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. In fact, 2014/15 data from in 2012. Bank of England (BoE) data also the Understanding Society survey reveals indicates that credit is still affordable by that a fifth of households felt they were historical standards, but interest rates “just about managing”, and a tenth were on a range of SME loans have increased finding it “difficult to manage” in terms of slightly since the start of the year.14 their finances. Increasing numbers of SMEs use Access to a sufficient income is a key external finance.15 The SME Finance pillar of financial health, and recent Monitor 2018/19 reported that 49 per decades have been a time of upheaval in cent of SMEs used external finance in 2Q the UK, as elsewhere. Overall economic of 2019, up from 36–38 per cent between growth in the UK returned to pre-finan- 2014 and 2018. The increase was driven cial crash levels in 2016—and unemploy- by micro and small businesses (those ment, which peaked at 8.4 per cent in with 0–49 employees). The main reason 2011, fell to 3.8 per cent by mid-2019. for not applying for a bank loan or a Underemployment is similarly falling, and credit line was sufficient internal funds.16 whilst wages are growing (3.9 per cent However, access to external finance is by August 2019), inflation has reduced not easy for every SME. Almost a quarter real wage growth rates to 1.9 per cent.19 of SMEs claim to have lost at least one Given this, it is perhaps not surprising opportunity in the past 12 months that in June 2019 the Living Wage because of lack of funding. The loan Foundation announced that more than 5 applications approval process is seen as million workers in the UK are in low-paid being too slow, and most SMEs were not and insecure employment, leaving them confident that they would get a loan from struggling to effectively manage their their current bank.17 family finances. Also, we find the use of personal According to the Financial Inclusion accounts to conduct business trans- Annual Monitoring Briefing Paper 2018, actions: 13 per cent of SMEs used a approximately eight million people were personal bank account for their business struggling to keep up with bills and credit banking, almost all of them were the commitments in 2017. Of these, only 13. Survey on the access to finance smallest ones (with zero employees). about 1.1 million people received advice. of enterprises (SAFE). Analytical The use of personal accounts was more Report 2018. European Commission, About 8 per cent of the UK adult popula- November 2018 often seen among the SMEs which tion, or 4.1 million people, said that they 14. Small Business Finance Markets injected private funds into the business. 2018/2019. British Business Bank had actually fallen behind with domestic 15. Ibid. The use of personal finance facilities was bills or credit commitments in three 16. SME Finance Monitor 2018/19 not uncommon: eight per cent of SMEs 17. SME Business Banking Opportunities or more of the last six months in 2017. Roundtable. Unisys, November 2018 used a financing facility in their personal Those on the lowest incomes are much 18. Measuring Poverty 2019, July name, especially the self-employed and 2019 https://socialmetricscom- more likely to be in arrears on utility bills mission.org.uk/wp-content/ those with a lower credit rating. and credit commitments: 16 per cent uploads/2019/07/SMC_measur- ing-poverty-201908_full-report. pdf 19. UK Office of National Statistics, August 2019 tHE FINTECH MARKET IN the UK| 5

of those on the lowest incomes (lowest turnover. Also, less than half (40 per cent) 10 per cent of incomes) were in arrears are growing in terms of value of sales.22 in 2012/14 compared with only 1 per Although access to external finance is cent of those with the highest incomes generally good (see above) many SMEs (highest 10 per cent of incomes). face other barriers: 44 per cent of SMEs The Money Advice Service, together had a worse-than-average risk rating in with Nationwide Bank and Open Banking Q2 2019 and this was much more likely for Good (OP4Good), has defined a series to be the case for the smallest SMEs with of categories to classify the type of people zero employees.23 Additionally, SMEs are financially struggling and financially affected by delays in receiving income: in excluded. The UK Financial Capability 2019, UK small firms were owed £14.9bn Strategy (FCS) as set out by the Money in late payments, with half of businesses Advice Service identified that as many reporting that outstanding debt slowed as 12.7 million people could fall into the investment.24 Financial planning and so-called “squeezed” segment. Half of management is also weak, especially them (6.4 million) are in 40s and 50s, amongst smaller SMEs. The proportion with older children, living in a mortgaged of SMEs undertaking business planning home. However, a considerable number is currently 57 per cent, with only 37 of the financially squeezed (3.6 million) per cent producing regular management are younger adults (singles in their 20s, accounts and only 32 per cent having a without children, living in privately rented formal written business plan. Only 25 per accommodation). Another sub-segment cent have a qualified person in charge of of the squeezed (2.6 million) is young finances.25 families and couples in their 30s, with young children and living in a mortgaged Actions of public stakeholders towards home.20 financial inclusion and health Finally, there has been a rise in the number of individual insolvencies: from Financial inclusion first emerged on the 20,742 in the first quarter of 2015 to policy scene after the 1997 election of a 27,388 in the first quarter of 2018. In New Labour government. At that time, 2017, nearly 100,000 people became the government established the Social insolvent. The number of landlord repos- Exclusion Unit, mandated to investigate sessions (evictions) by county court bail- the issue of financial exclusion. In 1999, iffs has declined slightly from a peak of the Policy Action Team 14 published nearly 53,000 evictions in 2015 to 36,000 its “Access to Financial Services” in 2017. Mortgage repossessions remain report, which recognised the direct link relatively low, around 7,000 per year. The between financial and social exclusion. overall decline in landlord repossessions Recommendations included the creation (evictions) is largely driven by a decline of a “basic bank account” to drive inclu- in evictions by social landlords (and some sion, and leveraging the existing Post decline in accelerated evictions). The Office network to facilitate ease of access. number of evictions by private landlords By 2003, the Basic Bank Account has remained fairly constant over the last was created. Whilst they offer the same 20. Source: Money Advice Service and 21 Nationwide and Open Banking for few years. standard features as the average current Good The picture of financial health of SMEs 21. Karen Rowlingson, Stephen account (e.g. cash withdrawals, direct McKay ‘Financial Inclusion Annual is mixed. On the one hand, financial indi- debits, online payments), basic bank Monitoring Briefing Paper 2018’, cators indicate that 80 per cent of firms CHASM, University of Birmingham accounts are not permitted to have an 22. SME Finance Monitor 2018/19 are profitable, and hold increasing cash overdraft facility and are fee-free for 23. Ibid. reserves. On the other hand, the median 24. “Financial Inclusion For Europe’s standard operations, including a failed SMEs: Building a Circle of Trust”: value of profit is low (£8,000), and for payment. This means the basic bank Banking Circle 2019 half of SMEs the value of cash reserves 25. Ibid. account is ideal as both a starter product does not exceed 10 per cent of their for those unfamiliar with mainstream 6 | tHE FINTECH MARKET IN the UK banking and for those customers who programmes. A 2014 agreement between struggle with problem debt.26 the nine largest current account providers In 2004, the Treasury department and the Treasury also mandates that published its “Promoting Financial basic bank accounts should be accessible Inclusion” strategy, which included the to the most vulnerable and least affluent formation of a Financial Inclusion Task in society. Force (as an advisory and monitoring The Financial Inclusion Commission’s body to the government) and a £120 report, Financial Inclusion: Improving million Financial Inclusion Fund. The the financial health of the nation, was mission of the Taskforce (2004–11) was published in March 201527 before the to increase access to banking; improve General Election and brought together access to affordable credit, savings and evidence the Commission gathered from insurance; and improve access to appro- around the country. The report acknowl- priate money advice. The Fund (2005-08) edged the absence of a national financial supported the rollout of initiatives to inclusion strategy, leading to a lack of increase the supply of free face-to-face coordination between key players. It also money advice in England and Wales, pilot recognised the inability of traditional new methods of money advice outreach, banking services to meet the needs of increase funds for lending to excluded low-income clients, the credit gap for communities, and a public information low-income clients, a mismatch between campaign to reduce barriers to financial supply and demand of savings, the unaf- inclusion, among others. fordability of insurance, and a general Between 2004 and 2011, these initia- lack of financial management skills. tives succeeded in halving the number of It is important to recognise the crit- people in the UK without a bank account. ical backdrop to all of these advances in The government has also put in place financial inclusion and financial health in a strong regulatory regime to ensure the UK, namely the Conservative govern- that markets are working fairly, and has ment austerity policy which has stripped given the FCA a clear mandate to protect significant amounts of funding from the consumers and consider access to welfare, tax credits, education and health financial services within its competition services needed by ordinary people to objective. support their wellbeing, improve their Under the coalition government lives and plan for the future. Financial (2010–15), there was no overall coherent inclusion might be increasing, but so too financial inclusion strategy. That notwith- is financial inequality. standing, there were a number of useful policy measures introduced, including changes to tax-free savings accounts and auto-enrolment in workplace pension

