UK FinTech On the cutting edge An evaluation of the international FinTech sector Commissioned by: Foreword Financial Technology – or FinTech – is fundamentally changing the way financial services firms operate and transforming the way we transfer, borrow, protect and manage our money. Just as the UK is the financial capital of the world, so we are also a leading FinTech capital, with increasing FinTech activity taking place across the financial sector. Small start-ups and innovation within existing large financial services firms is creating jobs and attracting investment. The sector has now grown from its disruptive roots into an industry in its own right – generating £6.6b in revenue in 2015. The UK Government is committed to supporting the We have published this report as we believe those in the development of the UK’s FinTech sector. We have already FinTech economy, including FinTechs, investors, regulators taken a number of measures to further this aim, including and traditional financial services firms will benefit from measures to support alternative lenders and the digital increased research and transparency on this innovative and currency sector as well as an industry-led initiative to give fast-growing sector. consumers better access to their bank data. I welcome this report and its recommendations to ensure the However, we know that if we are to remain a leading global UK’s continued strength as the leading global FinTech hub. FinTech hub we will need to go further. In order to inform our FinTech strategy going forward, HM Treasury commissioned Harriett Baldwin EY to produce a report to consider the UK environment for Economic Secretary to the Treasury FinTech compared to that in other leading FinTech hubs and highlight areas where the UK needs to improve, drawing on best practice from other leading FinTech hubs which we may wish to emulate. 2 | UK FinTech: on the cutting edge UK FinTech: on the cutting edge | 3 About this report Contents In August 2014, the Chancellor of the Exchequer, George Osborne, announced the 1. Executive summary 06 UK Government’s ambition to make the UK the “global capital of FinTech”. As part of Government’s work to realise this aim, Harriett Baldwin, Economic Secretary to 2. Introduction to the UK FinTech sector 20 the Treasury, commissioned EY to produce this benchmarking study of the UK and selected international FinTech ecosystems. 3. Analysis of core ecosystem Attributes 26 The purpose of the study is to assess how the UK FinTech The analysis, views and recommendations expressed in ecosystem compares to that of California, New York, Germany, this report were produced by EY and informed by over 65 4. EY recommendations 72 Singapore, Hong Kong and Australia. These regions were stakeholder interviews held with FinTech firms, investors, trade selected by HM Treasury based on their status as notable FinTech associations and policy makers across the in-scope jurisdictions. hubs. Across the seven in-scope regions, the report considers We are very thankful to all those who contributed their time and 5. Case studies 80 four Attributes essential to a FinTech ecosystem, namely insights, and made the production of this report possible. Talent, Capital, Policy and Demand. We use this framework We hope this report will be used by the UK Government to inform to assess international best practices and propose a series of policy and further support this vibrant and dynamic sector. We 6. Appendices 84 recommendations to maintain the UK’s position as a leading also hope the analysis and insights offered in this report will be FinTech centre. helpful to all stakeholders across the FinTech ecosystem. Imran Gulamhuseinwala EY FinTech Leader 4 | UK FinTech: on the cutting edge UK FinTech: on the cutting edge | 5 1. Executive A world-class summary FinTech ecosystem Since 2008, the UK has grown in stature to be the global FinTech capital. We estimate that the UK FinTech sector represented c.£6.6b in revenue in 2015 and attracted c.£524m in investment.1 With c.61,000 people employed in the sector (c.5% of the total financial services (FS) workforce), more people work in UK FinTech than in New York FinTech, or in the combined FinTech workforce of Singapore, Hong Kong and Australia.2 The UK has always benefitted from a large FS industry. However, much of the recent success of the UK’s FinTech sector should be attributed to a well-served and well-functioning ecosystem. Introduction The sector is growing globally in terms of investment, employment and the number of FinTechs, but it is far from mature. The UK has an enviable lead today in FinTech. However, it is vital that the UK keeps its pace, particularly as the sector approaches critical mass and starts to deliver a meaningful payback in jobs, innovation and growth. Strong competition from other regions is emerging: some are actively competing to create best-in-class FinTech ecosystems and are increasingly progressive in their use of government and regulatory policy to support FinTechs. Others are beginning to specialise in promising disruptive technologies, and China is scaling up quickly across the sector. Our research suggests that in order to maintain its world-leading position, the UK will need to continue to work hard to deliver. This report proposes a framework for benchmarking the FinTech sector and makes a set of recommendations to enable the UK to retain its market-leading position as a global FinTech capital. 