British Invasion, Fintech Edition
The dress was casual. The presentations were edgy. But representatives of Capital One's innovation lab made it clear to the South by Southwest crowd that it's not exactly like the startups it wants to hire away from.
Like a number of startups and "neobanks" that have sprouted up to challenge incumbent retail banks, Fidor Bank is positioning itself as a more consumer-friendly, tech-savvy alternative.
Boris Johnson, the mayor of London, visited New York last month, not to promote British tourism or compare notes with his counterpart Bill de Blasio, but to showcase financial technology firms.
Johnson accompanied a delegation of representatives from more than 20 U.K. companies who were pitching their wares to prospective investors and prospective bank clients. The trip was organized by Innovate Finance, a trade group started last year to advocate for London's burgeoning financial technology sector. Leading the charge was Claire Cockerton, the group's earnest and energetic founding CEO, who also cofounded Level39, an accelerator program for fintech startups in London's Canary Wharf office district.
A self-described "London technology ambassador," Cockerton sat down with American Banker to discuss how fintech can rehabilitate the global banking industry's image, how London became a hotbed for innovation and why Bitcoin businesses cannot get bank accounts. An edited transcript of the conversation follows.
How would you characterize your organization?
Innovate Finance is an independent industry organization; our members are fintech innovators, both small and big enterprise alike. We work with companies like IBM, HSBC, Swift and lots of little companies, some of whom offer enterprise-software solutions, some of whom have disruptive business models, like Bitcoin companies or peer-to-peer and crowdfunding platforms.
We were set up about a year ago and we launched six months ago at Level39, which is a fintech accelerator. I set that up with my business partner Eric Van der Kleij two years ago, and filled it with fintech entrepreneurs. And the No. 10 [Downing Street, the prime minister's office] asked us about technologies that were driving the sector and what the challenges were and asked me to establish this independent organization.
They champion the organization, and we've worked with [Her Majesty's] Treasury and the No. 10 Policy Unit to run roundtables about their key issues and feed back to them with recommendations about how they might better support the sector. But we're not funded at all by government. We remain an independent voice for the industry.
Innovate Finance wrote a manifesto before we launched about what the future of banking could be to people, [envisioning a future where] people had a much more positive association with their banking service providers. And we have a huge opportunity now, all of us working together, big incumbents and small firms, to reinvent banking for us all so that we can have a much more positive narrative about the role of finance in our lives.
We can be driving social inclusion for the underbanked in our own home economies, and the unbanked in foreign economies. We can be driving financial literacy with our kids by giving them great apps, [for example] teaching them how many times they [have to] mow the lawn to save up for a bike, teaching them responsible financial management.
We have the capacity, through these crowdfunding and peer-to-peer lending platforms, to unlock unused capital in your pocket and my pocket and fuel the SME [small and medium-size enterprise] sector. That's incredibly powerful. And I think fintech has the capability of helping us reinvent banking in the eyes of the general public, the consumer. And it will have a huge social and economic impact on our lives.
It's a transformation that happened to music and media and travel but hasn't happened to financial services - because of the crisis, because of the investment you [must] put into fintech
and because of the barriers to entry, no?
Huge barriers to entry. Exactly. And a complicated reg situation. I think the power here is in a great social and economic transformation, and for us to feel really amazing about banking, and about saving our money and leveraging our capital and supporting young businesses. That's the spirit of the movement of Innovate Finance.
We believe it's a global movement and we have an international ambition to reach out to members from the U.S. and other countries.
What policies have allowed fintech to flourish in London?
Why we have a thriving fintech sector is because of our historic financial services expertise, our geographic positioning, trading with east and west, because we were hurt quite substantially by the crisis, and we have this great exodus of talent from the actual incumbents, which enabled this great, bottom-up proliferation of young fintech companies.
Banks stopped lending. Therefore, peer-to-peer lending and crowdfunding got off the ground. Those were the conditions that made the peer-to-peer crowdfunding movement take place.