26. HM Treasury and Department for Work and Pensions Financial Inclusion Report, March 2019 27. Financial Inclusion Commission: Financial Inclusion: Improving the financial health of the nation, March 2015, www.financialin- clusioncommission.org.uk/pdfs/ fic_report_2015.pdf tHE FINTECH MARKET IN the UK| 7

The UK Fintech Sector

Conditions for the development of the UK internet use in both the 65–74 and 75+ fintech sector years age groups is growing more rapidly than among younger groups. Secondly, Internet and mobile devices the gender gap in recent internet use is Data from the Office of National Statistics28 narrowing. While the overall gap across shows that internet use in the UK is very age groups is relatively narrow (92 per high. In 2019, only 7.5 per cent of adults cent of men and 90 per cent of women had never used the internet in the first in 2019), larger differences can be seen quarter of 2019, down from 8.4 per cent within key age brackets: 65–74 (2 points) the year before. The UK ranks high among and 75+ (12 points), although, as with EU countries in terms of recent internet the age gap, this gender gap is swiftly use: in 2018, UK was the third highest, narrowing. after Denmark and Luxembourg, with 95 London and the South East had the per cent of adults aged 16–74 years being highest recent internet use (93 per cent) recent internet users. in 2019, while Northern Ireland was the Importantly, two key social gaps in lowest (87 per cent). Northern Ireland internet use are narrowing over time. First, had the largest regional increase in the generation gap: while adults aged 75 recent internet use since 2011, a rise of years and over are consistently less likely 18 points (Figure 1). to use the internet overall, the recent

Figure 1: Recent internet use by region, 2019

South East 93% London 93% South West 92% East of England 92% North West 90% East Midlands 90% Yorkshire and the Humber 90% Scotland 90% Wales 90% West Midlands 89% North East 88% Northern Ireland 87%

80% 85% 90% 95% 100% 28. www.ons.gov.uk/businessindustry- (Source: Office of National Statistics) andtrade/itandinternetindustry/ bulletins/internetusers/2019

8 | tHE FINTECH MARKET IN the UK

Another report29 shows that internet than men across all age groups under 55 use is not universal across socioeco- for the first time ever. This was particu- nomic groups. Whilst rates of non-use of larly the case for women aged 18–34, the internet are falling overall, non-use who spent on average half an hour longer remained higher among adults in C2DE30 online than men in the same age group. households (17 per cent) than those in Nearly half of UK internet users in 2018 ABC1 households (4 per cent). Adults named smartphones as their most impor- aged 16–64 in DE households who used tant device for accessing the internet. This the internet spent less time online per was particularly true among young adults week (23 hours) than those in non-DE (16–34 year-olds), where 70 per cent households (27.1 hours). Individuals in relied on their smartphone (compared to DE households were also less likely than 17 per cent of over-54s). Overall, smart- those in non-DE households to say they phones are driving a shift away from were confident ‘overall as an internet SMS and voice calls to internet-based user’ (84 per cent vs. 92 per cent). DE communications such as WhatsApp and households were also less likely to have Facebook Messenger. access to and to use most internet-connected devices including smartphones, Infrastructure for a cashless economy computers, tablets, DVRs, smart TVs, streaming media players and wearable The future of cash technology. No debate around financial inclusion and UK adults spend an average of 3 hours fintech can ignore the potential negative per day online (via desktop or mobile). impacts of a shift towards a “cashless In 2018, women spent more time online economy”.31 This is because the digital

