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The Fintech Market in the UK the Current State of the Fintech Sector and Its Potential to Contribute to Financial Inclusion and Health

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The Fintech Market in the UK the Current State of the Fintech Sector and Its Potential to Contribute to Financial Inclusion and Health The Fintech market in THE UK the current state of the fintech sector and its potential to contribute to financial inclusion and health 2019 2 | tHE FINTECH MARKET IN the UK FINANCIAL INCLUSION and health IN the UK In the wake of the financial crisis, and in the face of rising inequality and increased technological disruption, recent decades have seen a growing concern over a lack of financial inclusion in the UK, and a corresponding number of policy, regulatory, and civic initiatives are focusing on the problem. These initiatives aim to protect vulnerable people and force banks to focus their growth and reorganisation strategies on financially excluded clients (both individuals and SMEs), as well as to ensure that technological advances in the financial sector do not further endanger vulnerable clients. The 2018 introduction of Open Banking regulation, coupled with an increasingly cashless society, are creating a new ecosystem rife with both opportunities and risks for financial inclusion. Defining financial inclusion and financial financial transactions; meet expenses this report has been health (both predictable and unpredictable prepared by Jean- expenses); manage a loss of earned Stephane Gourevitch There are competing definitions of income and; avoid or reduce problem (Mobile Convergence “financial inclusion” in use by individuals debt. Being financially included relies Ecosystems), Piotr and institutions active in the sector. on access to income, access to finan- Koryński (MFC) The Financial Inclusion Commission1 cial services, and access to financial and Justyna defines financial inclusion as: “the avail- advice and information. This definition Pytkowska (MFC). ability and uptake of essential financial is used by the University of Birmingham services, at affordable costs, to every in a series of studies monitoring UK’s section of society. Financial inclusion progress towards or away from financial 4 ensures everyone in society has enough inclusion. Arguably, this framework more closely resembles the concept of 1. The Financial Inclusion Commission skills and motivation to use these services, is an independent, nonpartisan body and to benefit meaningfully from them.”2 financial health: an individual’s ability to of experts and parliamentarians have a day-to-day financial management who want to see an improvement in The UK Government employs a more the financial health of the nation. succinct, supply-focused definition, system that helps them be resilient and Established in 2014, the Commission emphasising availability over uptake. pursue opportunities. This includes the offers leadership, coordination 5 and accountability, and acts to “Financial inclusion means that indi- ability to spend, save, borrow, and plan. raise awareness and advocate In case of SMEs (small and medium for change. viduals, regardless of their background 2. Financial Inclusion: Improving the or income, have access to useful and enterprises) in particular, one of the chal- financial health of the nation” lenges is the lack of a standard definition Financial Inclusion Commission, affordable financial products and services. March 2015 These include products and services such of what constitutes financial inclusion. 3. ‘Government response to the When the European Commission talks Financial Exclusion Select as banking, credit, insurance, pensions Committee’, November 2017 and savings, as well as transactions and about support for SMEs, it references 4. Karen Rowlingson, Stephen its work with financial institutions to McKay ‘Financial Inclusion Annual payment systems, and the use of finan- Monitoring Report 2017’, University cial technology”.3 improve available funding through the of Birmingham, School Of Social provision of loans and venture capital, Policy, Birmingham Business School Financial inclusion can also be defined 5. www.financialhealthnetwork.org as the ability to manage day-to-day and sharing good policy in areas such as tHE FINTECH MARKET IN the UK| 3 loans and guarantees, venture capital, in the previous two years. Of those, half business angels, growth stock markets were unable to get the product at all, and crowd funding. This focus on funding while the rest ended up paying more only is reflected in its flagship report: or being subject to different terms and the “Survey on the Access to Finance of conditions based on their circumstances. Enterprises” (SAFE), which does not take Of particular concern is a lack of access into account essentials such as access to to affordable short-term credit, forcing payment services or foreign transfers, the people to turn to alternative lenders, time it takes to open a merchant account, such as payday lenders and loan sharks, or support for essentials