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Charlotte Crosswell: “Fintech is our best chance post-Brexit”

The Innovate Finance CEO says the flourishing UK fintech scene represents a multi-billion-pound safety net to help cope with life outside of the EU.

According to a report by the United Kingdom’s fintech industry body, Innovate Finance, the sector attracted more than double the amount of venture capital investment last year than in 2016. UK fintech companies raised a total of $1.8bn in 2017, an upturn of more than 150 per cent from £530m. Innovate Finance’s CEO Charlotte Crosswell says this happened “despite Brexit” – and in contrast with an 18 per cent dip in fintech investment worldwide. It means the UK has now overtaken China to occupy second place in the league of total fintech investment, with only the United States attracting more capital.

Having previously worked as head of international business development for the London Stock Exchange and president of NASDAQ Europe, Crosswell has watched for some time as the UK’s “resilience” and “fantastic regulatory ecosystem” allowed it to “rub shoulders” with global superpowers. While she doesn’t deny that Brexit “presents multiple challenges for the UK”, the foundations for a thriving fintech scene “were already in place before [the vote happened]”. Still, she urges the UK government to “guard against complacency” and strive for the best Brexit deal possible – “one that addresses the issues of sustained inward investment and maintains access to a high-quality skills pipeline”.

The appetite for fintech generally, Crosswell explains, was “catalysed by the global financial crisis of 2008”. Changing consumer demands, alongside the needs of banks and businesses to cut costs made technological solutions more attractive. “The financial crisis gave banks an incentive to find ways of cutting their costs. As revenue dropped, they faced a challenge to become efficient. But there was also a more general theme, at the consumer level, of people wanting financial services that were quicker and more convenient. Internet and open banking took off because people wanted to be more flexible with their payments.”

Crosswell says the UK recognised the potential of fintech earlier than most. “This was something being talked about as far back as the 1990s. And so that’s been reflected in how we regulate fintech over here, looking to encourage innovation rather than stifle it.” In 2016, the UK’s Financial Conduct Authority (FCA) found itself singled out for praise by Microsoft as it urged the US Treasury’s Office to emulate the UK regulator. In particular, Crosswell notes, it is the FCA’s sandbox that has captured people’s imaginations. “The sandbox is a way for companies to test products in the real world, which makes it easier for younger companies to go to market with more clarity.” The sandbox is part of the FCA’s Project Innovate, which advises companies about the regulations they need to bear in mind when developing new products.

London already has the advantages of “massive financial and tech sectors” but its regulatory environment, Crosswell says, also has an “active mandate for competition”. Following the “lessons of the financial crisis” and episodes such as the LIBOR rigging scandal, the FCA’s oversight has, she says, paved the way for a sub-market for “regtech” – compliance products used by financial services companies or regulators. Far from impeding growth, she argues, the new rules actually stimulate it.

“The UK’s progressive regulatory environment has been a driver of the capital inflows,” she says. “Last year was important, with the industry preparing for numerous new regulations including PSD2 and Open Banking, MiFID II and GDPR.  This has created an environment that encourages competition and innovation across incumbents and start-ups.”

It is “not enough,” however, “to just assume that this [trend] will continue”. Innovate Finance was set up to “co-ordinate fintech companies, policymakers and influencers alike, and add some colour to the UK’s evolving fintech landscape”. Entrepreneurship, she claims, can be a “lonely journey”. An industry body dedicated to supporting start-ups with “policy reports, expert advice, roundtable discussions and showcase events” can help “change the culture around fintech”, and speed up its mass adoption. “Fintech is clearly an area of strategic importance to the UK. Innovate Finance brought together 50 members when it started, and that number is now 250. We’re trying to collate multiple voices as one so we can lobby government and the bigger organisations to adapt to fintech.”

Brexit is, she says, the most obvious concern for the sector, “particularly within the contexts of skills and foreign direct investment. A lot of the investment in the UK’s fintech sector has come from outside of the UK.” The UK’s “access to an international workforce” has been a big part of the country’s success in fintech. “The UK has been a magnet for skilled immigration. We have relied for a long time on overseas skills to help our science, technology, engineering and mathematics [STEM] sectors. We’ve seen a natural progression of international students taking up further qualifications here, such as an MBA or a PhD, and those students stay on over here. They’ve been a key part of the fintech innovation boom. As technology causes financial services to change and develop, we are going to need to retain our access to talented graduates from around the world.”