Figure 2: Internet non-use among different socioeconomic groups

40% 38% 34% 35%

30%

25% 22% 23% 22% 20% 2017 20% 17% 17% 2018 15%

10% 5% 4% 5% 29. UK Communications Market Report, Ofcom 2018 0% 30. The NRS social grades are a system ABC1 C2DE DE Low-income Unemployed of demographic classification used in the United Kingdom based Source: UK Communications Market Report 2018 on occupation of the head of the household: A - upper middle class, B - middle class, C1 - lower middle class, C2 - skilled working class, D - working class, E - non-working. The grades are often grouped into ABC1 and C2DE, these are taken to equate to middle class and working class, respectively. 31. See for instance: www. weforum.org/agenda/2019/05/ in-a-cashless-society-vulnerable-citizens-may-end-up-paying-the-highest-price/ tHE FINTECH MARKET IN the UK| 9

payments landscape favours young, day-to-day transactions, and that class is a well-off and tech-savvy people, harming significant predictor of a reliance on cash. vulnerable and low-income people as the Specifically, 15 per cent of low-income transaction costs of cash rise in relation people entirely rely on cash, whereas less to those of digital payments. than 2.5 per cent of all higher-income Overall access to cash in the UK is on groups do. the decline. While 90% of cash is with- drawn using ATMs, between 2016–2019 Technology a total of 7,749 ATMs disappeared from The technological preconditions neces- the high street.32 Of the remaining sary for a transition to a digital economy 62,541 machines, only 83 per cent are are becoming increasingly prevalent fee-free, and industry watch dog Which? in the UK. According to the Access to has warned that this number is falling.33 Cash report, 98 per cent of adults in the Overall, both the number and value of UK have a debit card, and the number ATM transactions are falling, according of payments made using debits cards to data from LINK (the UK’s largest cash increased 14 per cent between 2016–17. network). In 2017, volumes of digital Increasingly, banks are issuing contactless payments outnumbered those of cash debit cards and vendors are accepting payments in the UK for the first time ever, contactless payments—leading to a 99 prompting the government to announce per cent rise in the number of contactless a review of the state of cash in the UK. payments in 2017. Also on the rise in the In July 2018, the Treasury Committee of UK are: the House of Commons announced an • Mobile payments using smart- Access to Cash Review funded by LINK phones or smartwatches to consider to future of cash over the • Peer to peer payments (less than next 5–15 years. The report did not take in the EU, but still present in the sides on the relative merits of a cashless UK to an extent) society, but rather considered how to • Biometrics for account security ensure that the transition to a cashless • Digital assistants such as Alexa society doesn’t leave anyone behind in or Siri who can make “invisible” terms of ensuring cash infrastructure purchases based on voice remains in place as long as it is needed, commands and ensuring that the digital finance • Inexpensive point of sale card revolution works for everyone, not just readers popular among small the better-off. business owners and stallholders. The group’s research, based on inter- views with thousands of stakeholders, Open Banking revealed that while cash is declining Open Banking is a major revolution in in terms of transaction volume, it banking. It means that banks are required remains important in terms of transac- to allow regulated third party providers tion numbers—making up a third of all access to their customer data. For third payments. Class gaps between use of party providers, it means having the cash and cards are evident, too: while bank-held data needed to build new there is a one point gap between use of tailor-made solutions for different niches debit cards between middle class and of the marketplace. For customers, it low-income groups (33 vs. 32 per cent, means greater control over their finances respectively), there is a ten percentage by managing different accounts from 32. www.statista.com/statis- point gap when it comes to use of cash different providers via one app, and the tics/291638/number-of-cash-main the same groups (39 vs. 49 per cent, ability to compare products based on chines-in-the-united-kingdom/ 33. www.theguardian.com/ respectively). The report also highlighted their own criteria. money/2019/may/01/uk-free-atms- that 2.2 million people in the UK are still By mandating data-sharing between charges-which-cash-machine-fees entirely reliant on cash for all of their banks and third parties, it creates new 10 | tHE FINTECH MARKET IN the UK spaces for negotiations between the collective bargaining power for different parts of the ecosystem, and as cheaper services or increased such is a good example of how regulation benefits. and public policy can actually open new innovative and competitive spaces on the That said, the Open Banking project market. also risks encouraging the rise of new And yet, the implementation of Open forms of discrimination or exclusion that Banking in the UK (and Europe) has could be maximised by the preeminent been neither as easy nor as painless as use of digital technologies. In particular, hoped, inasmuch as incumbent banks these are: have only gradually understood that they • The increased collection and use need to collaborate in better faith and of personal data facilitated by more openly with innovators and fintech Open Banking could exacerbate startups to maximise their strategic existing information asymmetries. competitive positions in the new open With more data, banks and other banking ecosystem. businesses can cherry-pick the That notwithstanding, Open Banking most profitable customers, and could be very beneficial for both finan- greater “personalization” and cial inclusion and financial health. First, price discrimination, to the exclu- Open Banking could allow customers to sion of vulnerable customers become the rulers of their financial data • More information can mean more for the first time. With greater control, confusion if consumers cannot people could more easily understand analyse, use, and apply it and leverage the value of their data. The • Customers could lose control of increased data insights and competitive the data once for instance they pressures that Open Banking promises, have consented for the providers combined with new technologies that to use it enable processes to be automated, could • The frictionless environment also potentially lead to benefits for finan- could lead the customers to cial inclusion and health such as: feel forced to take actions that • Clear, efficient and precise data could not be beneficial instead of that helps customers better pausing and thinking understand their financial • A shift beyond purely financial habits and the range of financial data towards other areas such as services available to improve their health, social situation, etc. decision-making, and automate • The vulnerability of data to being certain actions (e.g. transferring hacked, and frauds and scams money to avoid overdraft costs) that use data to lure victims. • Efficient financial health assess- ments by service providers that Fintech sector overview help to identify and anticipate how and when customers might Financial services are a key economic struggle with their finances and to sector in the UK, representing 6.5 per allow preventative action cent of total economic output and • Access to low cost, automated 3.2 per cent of all jobs in the UK in financial advice 2017–18, making it eighth in the OECD • More affordable credit and in proportion to national economic insurance products, especially for output. Fintech is rapidly becoming a key people who currently lack low-risk contributor to overall British compet- profiles itiveness in the financial services and • The ability for groups to pool technology sectors. financial resources and build their Investment in UK fintech reached a