Fintech - Q2 2020

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In partnership with London Tech Week 2nd - 10th September 2020

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Elliot Wellsteed-Crook London Tech Week ”Time of great change can bring about significant opportunities for innovation.”

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Innovate Finance “Digital-first banks enable customers to micromanage their finances unlike ever before.”

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Susanne Chishti FINTECH Circle “The impact of COVID-19 and the speed of its disruption in financial services is unprecedented.” ©SHANSCHE

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Q2 / 2020 IN THIS ISSUE

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What makes London a tech hub?

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Guy Bridge CEO, FINPOINT Limited “Through COVID-19, the spotlight is now firmly on digital adoption.”

07 Jake Plenderleith Editorial Manager, ICA “Compliance professionals need to be open minded about the use of new technology.”

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Please recycle

2 Elliot WellsteedCrook Head of Partnerships and PR, London Tech Week

019 was a bumper year for the UK tech sector. London overtook Beijing to become the third biggest tech hub globally and UK tech investment topped ten billion GBP for the first time.

Domestically, the UK tech sector grew six times faster than any other industry. Meanwhile, tech investment in the US and China fell 20% and 65% respectively, and the UK continued to pull ahead of European counterparts.

How did London do it?

The emergence of London as a technology and global financial services hub is no coincidence.

Over the past decade, a virtuous cycle emerged, whereby a surge of venture investing in London has attracted international tech talent, creating the innovation that encouraged further investment. And so, the cycle continued.

What’s more, from an international perspective, you can’t go wrong in a city where English is the main language, has a time zone favourable to every part of the world, boasts six international airports, 40 universities, maintains a solid legal system, and is the co-working capital of the world.

Remember your roots – the UK’s conservative approach has balanced an MVP approach In tech, you are likely to have many failures before you win. The post -2008 sink or swim world forced the UK away from a conservative business practice and closer to the US in terms of ‘failing fast’ to reach success.

But, at the same time, that dose of conservatism stuck, and served the UK well when using tech in the real world and upholding a greater degree of diligence in assessing

the actual value of tech firms, both economically and socially.

These two factors are critical to the UK’s future success and position as world leader in the responsible and ethical development of technology.

Making it happen – and testing thoroughly before roll-out When it comes to applied innovation, fintech is a great example of how UK regulators were quick to act, providing the regulatory and legal framework to enable innovation to flourish.

Initiatives like the Financial Conduct Authority’s regulatory sandbox are a case-in-point. The sandbox allows fintech firms to test their innovations in a protected market environment, providing a dry run that offers fintechs vital market and regulatory credibility to make innovation happen.

Crises can bring about opportunity Time of great change can bring about significant opportunities for innovation. Unicorns such as Uber and Slack were born in the 2008 financial crisis.

Others will emerge in the coming months and years. Whatever happens because of COVID-19, the UK tech sector was in excellent shape going into the new decade.

Now, the UK must nurture the virtuous cycle of investment, talent and innovation, and capitalise on what makes the UK if it is to consolidate and strengthen its position as a global tech hub.

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Written by Innovate Finance

Innovation and decentralisation are key

How fintech can help during and after COVID-19

The financial services industry is held back by rules imposed after the 2008 crash. We need to move forward. To liberate the financial industry, decentralisation is the way ahead.

O

ne of the unexpected side effects of social distancing and the lockdown has been the uncovering of a lot of pain points in the business process. “People needed to be in the office to press a button, but they weren’t there,” says Robert Sams, Founder and CEO of London-based blockchain company, Clearmatics.

“This highlights the importance of fault-tolerant automations and peer-to-peer business processes.”

This has all brought to light underlying issues in the market, namely that the landscape of over-the-counter derivative trading is stagnating, and massive changes are now in the pipeline. “Since the 2008 financial crisis, regulators have mandated that counterparties post collateral against their trades,” says Sams.

Restricting scope “That’s a good thing from the perspective of risk mitigation, but it means that an inherently bilateral market must rely on third parties to custody the collateral. The way this is done today is highly fragmented and inefficient. The solution is a smart contract system that replaces the third-party fiduciary with code.”

Clearmatics will be taking its “Smart Collateral Framework” to market later this year.

Another issue is the importance of collaboration and interoperability.

“Block chain protocols need to be based on open standards and open source implementations,” says Sams. “It’s similar to the internet protocols themselves.

Historically, the financial industry has thought about technology in terms of centralised services and utilities, but people are becoming increasingly aware that in future the “utilities” will be open protocols underlying decentralised systems.”

Decentralisation benefits Decentralisation has huge benefits.