All the same, “it’s possible to turn a challenge into an opportunity.” Most fintech companies, Crosswell suspects, have “international ambitions”. Complying with international standards – particularly the EU-mandated privacy directives PSD2 or GDPR – should, Crosswell says, represent a priority for all UK firms post-Brexit. “They have to, in order to stay competitive.”

How should the UK’s fintech scene look five years from now? Croswell says fintech will progress from the “low-hanging fruit” of consumer level and that growth will be found in larger business-to-business projects. “A lot of the existing banks or big companies are going to be looking at how technology can enhance their services and databases. I think what you’ll find is that 2018 is the start of even more collaboration between banks and fintech.” Where previously rivalry has existed between banks and disruptive start-ups, Crosswell suggests there could soon be a chance to partner effectively. “Banks might draw on fintech’s technology, while smaller fintech start-ups can draw on banks’ superior resources to deal with a 100-page legal or compliance document.”

Innovate Finance’s role in all this, Crosswell explains, will be “to serve as the facilitator for a better fintech ecosystem in the UK”, which she hopes will not be “too rooted in London” and will enable industry to help steer government policy on regulation and education. “I’d want to see a knowledge exchange between UK fintech companies. There are around 1,500 fintech companies here and we’ve got 250 across our membership. Of course we’d like to grow that and show how in convening around the table together, we can lobby government and learn from each other.”

“The internet has made geographical location less of an issue,” she points out, and hopes that the benefits of the fintech industry will soon be felt “outside of the capital and the South East”. While fintech “is certainly not a silver bullet” for the UK’s economic sustainability post-Brexit, Crosswell thinks “it is definitely our best chance, so we have to make sure we have the ecosystem in place to support it.”

Rohan Banerjee is a Special Projects Writer at the New Statesman. He co-hosts the No Country For Brown Men podcast.

Anne Boden
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Anne Boden: big banks “won’t be able to compete” in a digital future

The Starling Bank CEO predicts that  innovative fintechs like hers are well on their way to becoming the status quo. 

In October 2008, less than a month after the collapse of Lehman Brothers in the United States, then-Prime Minister Gordon Brown unveiled a plan he called “unprecedented but essential”. Of the £37bn Brown committed to bailing out the big banks, the lion’s share – £20bn of taxpayers’ money – was aimed at saving the Royal Bank of Scotland.

For the United Kingdom to provide state aid of this scale to one of its banks, RBS had to agree with the European Commission to launch a £425m Capability and Innovation fund, aimed at fostering competition. This fund is now becoming available to SMEs, in the form of grants ranging from £5m to £120m, and Anne Boden wants in.

Boden says her company, the four-year-old digital bank Starling, would do more with £100m than the likes of Santander and TSB – who she expects will also apply. “If you give it to us, we’ll shake up the market because we’re very efficient, we spend our money carefully, and we have a track record of creating things. [Santander and TSB] have so much money,” she says, that to the high street banks, “£100m is not going to make any difference!”

Boden’s career began in traditional banking. Having studied computer science in her native Swansea she started at Lloyds in the early 1980s, entering an industry that was “very, very different”. In the wake of the recession, the banks “tried to put everything back together the way it was before the crisis”, but to Boden it was clear that business couldn’t continue as usual. “It was no longer acceptable to fine customers when they went into unauthorised overdrafts. It was no longer acceptable to charge customers for returning a direct debit.” She “stepped away” and spent some time in fintech.

Re-entering banking as Allied Irish Bank’s chief operating officer, Boden helped return AIB to profitability, but says she knew that “the only way of actually doing something really transformative was to start from scratch.” She set about creating a brand new digital bank in January 2014. At the outset her wealth of experience in “the old world” was, in some ways, a setback. “I was a computer scientist, I was a woman, but I was also an ex-banker, and that was just as difficult.”

Choosing to abandon the old world and join the new made her a black sheep amongst her peers. “They were trying to defend the industry,” she recalls, but “there was new knowledge, new technology, and a new culture that I could embrace.” Within four years, Starling Bank had won Best British Bank at the British Bank Awards, narrowly beating its competitor, Monzo.