tHE FINTECH MARKET IN the UK| 11 record high of $20.7bn (£16bn) in 2018, fintech firms ranked based on innovation, despite a lower number of deals and a capital raising activity, size and country; slowdown in the second half of the year. In and the “emerging 50” firms of newer, its biannual Pulse of Fintech report, KPMG innovative companies. Atom Bank was reported that total fintech investment in ranked most highly from the UK, at ninth the UK was almost four times higher in place, with rival challenger banks Monzo 2018 than it was in 2017. Furthermore, and Starling also making their debuts in half of the top ten European fintech deals the “leading 50” segment of the list. took place in the UK, cementing its status London is still at the heart of the as the fintech capital of Europe. However, fintech scene in the UK, with more than almost half of 2018’s investment value 80 per cent of VC-backed startups head- came from just one deal: the acquisition quartered in the capital and claiming over of WorldPay for $12.8bn in the first half 90 per cent of capital invested. KPMG of the year. Between July–December predicted that 2019 would see more 2018, UK investment dropped to just consolidation in the global fintech sector, $1bn, compared to $2.8bn during the particularly in mature areas such as same period the previous year. payments and lending. Open Banking and The industry body Innovate Finance regtech investments are also expected to reported in February 2018 that UK rise, while traditional banks are likely to fintech Revolut’s $250m fundraising embrace digital banking. ranked among the top 10 largest global Between 2014–17, the UK market venture capital (VC) deals of last year, saw increasing competition between while Monzo, EToro, Liberis and BitFury traditional financial players and new were also among the UK’s top deals, each digital players. This was particularly raising over $80m. true in segments such as retail banking, Challenger banks took the lion’s share payments and lending. Startups in these of VC investment at 27 per cent, while sectors sought (sometimes unrealisti- personal finance and wealth manage- cally) to displace and even eliminate ment took 19 per cent, alternative lending traditional incumbents, with mixed and financing 18 per cent and blockchain success. The key barriers were changing and digital currencies 10 per cent. The consumer habits and growing consumer UK remains a competitive investment confidence. Traditional players, in turn, destination, with half of investment flows saw them as aggressive and dangerous coming from overseas, largely North upstarts introducing risk into the market- America and Europe. It is interesting to place (e.g. cybersecurity, compliance, note that the sector still has diversity etc.). issues—with just six per cent of deals Since then, surviving startups and new having a female founder, representing entrants have followed a more moderate only three per cent of capital invested. approach, resulting in a fintech ecosystem In 2018, UK fintech companies took that is much more collaborative. Many a greater share of KPMG’s Fintech100 new players are now proposing solutions/ than in past years, partly due to the services to banks to improve their digital growth of its neo banks. Twelve UK firms infrastructures, improve and reduce feature in the accountancy firm’s list of costs of key systems such as “Know- fintech companies transforming financial your-Customers” (KYC), “Antimoney services, compared to eight in 2017, and laundering” (AML) both blockchain and moved the UK from fourth to second AI-based, and cheap easy “digital bank in place worldwide, behind only the US a box” digital payment solutions. (which has 18 fintechs). In third place is Incumbent players in turn are much China with 11 fintechs on the list. more ready to cooperate with startups, The Fintech100 is divided into two in particular in the context of the Open sub-lists: the “top 50” established global Banking initiative where they are forced 12 | tHE FINTECH MARKET IN the UK to give access to customer account data. these startups found it difficult to adapt Traditional banks also find that it is more to the culture of a heavy, constrained, coherent and efficient to use digital bureaucratic and big organisation. players and third parties to provide new Likewise, the organisation and systems products and services, rather than devel- of a major bank, with its massive legacy oping them in-house. They have also issues around IT infrastructure, could not started to financially invest and support a easily be transformed internally and be number of startups. as flexible, lean and agile as a startup. Fintech investment trends are rela- Since 2018, many banks have tried tively agile, but it remains to be seen if a new strategy: creating separate the drop in activity in the second half is quasi-competing entities outside of due to Brexit uncertainty or the start of their main technical infrastructures and a wider trend–possibly the end of the developing their own startups (using current fintech cycle, presaging the next methods such as Cloud services, agile generation. Over recent months, deals methodology and others that are those and discussions (particularly among generally used by startups). One of the UK challenger and digital banks), have key functions of these new separate evidenced a push for further consolida- entities is to create a totally new digital tion across the segment. bank with either a generalist or special- From the point of view of traditional ised product/customer segmentation banks, between 2015 and 2018 there remit. It also allows incumbent banks to were shifting attitudes towards the new more efficiently compete and target the fintechs. At first, their arrival was treated raft of new digital bank startups making with something approaching disdain, headway in the UK, such as Starling Bank, inasmuch as the new comers were Monzo, Revolut, Tide, etc. These new viewed as lacking the muscles and deep digital banks often are separate from pockets needed to achieve their vision the main bank both in terms of systems, of replacing banks. Later, banks started use new infrastructure and technologies contributing to accelerators and incuba- developed as turnkey solutions by other tors in London such as Startupbootcamp providers (some themselves startups), Fintech (Lloyds Banking Group among have startups-like teams and cultures, others, Techstars (Barclays bank), etc. and have brands that are distinctive At the same time, banks also started from those of the incumbent banks they creating internal departments and initia- belong to. tives around digital innovation and trans- Interestingly, it seems that incumbent formation—a sort of startup within an banks use this strategy to reach markets incumbent to develop new products and that are traditionally more excluded services to rival the new market entrants. than most; this is particularly true of These internal startups, however, proved small business customers. Royal Bank of difficult and expensive to manage. Scotland, for instance, created a digital Much later, banks invested directly into bank led by its former COO Mark Bailie. startups, taking stakes between 20–30 Bò was first unveiled in 2018. In January per cent (sometimes buying them out 2019, it took 25 per cent and invested £5 fully). This strategy was successful when million into startup Loot, a digital account the startup was focused on improving app with budget management functions bank infrastructure, developing and and others aimed at the millennial, youth implementing technologies such as and student market with almost 200,000 Artificial Intelligence or blockchain, or open accounts. After Loot entered into implementing new marketing/product administration in June 2019, Bò recruited developments. It was less successful 32 per cent of Loot’s very young team when directly offering retail or business including Ollie Purdue, its Founder and clients specific product offerings. Often, CEO who will become Bò’s Chief Product tHE FINTECH MARKET IN the UK| 13