“Most of the world needs to be automated as it increases efficiency and allows you to do new things that look like science fiction,” says Sams. “But automation typically takes place on centralised platforms, which means the owner/ operator becomes a monopolist that captures most of the value created by the network.

Decentralisation turns that insideout and puts the network users back in control.”

Robert Sams Founder and CEO, Clearmatics

© S A R I N YA P I N N G A M

In the coming weeks, tools that support the financially vulnerable will come to the fore. Fintech has the capacity to support the most vulnerable with affordable credit and promote financial wellness.

T

he COVID-19 crisis has sent shockwaves through the UK economy. Many companies have applied for business support, with around 8.7 million jobs currently furloughed through the Coronavirus Job Retention Scheme.

The fallout from the crisis is going to leave a large number of people economically impacted, from the already financially vulnerable to those who have experienced redundancy, extended furlough or reduced working hours.

Unfortunately, this all points to one thing – a large increase in the number of people who are now financially at risk.

Fintech can be society’s safety net Fintech has the capability to help plug the holes left by the welfare system and traditional financial services. It is transparent, agile and can reach large numbers of consumers at low cost. As of January 2020, it was estimated that 1.6 million people in the UK were still regularly using doorstep lenders to address shortfalls in cash flow. But it doesn’t have to be this way.

Fintech has some innovative solutions, for example, Wagestream, which enables employees to access accrued salary during the month rather than waiting for their payday.

Others such as SalaryFits, already within reach of 700,000 employees in the UK, allows employees to access salary-deductible short- and long-term loans, alongside other financial services. Measures such as these negate the need for credit scoring and can free at-risk people from a cycle of unsustainable debt repayment.

Companies using underlying pre-payment technology can allow for cash cards to be used by those unable to access a full bank account. Open banking technology allows the self-employed access to financial products and government support that they might otherwise have been excluded from, and digital-first banks enable customers to micromanage their finances unlike ever before through accurate and instant analytics.

Furthermore, traditional nonbanking financial institutions such as credit unions can take advantage of new technology to reduce their operational costs and pass this onto their customers. Digital banks with a focus on financial wellbeing, such as Dozens, are looking to educate and empower people to benefit from the democratisation of financial services through technology.

The power of partnerships Fintechs can amplify their reach

Fintech was born out of the last great financial crisis and we should not hesitate to use it to help our economy recover in an increasingly digitised world. by partnering with incumbent financial institutions. For example, open banking platform, Money Dashboard, allows users to connect their current accounts, savings accounts and credit cards from high street banks to make it easier to manage personal finances. In addition, businesses like Plaid, which was recently acquired by Visa, can accelerate partnerships by providing an interface connecting all kinds of financial institutions and fintechs.

The COVID-19 crisis is accelerating overall digital adoption across the population. But we must see further collaboration between fintech companies, banks, tech giants, financial institutions, investors, government, regulators and other stakeholders in order to speed up fintech adoption.

Fintech was born out of the last great financial crisis and we should not hesitate to use it to help our economy recover in an increasingly digitised world.

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Increasing the opportunities for female leaders in fintech Fintech emerged from the 2008 financial crisis to reform traditional financial services, with aspirations to innovate, build trust and, deliver greater efficiency. While progress has been made for customers and businesses, are we optimising our ability to innovate?

Jen Morris Financial Services, Accenture

Tom Graham Financial Services Leadership, Accenture

D

espite the UK being one of the fastest growing fintech economies, female founders make up only 17% of fintech companies and receive 10% of all investment made into fintech businesses.

Why aren’t there more female leaders in fintech?

The finance and technology industries remain palpably male, with only 20% of executive committee members in major UK financial services firms being female. This is partially due to the unconscious biases that negatively influences recruitment, promotion and investment decisions.

For example, research indicates that venture capitalists (VCs) tend to ask men questions about the potential for gains – known as a promotion orientation, and women about the potential for losses – a prevention orientation.

Entrepreneurs who addressed promotion questions raised six times more money than those asked the prevention questions.

Another contributing factor is that too few women pursue STEM subjects at school and university.

Today, a third of all job vacancies at banks are tech related. However, the pipeline of women to fill these roles is limited, with only 26% of UK graduates with a STEM degree having been women in 2019.

What can be done to increase the opportunities for women in fintech?

The quickest way to change an unequal dynamic is to move the money to where the issue is and put it to work. In the same way that the UK government introduced the SEIS and EIS schemes to incentivise early stage investment, similar programmes benefiting investors in terms of risk mitigation and tax benefits should be set up to incentivise greater investment into women-owned and women-managed businesses,” says Nadia Sood, CEO and Founder CreditEnable.

