These past few weeks have, for much of the UK fintech sector, been hotly anticipated. Not only have they seen the UK publish a first-of-its-kind independent, government-backed Kalifa fintech review, they’ve also welcomed Chancellor Rishi Sunak’s 2021 Budget.
Whilst some may feel caught-up on their contents and implications for the wider industry, others may still be feeling out of the loop, or simply confused over some of the fine print. For those in the latter two camps, Moorwand has put together a point-by-point breakdown of both the Kalifa Review and the fintech-related policies included in Sunak’s Budget.
The two documents have arguably prompted somewhat of a paradoxical reaction from the industry. Ron Kalifa’s fintech review, published on 26 February, was hailed as a much-needed reality check on the areas the UK still needs to improve on to keep its global fintech crown. His five-point plan – which covered regulation, skills, investment, international status, and national connectivity – laid no stones unturned.
But just a week later, Sunak unveiled the UK’s Budget, which didn’t mention the word “fintech” once. Other than the £100 contactless limit increase, and the new tech talent-focused visa scheme, little else in the Budget seemed – at least on the surface – particularly relevant to the fintech sector at large.
As Luke Hamm, GovGrant’s CEO, said: “Fintech is one of the crucial sectors for the UK’s economic recovery from coronavirus and Brexit. The Kalifa Review has highlighted this fact, and yet today’s Budget has offered nothing to further investment in the sector.”
Crown-worthy fintech competition
The UK’s fintech sector alone represents 10% of the global fintech market today, and contributes more than £11 billion a year to the UK’s economy. In 2020, investment in UK fintech stood at just $4.1 billion in comparison, which is still more than the next four European countries combined. London-based fintech unicorn Checkout.com, now valued at $15 billion, is one of a number of prized start-ups to come out of the UK.
But with leading status comes a responsibility to maintain it. Which is why Kalifa’s review also highlights the risks posed to UK fintechs by international competition, particularly post-Brexit.
As Simon Jack, BBC’s business editor, surmised from the review: “Ron Kalifa would say, wherever it’s coming from, the UK needs to be vigilant and proactive in defending a sector which makes up 10% of the UK’s gross domestic product and pays 12% of all of its taxes.”
£100 contactless limit increase
Tipped off by The Times back in January, Sunak’s Budget confirmed a contactless payments rise from £45 to £100. Approved by the Financial Conduct Authority (FCA), it marks the second rise in less than a year – having climbed from £30 to £45 in April 2020. The latest increase also means the contactless threshold for multiple transactions has risen from £130 to £300. The limit came into law on 3 March, the day the Budget was announced.
Contactless has surged in use during the pandemic. At the start of 2020, four in ten debit payments were made using contactless. That number has since risen to six in ten.
But with a limit increase comes worries of fraud, as it drives up the value of stealing someone’s contactless card. Whilst this is an inevitable consequence of the increase, companies can combat its severity by ensuring consumer education sits at the heart of their contactless products.
Just because a contactless limit exists, doesn’t mean it needs to be used, or even activated. Some card programmes allow users to put in place separate caps on daily spending – whether that’s for adult budgeting purposes, or for imposing stricter limits on teen users. And the option of a card freeze or unfreeze feature, first popularised by challenger banks and then copied by incumbents, gives users more autonomy over when their card can be used.
And whilst Ian Johnson, Marqeta’s European managing director, thinks “it would be unwise to overlook the advantage this new limit could give to fraudsters”, he too points to a product-based solution. “A drive towards the adoption of digital wallets and virtual cards would solve this problem.” By forming a better education around contactless, fintechs are in turn listening to the needs of their customers and helping them to stay safe.
New visas to draw in tech talent
Lobbied for since 2016, the UK has finally agreed to take a more open approach to hiring fintech talent from overseas. According to Kalifa’s review, foreign talent represents close-to half (42%) of UK fintech employees. But no longer an EU member state, the UK is conscious a revamp of its immigration system is required to stabilize the country’s vast reliance on foreign workers.
Called a “Global Talent” visa, applicants for tech-related jobs will no longer need to obtain endorsement from a third party, or be backed by a sponsor. It covers jobs in fintech, gaming, cybersecurity, and artificial intelligence (AI). The full list of eligible technical and business skills can be found here. Starting in March 2022, a full revamp of the sponsorship system is expected in the summer.
Other countries have also rolled out similar schemes. This includes Australia’s “Global Talent Programme”, France’s “Tech Visa”, and Canada’s “Global Talent Stream”.
Scaling UK fintechs to IPO stage
With special purpose acquisition company (SPAC) mergers fast becoming the preferred route to an initial public offering (IPO) in the US, the UK is fast-becoming a less desirable location to go public. There were just 30 IPOs in London last year, and the majority of these happened in the last quarter of 2020. As a result, some London-birthed start-ups are mulling IPOs in the US, including WorldRemit.
Kalifa’s review therefore proposes free float reduction, dual class shares, and relaxed pre-emption rights. These suggestions coincide with a fellow government-backed report, led by former EU commissioner Lord Jonathan Hill, published just a week later. It calls for widespread reform of the London Stock Exchange (LSE). According to City A.M., the FCA will soon start consulting on the proposals made by Lord Hill’s report.
As well as focusing on the stock exchange, Kalifa’s review also proposes to implement a “scalebox” which would support fintech scaleups in growing their customer bases and testing new products, as opposed to just focusing on incubating start-ups.
Alongside a new fintech sandbox, the Kalifa review puts forward the establishment of ten fintech clusters across the UK, each tasked with writing their three-year growth strategy. Kalifa speaks for many across the UK who are keen to see fintechs set up shop outside of London.
The Competition and Market Authority (CMA) gets a special mention by Kalifa in the context of scaling companies. He says “there is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech”. In other words, the review encourages the regulator to reassess its rules for fintechs.
New Future Fund
In 2020, the government’s Future Fund programme spent £1 billion on more than 1,000 technology startups. And yet, the UK still felt a whopping £15 billion growth capital gap, exacerbated by the ongoing health crisis.
As a result, Sunak’s 2021 Budget includes the “Future Fund: Breakthrough” – essentially the Future Fund 2.0. Proposing another £1 billion investment, the fund will see the British Business Bank take equity in funding rounds of more than £20 million, led by private investors.
Sunak also included a “Help to Grow” scheme in the Budget. Designed to provide discounted software to 100,000 small and medium-sized enterprises, the government will foot up to 50% of the bill, or up to £5,000, for approved software.
These investments are, of course, in addition to the government’s Recovery Loan Scheme. Set to replace last year’s loan schemes, grants of £25,000 all the way up to £10 million will be available to all SMEs until the end of the year.
Discover more insights from Moorwand by reading our other articles.