Figure 3: Share of fintech 60% 54% firms by subsector 50% 40%

30% 20% 20% 12% 10% 6% 6%

0% Banking and Credit and Insurance Retrail Investment payments lending investments and management, pensions wholesale banking and capital markets

Officer. Bò will offer savings and deposits be working on an early-stage project to products to retail clients. RBS/NatWest create a digital bank in the UK. Running aim to migrate one million Natwest completely separately as a startup from customers to the new mobile platform the rest of the bank, it is rumoured to be once launched. For payments, Bò will be an ambitious cloud-based banking plat- using Starling’s Payments-as-a-Service form on which numerous products could offering. For its core banking tech, it be launched. That would be more akin has turned to Mambu and its flagship to a core banking software-as-a-service back office system, supplied on a hosted (SaaS) platform or a Platform-as-a-Service (cloud) basis. It is cooperating with (PaaS) or an “Amazon Web Services for Starling Bank for the payments services Banking,” along the lines of Starling’s through the Platform-as-a-Service devel- core banking product, or Germany’s oped by Starling. SolarisBank or London’s 11:FS Foundry, Unveiled by RBS subsidiary NatWest as for instance. a pilot in November, Mettle is set for a full launch within the next couple of months Types of fintech institutions, examples of in the SME market. Mettle is developed in services partnership with 11:FS and Capco. Mettle will allow customers to open a business In 2017, the UK Fintech Census identi- current account in minutes, forecast their fied 1,600 unique fintechs in the34 UK. business performance, create invoices Over half of fintechs are banking- and from their mobile phone and provide payments-focused, with a further 20 reminders for chasing payments. All of per cent focused on credit and lending. these features will be wrapped in a single Investment, however, is skewed towards mobile app with a debit card. the latter group, which partly reflects Since 2018, HSBC has been working on the UK’s position in peer-to-peer (P2P) a digital initiative (separate from the main lending, where it accounted for about 75 bank) that will focus on small businesses; per cent of European volumes in 2014. here again it seems it will collaborate Investment on the banking and with Starling Bank. payments sector accounted for 46 per Santander is purportedly preparing to cent of total UK investment, reflecting launch a standalone digital unit that will the overall level of activity in that sector. target small and medium-sized enter- 34. “UK FinTech Census 2017. The voice Despite the UK’s strong position in the of FinTech” HM Treasury, EY and prises. The new unit will offer smaller insurance sector, both activity and invest- Innovate Finance firms not only loans but help with payroll 35. “UK FinTech: on the cutting edge”: HM ment have been relatively subdued; Treasury and EY and pensions. however, indications are that greater JP Morgan Chase, a US bank, is said to activity is beginning to emerge.35 14 | tHE FINTECH MARKET IN the UK

