial stages and in the longer term.
Two recent developments also look set to drive future policy.
The FCA recently announced that it is working with the City of London to pilot a "digital sandbox". Although the project had been under consideration before the pandemic, plans were accelerated to enable the FCA to better support innovative firms that are responding to the pandemic's challenges. Through the sandbox, the FCA aims to:
In particular, the pilot will support businesses and organisations which seek to:
The FCA has promised to publish detailed use cases on these areas and will provide participants with data sets prepared during a virtual DataSprint event.
Applications to the digital sandbox opened in Summer 2020.
The UK government recently launched an independent review to establish priorities for the fintech industry, policy makers and regulators seeking to support the sector following a related announcement in the March Budget. The review will be led by Ron Kalifa OBE, former CEO of Worldpay.
The review's objectives are set out in its terms of reference, and include:
The review aims to provide recommendations for industry, regulators and policy makers in connection with five workstreams:
Each workstream will be led by fintech and financial services professionals.
The review is projected to complete within the next six months, subject to any future extension agreed with HM Treasury. A related report will be presented to HM Treasury, which will consider it before publishing a response.
In recent years, the UK has established itself as a global leader in fintech, with London being the only European city ranked as one of the world's top five fintech hubs. In the context of the global pandemic, market volatility relating to Brexit, and extremely rapid sector growth, it's encouraging that government and regulators are exploring the next steps with a view to cementing the UK's position of leadership, deepening ties with industry and protecting financial inclusivity.
If you'd like to discuss any of the trends identified in this article in greater detail, please contact a member of our Financial Services Regulatory team.
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