Fintech is one of the best funded and value startup sectors in the UK, the Blair Institute asserted in a recent report, stressing its important potential to an incoming Labour Party government.
In an almost certain election year, the Tony Blair Institute for Global Change (Blair Institute) and Startup Coalition have jointly penned a report examining the policy environment needed to support fintech growth.
Labour’s fintech future
Financial services are a significant part of the modern British economy, having taken the leading helm from the traditional heavy industries like mining and manufacturing. Also significant in the modern UK financial sector is technology, and as the Blair Institute noted, fintech converges between these two sectors.
The growth driving potential of fintech has not gone unnoticed by the Conservative Party government, particularly under Rishi Sunak and his Chancellor, Jeremy Hunt. It has also not gone ignored by Keir Starmer’s Labour opposition, however.
“It is through growth and only through growth that we can sustainably resource strong public services, raise living standards, and compete internationally,” Rachel Reeves, Shadow Chancellor of the Exchequer, remarked at the 2024 Mais Lecture.
The Labour Party has set out an objective to achieve ‘the highest sustained growth in the G7’, as mapped out by Starmer. Leveraging fintech and the investment that comes with it will be essential to this, the Blair Institute has stated.
18 of the UK’s 52 tech unicorns in 2024 are fintechs, the report noted. UK governments must ensure that an innovation economy is in place to provide an incentive for further investment.
Governments need to break down barriers preventing fintechs from accessing some of the foundational innovation incentives and schemes laid down in the UK over the past couple of decades.
The vast majority of fintechs begin as startups and whilst this has its benefits, more challenges present themselves as these companies scale up. The Blair Institute believes a Labour government could do more to help these growing firms as they go through the later stages of their commercial journey.
The R&D tax credit scheme is a particular area of concern for the Blair Institute as a barrier for both fintech startups and more established companies, having been “systematically undermined through a combination of policy change and poor administration by HMRC”.
The scheme was the subject of a merger in 2023, with the government combining the small business and large business reliefs. Labour states that it will keep this if elected to government, welcomed by the Blair Institute as positive.
Building up this innovation economy will have brought about exporting opportunities, as well as greater financial stability, in the institute’s view. Regarding the latter, further consolidating the UK’s Open Banking position – something Labour has made its own policies on – and further driving forward Open Finance, will be central to this.
Obstacles to opportunity
A Labour policy also welcomed by the Blair Institute is the party’s commitment to creating a fintech sandbox. These digital innovation and knowledge sharing centres have become popular platforms in recent years.
For example, the Conservatives have presided over the launch of the Digital Securities Sandbox (DSS), whilst UK Finance has also adapted the concept for its Regulatory Liability Network (RLN).
“Sandboxes are a well used concept within regulated sectors to facilitate firms wishing to trial new services and products for a limited time under the scrutiny of the regulator but exempt from full regulatory requirements,” the report summarised.
“Both the FCA and Ofgem have deployed sandboxes with some success. Critically, feedback from fintechs that we spoke to as part of this project are supportive of the concept but highlighted two critical features that the next government will need to address.”
However, there are considerations Labour should factor in when crafting its own sandbox, if elected later this year. Firstly, fintechs need to be encouraged to use it, such as by being granted access to datasets, including synthetic datasets, as well as customers.
The institute also believes that the sandbox should be temporary and come complete with an exit strategy. To follow up on this, fintechs need to be aware of how data or rescues gained via the sandbox can be used moving forward.
Aside from the sandbox, building on the Mansion House Reforms of the pensions sector is something that has broad cross-party support, with various political stakeholders noting the investment potential pension plans present.
Payments innovation is another significant area for the institute, which observed that the continuing rise of card payments has increased costs on businesses. Recognizing the significance of how consumers pay for goods will be critical for any government wishing to drive the UK economy forward.
The next government should strive to take action that enables the payments sector to be as competitive as possible,” report authors outlined.
“Competition will drive value for retailers, and therefore for consumers. This competitive landscape should be underpinned by the efficient and effective enforcement of existing regulation, and also proactive steps to enable alternative, more nascent technologies, to meaningfully compete.”
Again, Open Banking rears its head here, and can play a critical role in fostering greater competitiveness and innovation. Although Labour has recognised the role Open Banking can play, it will need to implement the findings of Joe Garner’s Future of Payments Review in its own way.
Payment Expert Analysis: The date for this year’s UK general election has not been set, but the government has made it clear that voters will go to the polls before the year is out.
Fintech is likely not a topic that many voters will have front-and-centre in their minds, but economic stability and growth is, and the party which better leverages this significant sector to foster said growth will stand the best chance of long-term governance.