The various types of fintechs present youth markets, providing payment solu- in the UK market are detailed below: tions (prepaid debit card) with specific controls reserved for parents. Digital banks and banking/accounting solutions for SMEs, micro businesses and entrepreneurs Insurance This includes helping SMEs to easily Fintechs engage in car insurance using open digital bank accounts and integrate telematics (black box) to monitor driver accounting software (such as Xero) and behaviour, manage insurance premium accounting/financial management suites. comparison sites or offer peer-to-peer A number of startups are also developing (P2P) or microinsurance platforms. For new models that are bridging the incom- instance, FloodFlash offers customers a patibility between fintech and cash. new way to insure flood risk. The company CashWay is a French company offering has developed a tech-led approach Software as a Service (SaaS) paid for by that makes flood insurance available to customer banks and at zero cost for the everyone, even those in high-risk areas. SMEs, micro merchants, etc. It offers Wrisk offers insurance connected to our “virtual bank branches” with payment personal lives and devices, aiming to and business management solutions inte- making it as simple as possible, for as grated. Soldo Business is a “spend control many people as possible, all within single and management platform” bringing app. The company recently signed a part- together banking, admin and accounting nership with BMW to become the sole features that allow the business owner supplier of BMW and MINI car insurance to keep an eye on your employees’ in the UK. Bought by Many uses insurance expenses. New players like Anna Money search data, consumer feedback and (aka Absolutely No Nonsense Admin) expert market analysis to identify specific is an online business current account insurance needs that are poorly served by and digital assistant for small and medi- incumbents. Canopy, on the other hand, um-sized enterprises (SMEs), Coconut (a offers a solution to landlords and renters business current account offering support called Deposit Free, which eliminates the for tax and expense reports, and a tool need for expensive security deposits by for tracking business finances) is trying providing insurance against arrears and to provide high-quality tools for financial damage. management focusing on SMEs, self-employed people and micro-businesses. Borrowing Fintechs provide short-term loans to Money transfer and payments individuals using fully digital processes. This includes online digital-only banks Payday lenders such as Wonga, without branches, online foreign Cashfloat, Everydayloans, Lendable offer exchange, overseas remittances, mobile short-term, high-cost credit for retail phone payments at checkouts, non-banks customers. Services for entrepreneurs to transfer money, payments via crypto- and SMEs focus on helping businesses currency and payout management tools. that are facing major issues to obtain Notable examples (including Monese, loans from banks. For instance, iwoca Tandem Bank and Curve) reach a general (the name stands for ‘instant working client market although bigger chal- capital’) offers finance for businesses for lenger banks (Starling Bank, Revolut and various purposes ranging from bridging Monzo) focus on savvy and younger retail short-term cashflow gaps to investing customers as well as business customers in stock opportunities. Where banks and SMEs. Starling has 550,000 individual are reluctant to engage in such lending, 36 36. www.which.co.uk/money/banking/ and 60,000 SME accounts in 2019. the government bypassed banks by bank-accounts/challenger-and- Osper and GoHenry are digital card supporting P2P and digital lending- plat mobile-banks-aj0mj7w688r5 accounts focusing on the children and forms by channelling public funding to tHE FINTECH MARKET IN the UK| 15 them. Companies such as Funding Circle, Investment Crowdcube, RateSetter and Zopa and Investment fintechs include P2P plat- others have been very successful in this forms for high-interest investments, respect. equity crowdfunding platforms and rewards platforms, online investment Financial planning advice and investment management, The focus here is on developing online online stockbroking services, top-up budgeting and financial planning tools, savings or investments and online spread- as well as tools to analyse expenses and betting. For example, LendInvest- oper compare financial products. Advisory and ates an online marketplace for property management apps often use data and lending and investing. Its online market- AI, and allow individuals to understand place platform lets everyday investors their outgoings, avoid useless costs, access different types of asset classes; improve their finances and ultimately and underwrites and pre-funds various save money. Companies like Cleo are investments. Investbound is a group particularly successful in the UK (and of seasoned portfolio managers and US and Canada), reaching more than a research analysts at institutional money million individuals. They are not only very managers. Companies such as Nutmeg important for financial inclusion but also have been instrumental in developing to improve financial health and education this market segment in the UK. Nutmeg’s of individuals. Amongst other successful wealth and investment management players here are MoneyHub and Money services have experienced substantial Dashboard. growth recently, leaping from 40,000 customers to over 50,000 in the last year, Saving apps At its core, Nutmeg uses technology to Moneybox rounds up user purchases to allow people to invest their money. The the nearest pound and invests the extra difference is that the company does this cash into a Stocks and Shares ISA as well through their team, rather than with into a broad range of companies through algorithms, and users can define their Moneybox’s tracker funds. Moneybox targets and even choose how much risk wants to make investing more accessible, they are willing to take before Nutmeg while giving customers the opportunity presents them with portfolio options. to grow their money. Likewise, Squirrel is a budgeting app that encourages Money management saving. It was created for non-savers, A range of new players are entering the in particular young people. It’s not the market (such as Emma) that provide first app of its kind, but its personal- savings and money management ised approach to helping a person save services, hybrid services (such as Dozens) is innovative, because it discourages that offer both a current account, money spending and incentivises saving. Instead management and wealth planning. With of a “one size fits all” system used by its developing digital technologies creating competitors, Squirrel is tailored to the opportunities to now address specifi- person’s lifestyle and savings targets, cally the market for financially excluded creating a plan specifically for them. It people in a more viable and profitable ring-fences savings money and expenses, way, market players have been devel- and releases the spending money to the oping strategies to maintain and develop normal bank account. their positions. 16 | tHE FINTECH MARKET IN the UK

The Role of Fintechs in Promoting Financial Inclusion and Financial Health

In April 2019, we interviewed key stake- create revenue streams (fee on holders across the UK, including startups, transactions; remuneration by companies and organisations with an partners; remuneration from fee interest or understanding of the financial on added services, etc.) exclusion markets. Although the startups we interviewed differ in size, nature Although many begin with a single and maturity—a few common threads product, or by focusing on a single market emerged: segment, they launch with the intention • All address market segments that of growing their product offering over traditional players can but don’t time—for instance, by adding payments (either in terms of the product or to a money management app, or savings segment) to a digital account with a payment • They are more flexible than tradi- instrument, etc. Savings products seem tional players in their customer to be high on the priority list for many approach, more transparent in we spoke to. For startups, future growth both their relations and the terms can be achieved either on their own or and conditions through partnerships with other startups • They strive to place the customer or even banks. That said, the fintechs we at the core of their operations and spoke to had mixed feelings regarding develop intricate customer rela- partnerships with banks. Most refused to tions processes and operations rule it out, but acknowledge the difficul- • They understood that the SME ties in working with banks because their and self-employed segment was inflexible structures and legacy issues either abandoned or underserved around technology. by banks and therefore a growth All interviewees acknowledge that market. Several understood the total financial exclusion is a rarity in the barriers to entry: namely that UK, yet many people are either squeezed customers won’t adopt their or struggling even if they are working. products if they weren’t free. In total, these segments (excluded, Therefore, they find other ways squeezed, struggling, indebted, etc.) to monetise their products and account for a sizeable proportion of the tHE FINTECH MARKET IN the UK| 17 population (probably around 14–15 per problems that startups face: the difficulty cent). What’s more, banks aren’t serving in finding funding (particularly at seed these people with relevant and appro- stage) and negotiating commercial pilots priate solutions. with banks. It also focuses on practical solutions to help financially excluded Open Banking for Good initiative people. It also provides a good model for future partnerships between govern- Open Banking is an important development, commercial banks and charities. ment that could facilitate better services for vulnerable clients, because it creates a Fintechs and financial inclusion space for new tools to help people understand and take control of their financial It is significant that among the more lives in new ways. than 51 digital banks created by startups Open Banking for Good (OB4G) is since 2015, more than 15 focus explicitly Nationwide Building Society’s initiative on financially excluded customers, and to use Open Banking in new ways to help that (at the outset, at least) many of what it calls the UK’s 12.7 million “finan- the biggest digital bank startups were cially squeezed” people. The OB4G project created to address specific difficulties in came out of Nationwide’s relationship opening, accessing and using traditional with the Inclusive Economy Partnership, bank accounts—demonstrating that the a collaboration between business, civil financial inclusion market is a growing society and government departments. and viable one. Startups often try to Nationwide teamed up with 17 charities differentiate themselves in terms of: and organisations to identify the three • Addressing underserved or most important challenges to improving excluded customers financial inclusion: income and expend- • Giving access to otherwise-un- iture, income smoothing, and money attainable financial products management. alongside additional services that Nationwide has made £3m available provide customers with better to fund the delivery of these solutions. information and to better manage Working with four key charities (Money their finances Advice Trust, Citizens Advice, The Money • Being simpler to use Charity and Money & Mental Health), • Being more transparent. seven startups have been selected in 20918 to participate in the challenge: Interestingly, fintechs are increasingly OpenWrks, Ducit.ai, Trezeo, Flow (Rai), integrating multiple services and/or Toucan, Squad, and Tully. addressing multiple functions, an indica- This initiative is particularly - impor tion that there is a room to expand their tant because it is providing an accel- offering, either on their own or through eration framework with a guaranteed collaboration between startups. set of commercial pilots and resources, and access to Nationwide’s customers. It therefore resolves one of the key 18 | tHE FINTECH MARKET IN the UK