If you properly fund women-led fintechs you solve this really fast. More visible women leaders, creating pathways for other women to move into fintech, join the C-suite, sit on boards, get into venture capital and start their own companies.

It’s not an afterthought for us. We don’t have to be reminded to hire women into senior positions,” says Caroline Hughes, CEO Lifetise.

It’s important we act now The Rose Review conducted in 2019

by HM Treasury estimated that up to £250 billion of new value could be added to the UK economy if women started and scaled new businesses at the same rate as men. In a time where we need innovation in financial services more desperately than ever before we must increase the opportunities for female leaders to solve some of the most critical challenges facing our economy.

Full citations available online at businessand industry.co.uk

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Not just for unicorns – fintech services all

Why fintech investing will become more attractive post COVID-19 With the global economy predicted to fall, valuations in fintech companies will be hit hard, too. This will provide investors unique opportunities to invest into those fintech firms at attractive valuations, which will shape the future of financial services.

Fintech is commonly associated with unicorn companies. But it is servicing a far wider part of the UK economy as we enter the post COVID-19 world.

A

s the country emerges from lockdown and turns its attention to rebuilding the economy, one resource that is of crucial importance is fintech.

Having developed into a diverse industry in recent years, it is making headlines beyond unicorn companies.

One particular fintech provides additional options for companies seeking funding to aid their recovery.

Financial assistance “Most companies are in need of financial assistance at the moment,” says Guy Bridge, CEO of Finpoint, an accredited delivery partner to the Federation of Small Businesses and UK Finance. “During the lockdown, our technology-led model came into its own. Fintech does not have legacy systems to deal with: as such, we were able to adapt our technology to include Bounce Back Loan and CBILS providers in a matter of days. This meant we were able to route business owners to the most relevant lending options quickly.”

Bridge is keen to emphasise the fact that fintech is not necessarily an alternative to more traditional financing methods: rather the two can work in tandem, with SMEs turning to both for their different needs.

“Traditional finance is not wrong: it can provide competitively priced products that meet the needs of SMEs,” he says. “The likes of FSB, Growth Hubs and Chambers of Commerce are keen to provide access to a diverse panel of lenders. But the relationship between fintech and the banks has not always been without challenge. As a result of the lockdown, we are able to put the advantages of fintech to work for banks that partner with us. This gives them the ability to move forward at pace and to assist business clients more quickly.”

Fintech can accommodate different needs And of course, there are many different products enabled by fintechs depending on an SME’s needs, such as forex and cloud accounting. In addition to that, during lockdown, SMEs have become more accustomed to using digital services, including Open Banking to securely share data with 3rd parties. “Through COVID-19, the spotlight is now firmly on digital adoption,” says Bridge. “Digital services make the running of a company easier and will help Guy Bridge it get through CEO, FINPOINT Limited tough times and thrive.”

Susanne Chishti CEO, FINTECH Circle, Fintech Investor & Bestselling Co-Editor of The Fintech Book Series Published

by Wiley

Fintech investments so far this year: crisis and I have no doubt that we The impact of COVID-19 and the will see many future “unicorns” speed of its disruption in financial (companies that will be valued services is unprecedented. at $1 billion or more) founded I expect this to be worse than the over the next one to three years.

Global Financial Crisis eleven years ago, as we have seen a global physical What is innovation and why is it so disruption to our lives almost important? simultaneously globally.

We defined innovation as As a result, it is not a surprise “addressing specific customer needs that fintech investments in Q1 2020 and business challenges in novel severely decreased globally. ways to increase the value delivered The CB Insights State of Fintech to both.”

Report showed that: “Q1’20 was one When we talk about addressing of the worst quarters in two years for customer needs, we are not just VC (venture capital) backed fintech: talking about functionality. We are The economic talking about shocks emotional and stemming from social needs, the outbreak of such as feeling the coronavirus confident The financial services sector have decreased a new solution cannot modernise quickly investor will work, appetite for keeping up with enough without the fintech’s fintech. peers or feeling sector technology and “Q1’20 valued as a business model advantage.

VC-backed customer. fintech activity Financial dropped to the service worst Q1 since 2016 for fintech organisations can enhance the deals and the worst Q1 for funding effectiveness of innovation using since 2017.” the following steps: No doubt that the investment • Create a standard framework figures for Q2 2020 will be even worse. for innovation across their organisation.

How investing strategies have changed: • Consider collaboration models Most investors have stopped to encourage closer partnerships investing in new deals and instead with third parties. have focussed on helping their • Experiment: constantly question existing portfolio companies survive what you need to prove to justify the expected depression. There will continuing to invest. be a decline in fintech valuations across all stages.

