In the digital-first economy, change, consumer-first and competition are the operative concepts. Case in point: mobile banking, digital wallets, open banking and data sharing (and even cryptos). As FinTechs and banks battle over dominance in this landscape, there’s a fine line between innovation and a “Wild West” mentality.
That mentality has served the digital-first economy well (witness the recent orderly transition to contactless payments), but in some cases, it has been as unruly as a young gunslinger (Robinhood). But regardless of how digital commerce and payments continue to play out, a balance must be struck.
And perhaps nowhere are the stakes higher than in the U.K., as Brexit and its consequences lurk like a shadow over its tech business. Alastair Lukies CBE, founder and CEO of Pollinate, a U.K.-based software firm that focuses on the digital transformation of banks’ SMB offerings, including merchant acquiring, said that a recent report issued in the United Kingdom can bring some order to the financial services landscape, and help the U.K. maintain its preeminent position as a financial hub.
As Lukies told Karen Webster, at the moment, financial institutions (FIs) and FinTechs are jostling and jockeying for their “piece of land” in payments and digital commerce, and are creating adjacencies that keep consumers clicking, browsing and buying – and creating data that helps foster new insights and innovation. He noted that the report (officially titled “The Kalifa Review of UK FinTech,” on which Lukies was a board advisor), is the latest in a long line of studies that reflect collaboration between stakeholders, with the aim of getting a near-term roadmap in place. Among the report’s recommendations: Digital pilots would be made permanent and partnerships between FinTechs and FIs would be encouraged. For example, the Kalifa Review recommends the establishment of a one-billion-pound “FinTech Growth Fund.”
“The way these things work in the U.K. is that when the government feels that something is at a ‘tipping point,’ they commission a report,” he explained, “a cross-departmental effort that has the support of number 10 [Downing Street, shorthand for the Prime Minister’s office) and the Treasury Department. And they ask someone who’s an expert in their field” to spearhead the effort (in the case of the FinTech report, that was Ron Kalifa, ex-CEO of Worldpay).
FinTech is a timely space to examine, where the U.K. has, as Lukies put it, “worked hard” in the wake of the financial crisis to attain its status as a financial hub, with a 10% market share of the sector globally. That’s been reflected in the number of jobs created, the capital already invested and the unicorns that reflect high enthusiasm and high valuations. Investment into U.K. FinTech stood at $4.1 billion in 2020 – more than the next five European countries combined.
One overarching theme has been to lower the cost of payments, where open banking, faster payments and the support (and participation) of networks such as Visa and Mastercard have helped to lower the operating burden of making transactions.
“The cost of payments should not act as barriers to businesses thriving,” Lukies said, adding that open banking is not a standalone initiative, but a “crossroads” where PSD2, open data standards and KYC/AML efforts intersect.
With Brexit and efforts accelerating outside the U.K. to bring banking and other services into the digital age – spurred by the pandemic and a hallmark of emerging economies – the competition is gaining ground. Lukies stated that banks and the U.K. government “can’t rest on our laurels … we have no choice but to invest in the future of financial services, whatever that might be. Lots of other people have seen what we’re doing and are asking ‘how do we replicate that?’”
‘Crack On And Do It’
For some of those countries, Lukies told Webster, where in at least some cases “benign dictatorships” hold sway, the mandates and the capital flow from the top. In developing those countries into financial hubs, he said, the philosophy is to “crack on and do it.” If complacency reigns in the U.K., he cautioned, other nations will catch up to and then overtake the country as a prime hub for FinTech development.
Among the key recommendations of the Kalifa report: making the London stock exchanges more appealing to companies for listings, accelerating and streamlining the issuance of visas to attract tech talent, and issuing frameworks for collaboration between the private and public sectors.
“In a very British way, we will make sure that all corners of the United Kingdom have an opportunity to share their perspective,” said Lukies. Done well, the cross-pollination and diverse viewpoints can help create an environment through which bleeding-edge innovation can happen, while skirting the dangers inherent in a Wild West environment.
There’s a strong chance that balancing act will be successful, Lukies predicted. The U.K.’s regulators, including the Bank of England and the Financial Conduct Authority, can use a “carrot-and-stick” approach to spur competition and create a level playing field between FinTechs and more traditional FIs.
If those regulators see that banks are not using their data to embrace innovation, “they can say, “we’ll just issue another banking license and give a Monzo or a neobank a license to do it. They are not encumbered by the legacy,” said Lukies. At the same time, the regulator wants to make sure that banks maintain their trusted place as the aqueducts of money movement.
The regulators must make sure that the FinTechs – who might make the best apps and create the best user experiences – also have compliance procedures in place to verify that transactions (and the people sending and receiving funds) are legitimate, noted Lukies.
“We’re making sure we don’t make a bad call and live to regret it,” he added – and so the U.K. is also keeping an eye on what regulatory developments and approaches are taking shape in locations as far-flung as America and Africa. Key to making the “right call” will be properly collecting, managing and sharing data, he said. The end goal, according to Lukies, is to ensure that the end customer gains access to the product and services they need. And there are some corners of commerce that can use data more effectively in service to those end consumers.
“The affiliate marketing and marketplace industry has an enormous amount of fat in it,” maintained Lukies, spotlighting one example, “and I’d be interested in understanding why a small bed and breakfast should pay 25 percent of their revenue to get the eyeballs for people to book there.” He noted that banks have a huge opportunity via their access to reams of data that can help close the loop and help firms target their efforts to their audiences more effectively.
Lukies stated that as digital payments evolve, through the pandemic and beyond, there’s the opportunity to introduce what he called “healthy friction” into the process. This type of friction can in fact foster deep relationships between financial services firms and end customers. Customers want to feel like they are choosing what they’re doing day to day and minute to minute in their financial lives, noted Lukies – and that they have the right to change their minds at a moment’s notice.
In one example, Airbnb has enough friction in the process that it encourages people to mull new options, such as inviting more guests for a stay, offering new locations or encouraging a longer visit. That’s an adjacency that is not necessarily about just booking a place to stay, but about building an experience (which includes payments, of course).
“It actually doesn’t matter how good the tech is or how clever the AI is,” said Lukies. “You’ve got to give consumers this feeling of control, and you’ve got to give them the sense that they have a point of view, even if you’re signposting them to where they will probably end up. “
Banks can get to this level of adjacency that can monetize new parts of the digital experience as they leverage the data inherent in their models, and as they follow frameworks and seek collaboration. Of the banks and this shift to digital, said Lukies, “it’s happening – and it’s happening in real time.”