We also have a much simpler regulatory regime than they do in places like the U.S., for example. We have the FCA [Financial Conduct Authority] and the PRA [Prudential Regulation Authority] and the Payments Systems Regulator, and the way in which companies navigate regulation and understand the authorization process is a little bit simpler - still with its own challenges, but it's a little bit simpler.
The FCA has also set up a Project Innovate team, which is a dedicated resource for young companies that want to ask informal questions, [and] get some informal advice about the authorization process: how costly it might be, what regulation might apply to them. It's a really easy way for them to access the regulator, understand how to become authorized [to do business] and avoid some of the costly pitfalls in that process.
So from a policy perspective as well, we [in the U.K.] have encouraged entrepreneurship quite thoroughly. We have the Enterprise Investment Scheme, the SEIS [Seed Enterprise Investment Scheme] and Patent Box [a reduced tax regime for intellectual property revenues]. We've created a very favorable tax environment for fintech entrepreneurs.
Specifically for fintech entrepreneurs?
Not specifically for fintech entrepreneurs but for entrepreneurship in general. And so you see this big proliferation of SMEs in the U.K.
For fintech entrepreneurs, we've pioneered regulation around equity-based crowdfunding, which really enabled Seedrs and Funding Circle and some of the other crowdfunding platforms to really take root there. And so from a policy and regulatory perspective we're trying to create the conditions necessary for fintech firms to flourish.
What's happening right now in the U.K. over the last year is that we have really great engagement from government and from the regulators. They are wanting to find ways in which they can access the new companies and support them, and it is a mandate of the Treasury to create a really strong competitive environment for financial services, one that allows new players to access basic infrastructure of financial services, one that encourages a more diverse and resilient sector. We have eight challenger banks in the UK.
New banks with [mostly] digital-only propositions. Challenger banks like Metro Bank [founded by U.S. banking iconoclast Vernon Hill], Aldermore and Atom Bank, that showcase - as a metric to see how competitive the marketplace is - that we have companies, foreign banks coming to set up, and digital-only banks wanting to choose the U.K. as a place to do business.
We also have a really good mix of tech talent and design talent and engineering talent and multicultural talent that has come from across Europe and Asia. That is a really important asset for London and the U.K. to build out a flourishing fintech scene. These are the kind of skills you need to build a new wealth management platform or a new, beautiful data analytics dashboard for traders, for example.
You've also seen the proliferation of many accelerators, spaces for young companies where they can access mentors, clients and investors. Spaces like Level39, Startupbootcamp, the Barclays Accelerator, lots of incubators. London has become quite a growing Tech City, as we call it, with pockets of tech innovation around the city, each with their own kind of industry bent. And in Canary Wharf we have a very strong fintech bent, obviously, because it's close to the big banks.
What brings you to New York?
I'm here with Boris Johnson on a mission to showcase British fintech entrepreneurs. We've brought 23 companies, many of whom are members of Innovate Finance, to introduce them to the big banks and investors in New York who are interested in funding and partnering with and buying from our companies.
The U.S. has put just over $700 million of investment into fintech last year alone. And this investment into fintech has accelerated many times over the last two or three years. We've seen this big, big momentum of investing in fintech companies. And now we're finding VCs and angel syndicate groups that are specifically dedicated to fintech. Like Fintech Circle or Fintech Collective or Anthemis Group or Passion Capital.
I'm a London technology ambassador as well. And we've brought our member firms to assess a new market. Part of the benefits of Innovate Finance is we help our companies export to other key trade and investment hubs. We went to Singapore in November, here we are in New York, and we'll be going to other key trading hubs this coming year like Sydney, Tel Aviv, Mumbai.
Why is Boris joining you on this trip?
London's getting this great reputation for being a tech hub. We put a lot of pride and attention into our tech community. And we see it as a primary driver of our economic growth. And so Boris is a real ambassador for tech globally, and not just fintech but health tech and fashion tech and [education] tech. And Boris is really trying to showcase how tech-friendly London is and some of the great innovators emerging from London who are making waves on the global stage. For him it's really important that that's what we become famous for.
