The British economy received two positive updates this week – firstly, the Bank of England (BofE) held interest rates and secondly the country exited recession. 

Payment Expert assess fintech’s role in this and what it could mean for the sector in an almost certain election year.

It was revealed this morning (10 May) by the Office of National Statistics (ONS) that UK GDP grew by 0.6% in Q1 2024. This is the fastest growth the country has experienced in two years and has officially brought the country out of the recession which it entered late last year.

Jeremy Hunt – Credit: I T S, Shutterstock

Growth for fintech, growth for Britain?

Fintech and the payments sector could be significant to these developments. Much aligned in its past actions, the government has been vocal about its ambitions in the finance sector, fintech, and tech in general.

In the past two budget announcements, in November 2023 and March 2024, Chancellor of the Exchequer, Jeremy Hunt, mapped out and reiterated the government’s plans for business investment, particularly in tech. A £500m investment in technology, with Artificial Intelligence (AI) a particular area of interest, was a key policy of the November budget.

Today’s news that Britain will climb out of a recession will come as welcome news to the government and give it confidence that its approach to finance and economics is working out. Prime Minister Rishi Sunak has already made this clear, saying on X that today’s news is indicative that “the economy has turned a corner”.

In his own statement on X, Hunt remarked: “After a tough period with the pandemic and the energy shock, today’s figures are proof that the economy is returning to full health.

“And more important than that, the IMF say our long term prospects are the strongest of any major European economy over the coming years.”

Looking at fintech’s role in the UK’s economic growth, research suggests that the sector is playing a key role in securing investment. According to Dealroom and HSBC Innovation Banking, UK startups raised $3.9bn in Q1 across various sectors.

Fintech was the leading sector during the quarter. The sector attracted £1.1bn in investment  raised across 73 rounds during the first three months of the year, with Monzo, PPRO and Flagstone the standout companies subject to funding.

This growth is being seen across the UK too, not just in the traditional financial centre of London. Manchester saw investment rise 59%, Cambridgeshire by 59%, Brighton by 200% and Scottish capital Edinburgh by 409%.

Two days before the ONS revealed the UK’s economic growth, the BofE made another crucial announcement. This was that the UK interest rate had been held at 5.25%.

This can be seen as a mixed bag. On the one hand, it is positive as it means UK inflation, and therefore the price of goods, will not rise any further. On the other hand, it hasn’t fallen – two BofE Monetary Policy Committee (MPC) members voted to reduce it to 5%, with the remaining seven voting in favour of holding at 5.25%. This figure is also still well over double the BofE’s target rate of 2%.

The BofE explained: “Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. 

“The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.”

The electoral elephant in the room

Ultimately, this means that despite the UK’s economic growth, the country’s consumers will continue to feel a squeeze on their wallets. However, the fact inflation has not risen does also mean that customer spend, and therefore payment volume, can be expected to remain stable.

As stated above, the government will be banking on the UK’s economic performance and the holding of interest rates as proof that its financial policies are working and that it is the party of growth.

This comes at a crucial time for the Conservatives. The governing party is tanking in the opinion polls in contrast to the Labour Party opposition. Compounding this further, the Conservatives were dealt a heavy blow in local and parliamentary by-elections last week.

With a general election later this year all but certain, the government will hope that today’s figures can claw back some public support. However, responses haven’t been entirely rosy.

Quoted by the BBC, Gora Suri, an economist at PwC, stated that there has been “little meaningful improvement in living standards”, whilst the Institute of Chartered Accountants in England and Wales (ICAEW) did not deliver an entirely positive overview.

Suren Thiru, ICAEW’s Economics Director, said: “The strong exit from recession may inadvertently keep UK interest rates higher for longer by giving those policymakers still worried about underlying inflationary pressures enough comfort on economic conditions to continue putting off cutting rates.”

A potential change in government will be of significance to many sectors, with finance and fintech areas with the most to potentially change. This is due to the Conservatives’ aforementioned focus on finance and fintech as economic growth drivers.

Keir Starmer, Labour – Credit: Rupert Rivett / Shutterstock

The government has been pumping money into AI, is targeting the UK’s status as a crypto hub – as explained by Conservative MP Lisa Cameron to Payment Expert at Pay360 – and wants to maintain the UK’s global standing in Open Banking.

This is not to say that the Labour Party has no interests in this area, however. The party’s fintech policies revolve around securing leadership in AI but with regard to consumer protection, and using Open Banking to drive competition in retail payments.

It seems then that regardless of who sits in Downing Street, fintech and finance as economic growth drivers will not be ignored. In a post-industrial Britain, it is nearly impossible to ignore these sectors anyway. 

The element that may be affected is how a different government may approach industry and regulatory relations in its bid to build on Q1 2024’s growth.