TABLE 1: Examples of fintechs engaged in improving financial inclusion

Table 1 details fintechs that contribute The majority of U Account customers do to the improvement of financial inclusion not have any other account. by targeting excluded segments of the SoSure offers social insurance of population and businesses—providing mobile phones for groups of friends. It quality financial services, facilitating insures mobile against damage, theft or access to services of the incumbents or loss. In the event of there being no claims other fintechs. Startups marked in yellow within the group for the whole year then were interviewed during the project to SoSure refunds 80 per cent of the cost of understand their approach to financial the insurance. inclusion. Finverity is a P2P investing platform offering SMEs in developing markets Financial services for the unbanked and liquidity against invoices by linking them underbanked with investors in developed markets. In Loot37 provides an easy-to-open and easily this way, it offers affordable liquidity to accessible current account with a debit SMEs in markets which lack appropriate card. The account is accessible through scoring systems and infrastructure for a mobile app allowing smartphone users SME credit. to transact anytime and anywhere. Additional tools for monitoring spending Facilitation of access to financial services and budgeting help users optimise account Funding Options is a marketplace (aggre- and money use. gator) for SME lenders, a broker for 37. Since our interview, Loot has entered into administration. Bò, U Account, similarly to Loot, offers a commercial finance and lead generator. RBS subsidiary creating a new bank account with a debit card and a budg- It matches a potential SME borrower digital bank that was supposed to develop a partnership with Loot eting tool. A typical customer is 24–45 with over 50 credit providers. Using Open and took 25 per cent for £5m in years old, male, mainly in the C2DE social Banking data, Funding Options auto- January, recruited Ollie Purdue as Chief Product Officer as well as 17 category (working class or unemployed). matically reviews the applicant’s bank team members from Loot. tHE FINTECH MARKET IN the UK| 19

statements, conducts underwriting and and a virtual IBAN to collect funds from presents to the lender a pre-approved suppliers or card users and connect them client. This speeds up the underwriting to a global payment network. process. Fintechs and financial health Improving accessibility of financial services NestEgg empowers individuals to take A number of fintechs provide services control of their own financial identities to individuals and enterprises that help using data relevant to their circumstances. them maintain or improve their financial Transparent matching algorithms make it health. Services can be grouped around easy for individuals to apply for credit, the following areas: managing income and make it cost-effective for responsible and expenses, maintaining resilience to lenders to assess an applicant’s credit- weather financial ups and downs, and worthiness. It focuses on how individuals improving long-term outlook. Table 2 can improve if they are declined credit. presents the examples of fintechs active By using red and green colours to indi- in these areas. cate various situations, an individual can easily see what keeps them in the red and Managing income and expenses get advice on what to do to get to green. Elifinty is a financial app driven by artificial intelligence. Thanks to Open Banking, Quality of financial services the app predicts the financial challenges SettleGo connects SMEs to the digital that people will face, and uses advanced economy and helps them collect, convert algorithms to identify an appropriate and pay money globally. It provides an financial solution. Elifinty currently efficient and transparent tool to manage cooperates with a charity in East London all types of payments. It provides busi- which provides emergency grants to help nesses with a one-stop solution to send people reduce debt and make savings. and receive international payments,

Table 2: Examples of fintechs engaged in improving financial health 20 | tHE FINTECH MARKET IN the UK

