At this October’s G7 Trade Track, a special discussion forum focused on international trade between G7 leaders, ministers explored ways to support a thriving and innovative digital economy. They agreed on a set of Digital Trade Principles to maximise the opportunities of the global digital and technological economy for all member states.
But although the G7 leaders agreed on a unanimous set of standards for the future, the investment climate regarding innovative and emerging technology differs quite substantially among member states. In fact, it is what the UK is already doing in this area which means we can ensure it remains a test-bed for innovative and emerging technologies.
Fintech, where my experience predominantly lies, is a sector with particular opportunity, with substantial growth expected across the globe. The sector is projected to add £13.7bn worth of value to the UK economy by 2030. To achieve that, the UK needs to become and remain a welcoming place for innovation and new technologies that challenge the status quo.
A receptive audience, one which is willing to experiment with and adopt new technologies is an important part of this. Policy makers often think about innovation and entrepreneurship from a supply perspective, asking what can be done to encourage more people to become entrepreneurs. The demand perspective is perhaps as important, asking what can be done to encourage people to adopt the products and services that entrepreneurs create.
A policy paper from The Entrepreneurs Network examines this question in detail, ‘The challenge then is not only to be a nation of inventors and entrepreneurs, but also a nation of early adopters – indeed, achieving this will only encourage home-grown inventors and entrepreneurs too’. The paper looks at barriers to early adoption, which frequently come down to the approaches taken by regulators. With examples from lab-grown meat to industrial applications of drones, the authors show that a pro-innovation approach from regulators can protect consumers and stimulate economic growth.
In fintech, our experience to date has been that different countries have taken distinctly different approaches to regulation, which have had consequences for their nascent industries.
The European approach in fintech has tended towards regulating specific technologies, following the so called ‘precautionary principle’, at the heart of EU policy making, that it is better to be safe than sorry. The EU’s Markets in Crypto Assets (MICA) regulation, for example, aims to regulate crypto-assets, but has been criticised for overregulating stablecoins, an innovative use of blockchain technology.
By contrast, London has actively sought to bolster its credentials as a place for innovative and emerging technologies, particularly in the financial domain. According to recent research from Dealroom.co and London & Partners, London-based fintech firms have already raised more VC investment than any other year, ranking second on the worldwide list for fintech VC investment ahead of New York and slightly behind San Francisco.
We can ensure that the UK is a test bed for innovative and emerging technology by resisting the temptation to go the way of the European approach, and preserve the UK’s principles-based approach. The UK’s Financial Conduct Authority begins with a set of principles for financial businesses – for example, ‘A firm must pay due regard to the interests of its customers and treat them fairly’. Regulatory principles like these can protect consumers from harm, without banning specific technologies.
The data shows that the UK’s principles-based regulatory approach may be more appealing than the European equivalent. Strong principles that are tied to consumer priorities and public safety allow regulators to be more permissive than precautionary, and thus more open to innovation.
Just last month, the Association of Financial Markets in Europe (AFME) ranked the UK ahead of Sweden, Denmark and Lithuania as the number one fintech leader in Europe for the third consecutive year, citing the recent enhancements in the UK’s regulatory sandboxes as one of the main drivers of growth in the fintech space. These sandboxes are frameworks which allow FinTech start-ups and innovators to conduct live experiments under the supervision of regulators, a sign of a pro-innovation approach to regulation.
Part of London’s success in fintech has been down to the British public’s early willingness to embrace the “challenger banks”. These startup banks, seeking to disrupt the traditional monopoly held by the ‘Big Four’ retail banks, were part of the first wave of fintech innovation, employing technology and new business models that offered a better experience than bricks and mortar banking.
For instance, the initial success of Monzo, one of the first British challenger banks, can be credited to the company’s thorough analysis into the financial habits of millennials. Monzo understood that offering a more personalised, deeply customisable experience was crucial to appealing to its target audience. Its founders also realised that putting the consumer first instead of initial revenue was essential to kicking down the doors of high finance, an industry traditionally hostile to newcomers.
This success is at the hands of consumer-focused founders, but also a receptive market. In the UK, one in five UK consumers uses a challenger bank as their primary account, whereas in the EU the number is far smaller. In Europe, traditional banks still dominate, perhaps partly because of local regulation, but also reflecting more conservative attitudes to personal finance. The British public’s willingness to change their habits and embrace innovative business models that can save them time and money has helped to convince subsequent founders that in the UK they will find a market for their services.
According to new figures from industry body Innovate Finance, post-Brexit London has “cemented its status as the fintech capital of the world”, raising a total of $5.7bn in H1 2021, outstripping the total investment secured in 2020 by 34%. The Bank for International Settlements, the UK is the second global leader for investment flows into fintech after the US, with $10.5 bn of flows into the first six months of the year, compared to EU countries which only posted $8.5bn of flows.
We can ensure that the UK becomes a nation of early adopters, and maximise opportunity in the global digital and technological economy as we do so, through policies that embrace innovation without compromising on consumer protection.
We do not yet know what the most important technologies of the future are, nor what their major risk factors might turn out to be. But that doesn’t mean proceeding with caution, it just means adopting an approach which focuses on outcomes for consumers, rather than making choices on individual technologies. An approach based on fear of the unknown can never be one that fosters innovation.
By Viktor Prokopenya, Founder VP Capital