When Ron Kalifa reported to government on the future of UK financial technology (fintech) in February 2021, he depicted a “now or never” moment for the government to put measures in place to ensure the fintech industry plays a key role in the UK’s future economy.
His Treasury-commissioned review of the UK’s future in financial technology told the government it must urgently introduce effective policies in five key areas as the fintech industry reached a major crossroads. He made recommendations in skills, spreading the industry nationally, investment, overseas trade, as well as policy and regulation.
Kalifa, chairman of fintech giant Worldpay, completed his report with the backdrop of the Covid-19 pandemic and a UK economy weakened by self-inflicted damage brought by Brexit.
The high take-up of digital banking during Covid-19 lockdowns offered a glimpse of strong future demand for fintech services. But in his report, Kalifa warned that if the UK stumbled into this era, it could miss the boat.
Since he made his recommendations, the economic environment has taken a turn for the worse. While Covid-19 and Brexit were known challenges when the report was published, Russia’s invasion of Ukraine and the current global economic slowdown were not.
The industry now faces severe challenges, with volatility, higher interest rates and higher inflation, which have reduced the much-needed investment capital the sector needs. According to a report from KPMG, investment in UK fintech from private equity and venture capitalist firms fell by 56% to $17.4bn in 2022, compared with $39bn in the year following the Kalifa report.
The question is, what do fintechs think of the progress towards Kalifa’s recommendations?
Brexit holding back UK fintech
One major problem for businesses across sectors, including fintech, is Brexit. According to fintech entrepreneurs, the UK’s relationship with the EU is still a major challenge.
Ian Duffy, CEO at Ireland-headquartered payments fintech Accelerated Payments, said Kalifa’s recommendations were important for the government to safeguard the UK’s fintech crown, but that raising money was difficult with the UK outside the EU.
Ian Duffy, Accelerated Payments
“The impact of Brexit has been so profound that the difficulty to raise funding for scaling companies has continued to grow, with government subsidies waning and banks unable to lend as a result of heavier regulatory restrictions,” he said. “This crisis is further compounded by export challenges associated with added post-Brexit red tape.”
Duffy added that fintech companies would need to rely on other fintech finance companies to help them grow because “the government can only do so much to support the liquidity crisis that these companies face”.
Michalis Michaelides, who heads up business development for Europe at payments specialist fintech BPC, also believes dealing in the EU needs to be made easier.
He said, as highlighted by Kalifa, access to global markets is a crucial requirement for an international fintech hub. “While a lot of steps in the right direction have been taken, a lot more needs to be done to ensure the UK’s leadership role in the years to come,” he added. “The government must take the lead in establishing structural changes across all regulatory bodies and must forge interoperability with international actors, and the EU in particular.”
Günther Vogelpoel, CEO at Amsterdam-headquarterd fintech Recharge.com, said while the UK fintech sector received a boost upon the release of the Kalifa report and that positive steps had been taken, the UK fintech industry is still constrained by antiquated regulations in finance.
“European fintech and technology scaleups are keen to support the British public in navigating the harsh macroeconomic conditions, but are still held back by UK government inaction and red tape,” he said.
The UK is at risk of losing its “fintech crown” as a result of limited progress on developing new regulatory frameworks, according to Brad Goodall, CEO and co-founder of Banked, which provides real-time payment services.
“In his report, Kalifa set out that the UK financial sector’s regulatory framework is hindering fintech scaleups. Since the report’s release, modest steps have been taken to increase support for innovation in fintech through incremental improvements by authorities,” added Goodall.
Brad Goodall, Banked
“Kalifa was clear that a refresh of regulations would not be sufficient, and yet a major overhaul was only recently announced, with limited information about the timeline for new frameworks. Two years after the report’s release, limited progress has been made and fintech scaleups have been left to contend with outdated regulation, leaving the UK’s fintech crown in jeopardy.”
Rowan Brewer, CEO of Paymentology, agreed that not enough was being done around regulation and warned that progress on Kalifa’s recommendations had slowed.
“The UK fintech industry has continued to grow, with payments scaleups in particular reporting impressive global partnerships, but fresh guidelines for emerging technology industries have not materialised. Two years on, progress on recommendations has slowed down, with diminishing fresh efforts to overhaul the regulatory environment.”
Several components of the Kalifa review have not been delivered, according to Yoko Spirig, co-founder and CEO at Switzerland-headquartered fintech Ledgy.
“The London Stock Exchange is not yet seen as a top-tier destination for tech listings, and the UK is still missing a fully operational crypto regulatory regime as recommended by Kalifa. Other fintech hubs like Berlin and Paris are building talent and investment capacity all the time, so the UK cannot be complacent,” she said.
Spirig warned the UK not to rely on its past reputation in fintech. “As a scaling Swiss fintech, we decided to open a London office last year because we believe the UK is the deepest and most sophisticated market outside the US. But the recently announced European Tech Champions initiative also highlights that the continent is doubling down on tech investment in a bid to cement Europe’s position as a startup-friendly tech hub,” she said.
“Against this backdrop, it’s vital the UK government continues to support the fintech sector, encourage balanced risk-taking and drive innovation if it wants to remain ahead of its European rivals.”
Positivity amid global challenges
But there is positivity for the UK fintech sector despite the economic turmoil being experienced globally.
Eric Huttman, CEO at foreign currency fintech MillTechFX, said the overall macro-environment in which fintechs operate has been dominated by elevated volatility.
Laurent Descout, Neo
“While the uncertainty that has come from this macro backdrop has been difficult to manage, it has also presented opportunities for fintechs solving real-world problems and delivering significant efficiency gains and cost savings to those who really need it, such as firms reliant on legacy providers and outdated technology.
“Many of the recommendations in the Kalifa review helped put the focus on UK fintech and build resilience which has been vital during this tough period,” he said. “Momentum has not slowed and it’s vital that the fintech community continues to work together to drive the industry forward and build trust to increase adoption among businesses and consumers beholden to legacy processes and providers.”
Laurent Descout, CEO and co-founder of cash management fintech Neo, said although the past 12 months had been challenging for fintechs globally, London fintechs have largely weathered the storm.
“As we approach the Kalifa review’s second anniversary, it’s clear the foundations laid to date have helped London maintain its healthy competitive advantage and we expect digital adoption will continue to boost growth in many areas, including the payments market.”