1. The £6.6b of revenues relates to high growth FinTech. Including traditional FinTech, the combined size is in excess of £20b. Please see UKTI’s “Landscaping UK FinTech” for further details 2. In this report, Hong Kong (HK) refers to Hong Kong Special Administrative Region (HKSAR) 6 | UK FinTech: on the cutting edge UK FinTech: on the cutting edge | 7 Approach The focus of this report is on benchmarking the FinTech In order to assess the quality of the FinTech ecosystem in each region, the Attributes of Talent, Capital, Policy and Demand were ecosystems, as we believe the strength of the ecosystem benchmarked against the following benchmark factors (“Factors”) shown in figure 2. In this report, we compare the FinTech ecosystems of seven provides the strongest indication of the future health of this regions: the UK, California, New York, Germany, Singapore, nascent sector. Hong Kong and Australia. These in-scope regions were selected Our view is that a well-functioning FinTech ecosystem is built on Figure 2: Ecosystem Attributes and benchmark Factors at the outset of the exercise by HM Treasury on the basis of the four core ecosystem attributes (“Attributes”): reputation and size of their FinTech sectors. California and New York were considered separately as their ecosystems operate Attributes Factors Description relatively independently, despite being part of one large national 1. Talent: the availability of technical, FS and market, and we were keen to understand best practices at the entrepreneurial talent Talent availability Current availability of technical, FS and entrepreneurial talent local level. In addition to these regions, mainland China and Israel Talent were considered based on the recent growth of their respective 2. Capital: the availability of financial resources for Talent pipeline Availability of future talent, both domestic and foreign FinTech sectors, but have not been formally benchmarked in this start-ups and scale-ups report. Seed capital Access to start-up capital (£0m–£5m) Data on the FinTech sector is limited. As such, all references to 3. Policy: government policy across regulation, tax the market size and employment in this report are estimates. and sector growth initiatives Growth capital Access to growth capital (£5m–£100m) These estimates were based on triangulating top-down and Capital bottom-up quantitative models and market assumptions. These 4. Demand: end-client demand across consumers, assumptions were informed by over 65 external stakeholder corporates and financial institutions (FIs) Listed capital Access to the public markets interviews and more than 30 internal EY interviews. Regulatory regimes Regulator support for new entrants and innovative business models Figure 1 below highlights how these four Attributes interconnect to support the ecosystem and identifies the network of stakeholders. Government support for programmes to open up the sector, increase Government programmes Policy competition, attract foreign FinTechs and improve cybersecurity Taxation policy Availability of tax support for investors and corporates Figure 1: The FinTech ecosystem Entrepreneurs Technology Consumer demand Adoption by local market consumers (B2C) Academia firms Demand Corporate demand Adoption by corporates, particularly SMEs (B2B) Traditional FIs FI demand Adoption by FIs (enterprise) Talent s ub h Angel h The following section provides a summary assessment of the seven FinTech regions across each of the four Attributes. Full details can c Consumers e investors T be found in section 3 of this report. in F VC FinTech Capital Demand investors firms IPO investors Corporates Policy Government Key Attributes Regulators Stakeholders 8 | UK FinTech: on the cutting edge UK FinTech: on the cutting edge | 9 Talent Capital Policy Demand The UK currently has a very good pool of talent, with The availability of capital in the UK is good for early-stage The UK has the strongest FinTech policy environment, with FinTech demand is robust in the UK, driven by London’s exceptional access to financial expertise, although investment; California is dominant in FinTech investment the most supportive regulatory regime; policy initiatives in strength as the global financial capital; New York also there are concerns about the future tech talent pipeline; overall. Singapore and Australia are increasingly progressive. benefits from its position as a global financial centre and California leads for the depth of talent overall. currently has the highest rate of consumer adoption. The UK generated c.£524m of FinTech investment in 2015.