Inclusive and well funded Fintech sector would be transformational for most vulnerable communities
Fintech has the opportunity to be 'illustrative and enabling of inclusion', says Lord Holmes.
Fintech is booming in Britain, a national success with global impact and the ability to be part of the solution to some of our most intractable financial and social issues, not least that of financial inclusion.
Financial inclusion is defined as the availability and uptake of essential financial services, at affordable costs, to every section of society. Currently in the UK 1.7 million people do not have a bank account and 40% of the working age population have less than £100 in savings.
The UK is a global hub for fintech innovation and the market, already estimated to be worth £20 billion in annual revenue, consists of a vast and growing range of products that offer consumers more tailored, flexible banking services and better control over their money.
The Government has done much to support the fintech industry in the UK and we have benefitted from a world leading regulator in the Financial Conduct Authority (FCA). Similarly I support the recent appointment of our first Minister for Financial Inclusion; a key recommendation from the Committee for Financial Exclusion, of which I was a member.
So, IF we are to fully realize the fintech opportunity, what is the IF? The IF, both within and without Fintech is: inclusion and funding. IF we can enable an inclusive, well and timely funded fintech sector what it could do for Britain and indeed for some of the most vulnerable in our communities, is nothing short of transformational.
To take funding first, if fintech is to flourish it cannot continue to be the case that many start-ups find themselves spending 70-80% of their time on funding rounds. Funding, as in any business, is vital but if that alone requires so much time then little is left to run and grow the business. The danger is that growth for the business, economic growth for Britain and indeed financial inclusion is slowed, stifled and sometimes even shut off. Rather than encouraging speedy growth we are applying the brakes. This is in stark contrast to the funding ecosystem in the U.S. where the U.S. unicorns’ gleaming horns are speeding past the UK’s Fintech pit ponies, and this despite both starting with the same passion and potential.
Inclusion is similarly vital. There are many “rock star” founders in UK Fintech, from diverse backgrounds but even so, far too few are female or from the full beauty of what makes up modern Britain. Even when they are female many report that when they go to secure funding, yip, back to that, they find they are far less likely to secure those funds than if they were male, ludicrous in 21st century society. Inclusion a severe problem again within and without Fintech.
It is this IF which has equal applicability for the potential consumers and beneficiaries of the Fintech opportunity. For decades SMEs have found it more than difficult to secure funding, at all never mind with pace. Traditional financial institutions have had little interest in and no pressure put upon them to engage and enable this most vital element of our economy. At the individual level, even worse, millions of individuals under or unbanked, suffering at the sharp end of financial exclusion. The DWP have been involved with some successful ‘proof of concept’ tests to benefits payments, with one producing a system using distributed ledger technology and smart phone application, that has the integrity of a very expensive centrally protected account record yet costs a fraction to build and run. Another ‘proof of concept’ solution using prepaid technology for welfare recipients offers a route into the financial system without a need to open an account or pass a credit check. The recipients gained greater control over their finances, were able to secure better deals on their services, not least power and, perhaps most significantly, became not passive recipients but partners in the project, coming up with improvements for the programme. I welcome these initiatives and firmly believe that the effort for applying Fintech solutions to promote financial inclusion must be cross government, and extend to local and devolved government, as well as the regulator.
To support these regulatory improvements political leadership and greater understanding of the potential barriers to inclusion is required. To this end I support the Financial Inclusion Commission’s recommendation that the Minister for Financial Inclusion commission a detailed study segmenting the financially excluded population in the UK.
The pace of change is incredible, in the 50 years since the first ATM we now have contactless payment cards. Smart phones are ten years old yet have become an essential banking and payment tool for many. Fintech is no miracle solution nor should any such ever be sought. However, it has the potential to play a vital role in our economy in such an uncertain future, it can be illustrative and enabling of inclusion and, IF, funded with pace can be the creator of funding across society, not least to those who, for far too long, have been effectively and shamefully excluded.
Lord Holmes of Richmond is a Conservative peer in the House of Lords
The Community Investment Coalition and Responsible Finance have responded to Lord Holmes, saying that Fintech should be allied with the responsible finance model to tackle financial exclusion. Read their full response here.