What has the vibe been like from the U.S. banks on this trip?
Well, they're leaning forward. They are interested. I've had a number of meetings here with the establishment over the last couple days. They're very interested in the sector and in learning about the companies. So we've filled the room at our events with interested buyers. What happens next will be the real test.
What is the appetite here [among] the established banks to take a chance on some of these smaller firms? I think we're seeing a lot of that in the U.K. happen, where big banks are carving out particular projects and investing in smaller companies and procuring from smaller companies. Which is great, a really positive sign. But we don't have enough time to demonstrate what the appetite is here in the U.S. in procuring from younger companies. But it's a must.
Based on the questions you're hearing, where are U.S. banks looking for help the most?
Many of the banks are interested in the payments sector, of course. That is a very busy and bustling sector. I think they feel that a lot of SMEs don't yet have a full proposition for them to partner with. They're obviously very interested in data analytics firms, firms that are providing new tools for traders. We have two companies, Sybenetix and Essentia Analytics, we brought over to New York, and they're providing behavioral science platforms to understand your own biases around how you make your investment decisions, which is really interesting.
Also cybersecurity companies are high on the list, of course. Digital Shadows is one of the companies. They just announced $8 million of investment and they're here [in New York]. They're one of the companies we grew from two people in Level39. They're now just over 30. They're coming here to the U.S to expand here because they've had great interest by some of the bigger banks.
We've also brought over remittance firms, and payments firms, as well as alternative finance firms. Firms like Zopa, a peer-to-peer lending platform [and] iwoca, which is also providing SME financing. And those firms are testing out the investment environment in the U.S.
Are they looking for contracts to be vendors, or for capital?
It depends on which sector you're referring to. Some of them want to sell their product into the banks, and some of them are looking for partnership opportunities with the banks. And some of them are looking to the corporate venture funds or the VC community to back them.
You mentioned remittances. Banks in the U.S. and U.K. have been dropping relationships with providers of money transmission services, particularly those serving high-risk areas like Somalia, with potentially disastrous consequences. What role, if any, does fintech play in arriving at a solution?
We brought over a company called Azimo. Its service is catered for the migrant worker who is looking to send money home for a low cost, quickly and safely. TransferWise just raised over 60 million pounds. So this is a sector that is increasingly interesting to investors. And it's growing. Some of the U.K. companies feel the U.S. is a prime market for this. They also went to Singapore with us because it's a prime migrant community in Singapore as well.
And this is where I think fintech has the ability to make a significant social impact, allowing emerging economies to participate in the banking sector. One small step is migrant workers sending money home, and companies like [Kenya's] M-Pesa that are operating in emerging economies are providing digital banking services that are allowing new communities to participate. So I think that is a really powerful social impact of fintech innovation.
But there's a compliance issue. Banks don't want to touch anything that could be associated with bad actors. Some of the recipient countries have a poor infrastructure for identifying the recipients of funds. How much of that can tech address?
When you look at current [know-your-customer] technologies, there's something to be said about how we evolve those, to say: "why aren't we using other mechanisms to identify and authorize certain customers and certain players?" And I think we've gotten new technologies that are able to use social media and other forms of digital footprinting to verify identities and verify the potential for fraudulent activity. So I think we need to evolve our tech around KYC. The incumbents need to do that.
Fintech also has the ability to take a new view on a creditworthy customer. We've all had an experience with a bank where we, despite being a fully employed, stable, housed member of society, have had a lengthy process of getting a bank account, getting a mortgage, getting access to credit. That system, those processes are clearly broken. Even those who are at the middle and upper-middle class of society experience friction in that process. Think of what it's like if you don't have that history. And I think fintech is using different ways of credit scoring, different ways of identifying customers in order to provide new services.
Given the amount of money that's gone into fintech in the U.K. and the U.S. as well, is there legitimate concern about a bubble?