Harmoney is a money management is also an incubator for those who were chatbot linked to Facebook messenger declined, helping them get back into the that helps people managing money in system. Users buy a Loqbox worth the three moments: day-to-day matters equivalent of their yearly savings, but managed weekly (e.g. shopping), monthly instead of paying upfront they use an bills, and lumpy annual expenditures. The interest-free loan. Monthly savings are bot uses information on bank account recorded as loan repayments showing transactions to categorise current the lenders that the user can responsibly spending, forecast upcoming spending, manage finance. Loqbox was launched in track available funds, and advise how July 2017, which now has 10,000 users to optimise spending and how to save. per month and rising. Harmoney targets young parents with Dozens brings together spending, small children and 18 years olds starting saving and investment, allowing users adult life. to stay in control. Its mobile app is a ANNA Money (Absolutely No current account that tracks spending and Nonsense Admin) is a mobile business helps the user to save. It is also a tool for current account, a card and digital admin putting money aside and rewards the assistant for invoicing and tax support. It user for good financial behaviour (users targets freelancers and SMEs (typically can earn 5 per cent per annum with their with 2–5 employees) in creative indus- fixed interest bonds and become invest- tries; startup enterprises that want to ment-ready with a simplified investing try something new, those rejected by a tool). Users can create smart saving rules bank’s KYC policy, and business owners and automate putting aside money. who don’t have time for admin. HealthyHealth enables access to insurance. Through a developed mobile Resilience to weather financial ups and downs application physical activity is measured Loqbox builds credit histories for people and risk calculations are performed. If the who never used credit before (due to user agrees to share the data recorded age or migration). The aim is to get by the app with the insurer, the user can people into the financial system because access to insurance more quickly and otherwise they have to pay an exclu- cheaply. In addition to the risk calculation, sion premium (similar to the poverty the application also offers a personalised premium), for instance a pay-as-you-go plan to improve the customer’s health. electricity meter instead of monthly bills or an inability to get a contract with a mobile operator. Loqbox addresses three issues: lack of opportunities, lack of capability and lack of resilience. Loqbox tHE FINTECH MARKET IN the UK| 21

Opportunities for FINTECHS in Improving Financial Inclusion and Health in the UK

Overall, in the UK we see a very strong recent years thanks to public policy and presence of highly diversified fintech the emergence of fintech startups. providers, proactive public policies and a Data related to financial health is broad coalition of stakeholders working more telling than data on financial towards better inclusion and health—yet inclusion—and paints a more alarming uptake by, and impact upon, consumers picture of the financial standing of UK remains unclear. It is too early to deter- households (and to some degree SMEs). mine whether new providers engage Eight million people were struggling to unserved and underserved segments, or keep their financial commitments in simply replace existing forms of financial 2017, and as many as 12.7m people could services with new products and distri- fall into the so-called “squeezed” (just bution channels. It is important to note about managing) segment, which shows that there is a strong public recognition that financial inclusion is an imperfect that technology and fintechs may have a measure of financial well-being. Having a positive impact improving financial inclu- bank account, while useful and beneficial sion and health, but also that some forms in today’s economy, does not necessarily of digital services may themselves cause correlate with good health of an indi- exclusion and deterioration of financial vidual or a small firm. health. Increasing technological disruption, the disappearance of the traditional Financial inclusion and health banking services and the introduction of Open Banking regulation – coupled with Despite marked progress in curbing finan- an increasingly cashless society – are cial exclusion, a substantial number of creating a new ecosystem rife with both people in the UK still do not have a bank opportunities and risks for financial inclu- account—and a much larger number sion. The government and other stake- underutilize financial services, are denied holders are keenly interested and engaged access to or cannot find a product that in deepening financial inclusion and meets their needs, meaning they resort improving financial health, even though to high-cost lenders or second-best prod- we see competing definitions of inclu- ucts. In the UK, pure financial exclusion sion and a still-underdeveloped under- (not having a bank account) has fallen in standing of financial health–especially 22 | tHE FINTECH MARKET IN the UK when it comes to SMEs, where the major ways to monetise their products focus is on access to credit rather than and create revenue streams such other aspects of financial health. as transaction fees; remuneration by partners; fees on added Supply services, etc. The UK is home to the largest number of fintechs in Europe. There are about 1,600 Policy fintech organizations offering a wide range The UK is one the first countries in Europe of financial services, including money to have focused on financial inclusion and management and advice. A number of financial health of individuals and small them target low-end consumers and firms. This is reflected in key government SMEs with novel solutions and tailored policies and initiatives to ensure that services for underserved segments. financial service providers do not exclude Fintechs have demonstrated their consumers, and to educate and nudge the ability to efficiently produce innovative population to responsibly use financial solutions addressing the specific needs of services. These initiatives aim to protect financially excluded people. While fintech vulnerable people and force banks to and Open Banking provide real opportu- focus their growth and reorganisation nities to address this vulnerable segment, strategies on financially excluded clients the move towards a cashless society (both individuals and SMEs), as well as to raises new concerns. Cash continues ensure that technological advances in the to play an important role in the lives of financial sector do not further endanger low-income and vulnerable individuals. vulnerable clients. The important and relevant aspect of fintech developing for financial inclusion Conclusions and health is the fact that a significant The well-developed fintech sector in the number of the new start-ups deliberately UK, and the relatively high level of finan- entered the financial services market to cial inclusion, offer an interesting test target the unserved and underserved case around whether financial technology (low-end) market. Other common themes can close the inclusion gap and improve that emerging in the UK are that fintechs: the financial health of individuals and • Address market segments that businesses. It offers numerous oppor- traditional players can but don’t tunities for other counties to learn from (either in terms of the product or these market experiences. It also offers segment) a significant opportunity to research the • Are more flexible than tradi- relationship between financial inclusion tional players in their customer and financial health, the role of enabling approach, more transparent in policies and the importance of public their customer relations and their awareness about new forms of financial terms and conditions services. Education in particular is of key • Strive to place the customer at importance: without it, when faced with the core of their operations and an overload of choice between providers develop intricate customer rela- (offering often unfamiliar products and tions processes and operations services) consumers may be unable • Understand that SMEs and to compare their options and choose self-employed people are aban- wisely—which can potentially lead them doned (or underserved) by banks to refrain from using such services alto- and therefore a growth market gether, giving rise to greater exclusion • Understand the barriers to entry: and worsening their financial health. namely that customers won’t adopt their products if they aren’t free. Therefore, they find other The Microfinance Centre is a social finance network that promotes fairness, inclusion, equality and responsible service.

We unite 113 organisations (including 77 microfinance institutions) across 36 countries of Europe, Central Asia and beyond, who together deliver responsible microfinance services to almost 2,000,000 low-income clients.

Our mission is to empower individuals and sustain communities through innovative social finance and microfinance.

This publication was prepared as part of the project entitled “Building Innovations for Social Finance in Europe” funded by MetLife Foundation.

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