In summary, the financial services Exit strategies will change. sector requires innovation to survive.

Investors will look to accept down As lots of innovation is provided by rounds to agree new investments in fintech companies to large financial portfolio companies or to consider institutions, the destiny of both is how portfolio companies could be inter-connected. merged to save costs and strengthen The financial services sector the business long-term. cannot modernise quickly enough We are moving into an environment without the fintech’s sector where cash is king and the investors technology and business model who can deploy it over the near advantage. future will be able to find very Therefore, investors in fintech attractive deals. have got the key privilege to further We should remind ourselves that fund these B2B fintech companies, some of the best tech companies which will help financial institutions such as Dropbox (2007), WhatsApp to remain competitive long-term and (2009), UBER (2009), Square (2009) invest in those B2C unicorns, which and Instagram (2010) have been will ultimately compete against founded during the last financial existing financial players.

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AI won’t replace compliance, but challenges lie ahead Automation and artificial intelligence (AI) are set to pose a unique challenge to the future workplace, including the compliance profession. How should compliance respond to such innovation?

H JAKE PLENDERLEITH Editorial Manager, International Compliance Association

and-wringing over technology and automation replacing human beings in the workplace has a long history and is far from being unique to our times.

When unveiling his automated assembly line, Henry Ford, instead of praise, was met with distain from workers fearful of losing their jobs.

Contemporary concerns on how AI and automation will affect financial services are no different.

Encouraging AI uptake requires staff training New technology has always generated agitation and speculation on job losses.

Such reactions are understandable, if often unwarranted.

The challenge AI and automation represents is not one of making employees surplus to requirements, but in ensuring that staff are trained in using these technologies appropriately and efficiently.

A survey by IBM estimated that, in the next three years, 120 million workers worldwide will need to be reskilled due to the impact of AI. Similarly, in a 2018 report, PwC claimed employees in financial services may be ‘relatively vulnerable to automation in the shorter term’, due, in part, to workers currently spending a large amount of time doing ‘simple computational tasks’.

Other sectors have successfully adopted AI. The UK Serious Fraud Office (SFO) has employed AI to automate document analysis, and, as part of its 2018 case against Rolls-Royce, used a ‘robo-lawyer’ to scan documents for legal professional privilege content, which was 2,000 times faster than human lawyers.

AI within financial services AI is already here, and spreading. In September 2019, HSBC announced a new transaction monitoring tool, which used network intelligence and automated contextual monitoring in its trade finance division. The bank also rolled out a financial crime transaction monitoring tool to identify commercial opportunities. The tool was designed to highlight ‘red flags’ of potentially unusual activity and ‘green flags’ for new business.

In fact, AI has long infiltrated the most commonplace areas of our lives, from Netflix recommendations to Gmail email filtering. In these simple instances, little justification for AI’s decisions is needed.

But, as AI is employed in more complex processes in financial services, the rationale behind its decisions must be understood.

Financial services staff should, for

instance, be able to justify a loan request rejection by AI to a customer. The UK’s Financial Conduct Authority (FCA) recommend ‘sufficient’ explainability for AI’s outcomes as the target.

Compliance professionals will need to upskill The financial crisis of 2007–08 and the increased focus (and enforcement) from regulators on financial crime risk saw a bump in resources in compliance teams around the world.

Given the impact of COVID-19, firms will likely look to optimise resources; this could include using new technology to automate manual processes.

Compliance professionals will need to adapt and upskill. People will continue to be needed, but the types of jobs they perform will evolve. As a necessity, then, compliance staff must remain in-step with developing tech.

In its 2018 report on automation, PwC outlined that employees without a higher-education are those most at risk to automation and AI, demonstrating the need for life-long learning from compliance professionals.

Given the impact of COVID-19, firms will likely look to optimise resources; this could include using new technology to automate manual processes.

These should include soft skills – a skillset highly sought after and one that, crucially, AI cannot replicate.

Compliance professionals need to be open minded about the use of new technology and the potential for it to benefit both the control framework and the wider business.

The future compliance professional must be commercially savvy and collaborate with colleagues and even robots, to meet business goals. This requires being open to innovation and adapting to change.

AI will not replace the compliance function but its impact at the manual level will be significant. It’s important compliance professionals respond to this shift so that they are best equipped to use AI to benefit the compliance function and their business.

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Investors [will have] unique  opportunities to invest into fintech firms at attractive valuations, which will shape the future of financial services.

- Innovate Finance

ŠX I AOY U N L I