[Long pause] I'm sure we're all very sensitive about bubbles, and we need to be fully aware of some of the risks of the new business models and new technologies because some of them are very new. We don't know what their longer-term impact is. Without a balanced conversation about the potential, as well as the risks and the opportunities, then of course there's always the risk of a bubble. But I think that there's all the right expertise [available] to have that balanced view of what are the risks, and what is the potential of fintech innovation.
Have Bitcoin companies in the U.K. faced challenges obtaining or keeping banking accounts, as they have in the U.S.?
Huge issue, same thing. Blockchain.info is one of the largest Bitcoin [wallet providers]; it is having trouble getting bank accounts, although it just got a huge influx of investment. And it's got brilliant technology, great interface. It's a really promising young firm.
They can't get U.K.-based bank accounts and have had to put in place redundant banking services in various different places to ensure that they can operate. So we haven't yet created full operating conditions for Bitcoin companies in the U.K.; that's one of the issues we're driving.
What's it going to take?
A couple things. One is: we need some greater clarity from the regulator about KYC and about [anti-money-laundering requirements]. Some of the big banks are concerned about the commercial risks.
Obviously they have a right to choose whom they bank. And it's an independent commercial decision. And for them the risks outweigh the benefits of banking some of these younger companies, and they are fearful of some of the implications.
It's been said that there's a lack of clarity about who is responsible for whom. And so banks feel that they are not only responsible for their customer but for their customer's customer and that they will of course, because they have all the deep pockets, be hit with all the fines [if lapses are discovered].
There's also a need, as I mentioned before, a need for reform in the technologies we use for KYC and AML. Because I think we can do a lot better job at it at this point.
It's going to take a challenger bank, or an incumbent, who's willing to come in and say, "I'm willing to bank this sector." Or it takes a government that is willing to back the provision of some basic clearing services for these younger companies. So there are different parties that are working on a combination of those in the U.K. I think that's what it's going to take and I think it will happen.
With regard to KYC, what specifically do the banks lack a clear picture of?
It's about who's responsible for specific fraudulent transactions. They feel that there's a lack of clarity around responsible parties and around their ability to influence the activities or the transactions of the party that they bank.
Big picture: Given how heavily regulated the financial industry is, with the high barriers to entry we discussed, is it disruption-proof? Is there a disincentive to innovate given that it's such a protected industry?
I think it varies from country to country. There's a great push on in the U.K. to open up the basic infrastructure of financial services to allow new players to participate. So there's a real drive to create competitive conditions. And my sense in the U.S. is that the regulatory environment is just so fragmented, and state by state. And some of the regulatory bodies seem to overlap. And with the new business models and services they provide, it seems they need to go to a lot of different regulatory parties [for approval]. And it's hugely costly. My feeling is that the barriers to entry are higher in the states.
But my feeling is [innovation] will happen. It will happen in the U.K. The Payment Systems Regulator is undergoing a big reform at the moment. And there's a real drive to open up the [bank-controlled] Faster Payments networks so other companies can participate.
My view is that this change will happen and we will need the incumbents to participate, though, which is why we have incumbents as part of Innovate Finance. The big banks have the exposure. They have the knowledge, and being multinational, an intense, palpable sense of risk in this sector. And we will need them to help us transform the sector and to work with some of the younger tech companies and invest in this transformation. But I think it will happen.
What is your background? What did you do before this?
I've always been an entrepreneur. I'm from Canada. I studied architecture at the University of Toronto and grew a business and sold it and came over to the U.K. and have been working in the tech sector for the last six years and I've been setting up this fintech accelerator in Canary Wharf. Because I just find the barriers to entry and the slowness of reform in financial services to be quite frustrating, personally, to me as an entrepreneur and as someone who wants more out of banking and wants to have a better, positive narrative about this sector because of all its potential. I'm just really passionate about it. That's why my last few years have been dedicated to helping fintech entrepreneurs.