Boden gets out her phone and opens the Starling app. “We’re all about the day-to-day money,” she explains. The app is slickly designed – “it’s quite addictive” – and allows customers to track, categorise and map their spending in real time. Pre-approved overdrafts can be adjusted using a slider, and money can be added to “goals” – an item or experience worth saving for – instantly. One feature, which Boden says she finds particularly useful, locks and unlocks the debit card – “I’m always losing my card in my handbag.” She demonstrates a bill-splitting feature which sends little prompts for payment – perfect for millennial dinner parties. Or when your mum lends you money and wants to get it back? Boden giggles. “Yes!”

While both Starling and Monzo offer tech-first, app-based banking aimed at millennials, Boden would be first to admit she isn’t a millennial, nor is she typical of the fintech scene: “like it or not, the majority of people in fintech are men in their 30s and 40s with beards”.

One of those bearded 30-somethings is Tom Blomfield, CEO of Monzo. Blomfield was Starling’s chief technical officer until – following a reported falling-out between Blomfield and Boden – he left to start his own challenger, Monzo, in 2015. Boden says that Starling is the more serious option of the two. “We’ve only been a bank,” she says, in reference to Monzo’s beginnings as a provider of pre-paid debit cards. “We’ve never been a pre-paid card, and we have many more of the real banking features.” The fact that they have Current Account Switching (CAS) and function as a B2B company – servicing “other fintechs” as well as the Department for Work and Pensions – shows that Starling is much more than a flashy app, Boden says. "As well as being able to offer these great services, we have more of a revenue stream."

When the subject of Open Banking is raised, Boden wheels out a whiteboard – it’s time for a lesson in economics. The deadline for implementing EU directive PSD2 was 13 January 2018, a deadline that several big banks missed. “PSD2 introduced the idea of open APIs, and open APIs mean that a customer can permission somebody else to see your data.” Starling has been PSD2-compliant since its inception.

Via platforms called “aggregators”, customers will be able to share their financial data through APIs, allowing other financial providers to view it and offer them tailored products. It’s thought that this will allow consumer to switch providers much more easily, encouraging competition and ending the banking monopoly.

The response from the big banks, Boden explains, has been to try to buy control of this. HSBC recently bought its own aggregator – she draws aggressive circles on the board – because “it thinks it can consolidate Barclays and Starling into its app”. If one bank can buy the digital space in which customers can pick and choose between banks, that freedom of choice becomes an illusion.

Boden predicts banks like HSBC “will copy everything we do”, but two years later, citing a recent Lloyds announcement: an exciting new feature that enables people to lock and unlock their cards. But the “big battle”, she says, will be on cost. “The big banks are increasing their cost base all the time, and they won’t be able to compete because our cost of delivery here is very low.”

Cheap as it may be to run, Starling is still a bank, with all the regulatory baggage that comes with that label. Boden takes issue with some regulation, such as the Minimum Requirement for Own Funds and Eligible Liabilities (MREL). MREL, a the-government-never-wants-to-bail-you-out-again fund, was established after the financial crash and stipulates that banks must have “bailing debt” to insure the capital they hold in the event of a collapse. A bank is eligible if it holds over a certain amount of customers: “everybody assumed that this would only be for big banks and nobody expected this to apply to banks like ourselves, but because we have so many customers, it does”. Relative to the big banks, Boden says, Starling carries a very small amount of risk, but such a requirement could put the brakes on growth for ambitious fintech companies.

As a CEO, she is both down to earth – personally responding to customer queries on Twitter – and economically philosophical. She has spoken publicly about “the war on cash”, which she hopes to win. “Cash is very costly. Banks charge businesses a huge amount of money for using cash.”

While she is reluctant to be drawn into a political debate about the implications of a cash-free society, Boden says “we have an obligation to make sure everybody can get banking services” before this becomes a reality. Historically, people on low incomes have been more likely to avoid banking and stick to cash, but Boden argues that Starling is changing this relationship, both through pricing and control: “we have customers that are managing every penny.”

Boden is now focused on building Starling’s case for receiving the £100m grant from the Capability and Innovation fund. If her team is successful, awarding the spoils of post-recession banking punishment to a digital start-up has a certain cyclical poetry to it. Boden has said in the past that she “doesn’t really relax”; despite her friendly exterior, the world of traditional banking may come to regret letting this hard-working Welshwoman out of its sights.

Augusta Riddy is a Special Projects Writer at the New Statesman.