such as accounts or go without. An estimated 2–7 million payable that are just as critical to survival UK households use high-cost credit each and growth.6 Similarly, the approach year.10 Between 2014–16, nearly half (47 to SME financial health is narrowed to per cent) of the population had some financial performance indicators.7 form of unsecured lending (of which credit cards were the most popular, Scale of financial exclusion followed by formal loans, hire purchase and overdrafts). Net credit card lending By 2017, the number of “unbanked” to individuals is now growing at a rate people in the UK reached an all-time low. of about 10 per cent per year. This rate Nevertheless, there were still 1.23 million of growth is the highest it has been in adults without access to a current (basic) a decade, yet not as high as it was in or savings account. It should also be the years leading up to the 2008 credit noted that just because someone has a crunch. Net consumer credit lending bank account doesn’t mean that they will (excluding credit cards and student loans) use it—so usage statistics may be consid- is now growing at a rate of about 9 per erably lower than these figures suggest. cent per year. This rate of growth fell Yet despite the apparent progress slightly in 2017/18 but was at a similar made in accessing bank accounts, people level to that witnessed just before 2008 were saving less of their incomes in 2017 credit crunch. 6. The narrow focus is also seen than at any time over the past 20 years. In recent years, the government has in the UK where the SME Finance focused its attention on the high cost of Monitor tracks only access to The 2017 household saving ratio was external financing. half the level it had reached in 2009. In credit, particularly in the case of payday 7. Examples of the reports analysing lending and rent-to-own products. The financial health of UK SMEs 2016/17, about one in eight (6.5 million) include: “SME finance in the UK: past, UK adults had no cash savings whatso- Financial Conduct Authority has pointed present and future” by UK Finance out that the cost of unarranged overdraft and “Collaborate UK 2017: The ever. A further quarter (24 per cent) had confidence and health of UK SMEs” savings of less than £1,000 (including fees is regularly ten times higher than by CitySprint fees for payday loans. This is a concern 8. Individual savings account is a all money held as savings in current scheme allowing individuals to accounts, savings accounts, cash ISAs8 in light of the fact that no fewer than 5 hold cash, shares, and unit trusts million people take out payday loans,11 free of tax on dividends, interest, and premium bonds). Moreover, the class and capital gains introduced in gap in savings appears to be growing. compared with at least 14 million using 1999 in the UK and replacing both unarranged overdrafts.12 personal equity plans (PEPs) The average (median) saver had at least and tax-exempt special savings £9,000 in 2014/16, up from £7,000 in In terms of insurance, a 2017 Financial accounts (TESSAs). Inclusion Commission report found that 9. Karen Rowlingson, Stephen 2006/8—where as those in the top McKay ‘Financial Inclusion Annual quarter of savers had at least £46,000, nearly 16 million people in the UK living Monitoring Briefing Paper 2018’, in rented or owner-occupied housing CHASM, University of Birmingham up from £34,100 in 2006/8. Thus, whilst 10. www.financialinclusioncommis- fewer people are saving, those that lacked home insurance to cover loss sion.org.uk/facts through fire, theft or flood. Key demand- 11. www.moneywise.co.uk/news/2019- are saving are saving more, suggesting 01-25%E2%80%8C%E2%80%8C/ widening wealth inequality.9 side barriers include a real or perceived surge-payday-loans-raises-con- lack of affordability, poor financial habits cerns-about-consumer-debt Furthermore, a 2017 Financial 12. www.fca.org.uk/news/press-re- Conduct Authority report highlighted and skills, low levels of trust, lack of leases/fca-confirms-biggest- digital finance skills and living in high-risk shake-up-overdraft-market that over 4.5 million UK adults reported having been declined a financial product areas. Supply-side barriers include the 4 | tHE FINTECH MARKET IN the UK complexity of product design, an over-re- State of financial health liance on digital channels, and increased use of big data driving client exclusion. Overall poverty rates in the UK have According to the SAFE Survey,13 access only dropped slightly (from 24–22 per to external financing is the main problem cent) since 2000, according to a 2019 for only 6 per cent of SMEs, and is a Social Metrics Commission Report.18 This concern of fewer SMEs every year. The includes 8.3 million working-age adults FSB’s “Voice of Small Business” survey for and 1.3 million pension-age adults— Q4 2018 reported that the credit availa- meaning that simply having a bank bility index rose for the first time in a year account is no guarantee of a financially to its highest level since it was introduced healthy life.
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