The great fintech handout

By David Stevenson on 26th April 2018

Challenger Banks

Never mind who it goes to; David Stevenson hammers the RBS Remedies Fund.

The great fintech handoutImage source: https://goo.gl/YbJKxY

One of the trendy new economic ideas circling around the (Hard left) world of Jeremey Corbyn is that the state should play a much more important role in encouraging innovation and change. Mariana Mazzucato, Professor in the Economics of Innovation and Public Value and Director of the Institute for Innovation and Public Purpose at UCL, has been one of the most vocal proponents of what we could I suppose call an entrepreneurial state, i.e. using the state to power innovation and then sharing in the benefits of this innovation. This new way of thinking fits nicely with good Old Jezza’s thoughts about renationalising RBS and turning it into a UK version of the German state investment and infrastructure banks – just about the only sensible economic idea his party has come up with over the last few years.

By a bizarre irony – given that we have a government ruled by free market Conservatives – we’re about to see these ideas take shape in the world of fintech courtesy of the RBS Remedies fund. My colleague Ryan Weeks has written extensively about this debate over the last few weeks, tracking the inevitable controversy about who gets the big dollop of cash. The bottom line is that the RBS rescue has been waived through with a couple of expensive conditions, notably that funding be made available to support SME funding (the incentivised switching scheme) as well as the Capability and Innovation fund, detailed in the box below.

A number of industry figures have quite rightly started to question why potential bidders for the cash – due to be announced fairly soon – should include fairly established players such as Santander. On this basis I’d suggest that Goldman Sachs be allowed to bid for the cash – arguably they’ve been just as ambitious in fintech courtesy of their Marcus offering as the Spanish owned bank. The lurking issue here is of course a definitional one – who should be included in the list. An argument can be mounted that in order to deliver scale to the SME sector, you need scale players and that means ignoring the scrappy fintech upstarts and challenger banks. The counter argument I suppose is that if your primary purpose is to encourage innovation, you should back businesses that have new ideas and speed-to-market hard wired into their DNA. With the best will in the world, I’m not sure one could argue that that is true of any of the big established banks.

For me though there is a more fundamental issue.

What the hell is a state owned bank doing giving a cheque worth as much as £120m to a bunch of private businesses?

Even if one accepted Professor Mazzucato’s core argument that the state should act as an entrepreneur and innovator – an argument I have some sympathy for, though hedged in with numerous important caveats – the first most obvious question is why has it been structured as a grant? Surely to use the good professor’s logic, we, the tax payer, via the state, and thus RBS, should be reaping the benefits of this massive investment? Logically the state should get a stake in the lucky business commensurate with the level of investment.

The next line of argument would be one of choice. If we’re really interested in encouraging our SME sector why on earth is this money being spent on the fintech sector? With all due respect to the fintech sector (most of which is based in London, more on that question of geography in a mo), it's not exactly starved of capital and interest.

In my honest opinion the really big capability and skills gaps exist around who sets up new businesses in this country, i.e. the paucity and quality of our entrepeneurs. We’re missing out on a huge swathe of entrepreneurial talent in the UK via chronically poor further education and lack of financial incentives for under privileged younger people. With £425 million we could fund a heck of a lot of entrepreneur allowances for 18 to 25 somethings.

Proponents of the Remedies scheme will of course retort that what’s being encouraged here is a combination of technology to better enable access to financial products. But even this defense falls away under scrutiny in my view.

If we care about technology for example, spend the money wiring up enterprises in rural areas – that would give a huge bang for the buck. If we alternatively care about access to finance, then spend the money on a Late Payments Regulator who would have an army of inspectors who’d kick every large cap late payer to kingdom come for not paying their SMEs on time.

Sticking with the theme of choices, I’d also lament the fact that this huge bundle of money will also be almost certainly winging its way to a bunch of businesses within two miles of the AltFi offices in the City of London. The UK has a huge problem with geographical inequality, accentuated by a relentless focus on innovation in London. If we are to crack these problems, every last penny of this money should be spent outside London and preferably excluding the rest of the South East.

But stepping back from these relatively minor objections, the much bigger issue for me is why we as tax payers are spending £425m on helping a bunch of fintechs – no matter how much we at AltFi might love all those wonderful disruptors.

Now obviously, the cash isn’t actually direct tax payers money, taken from the Treasury, but in reality let’s be honest – it is our cash. We, the taxpayers, own RBS, and in effect this £425m is indirectly our money.

Which brings us back to the Labour leader's socialist obsessions. I have no time for hard left populism but it does strike me that we could do with a new entity that combined the British Business Bank with the UK’s National Infrastructure Commission. In continental Europe it would be called a National Investment Bank, with an explicit focus on long term investment projects designed to improve national productivity – and thus by default help SMEs throughout the UK. £425m could be useful seed capital which could in turn be leveraged up to sustain even higher levels of funding (a leverage ratio of say 4 to 1 could get us closer to £2 billion). I suppose if Mr Corbyn gets into power after gross incompetence by the current government, he could even apply the principle of Ockham’s Razor, ditch the idea of a national investment bank, and just turn RBS into said entity. But whatever entity we end up focusing on, my basic challenge stands. What the hell are we doing giving this huge level of cash to private sector businesses?

 

More info on the RBS Remedies Fund

The Capability and Innovation Fund comprises a total of £425 million which is divided into four pools. The four pools each have a distinct purpose and are divided into a number of pre-determined grants as follows:

Fund

Number and value of grant

Purpose

Pool A

1 x £120 million 1 x £100 million 1 x £60 million

To facilitate the development of more advanced business current

Account offerings and ancillary product sets by banks with existing

and substantive business current account capability

Pool B

1 x £50 million 2 x £15 million

To facilitate the modernisation of existing business

current account offerings or (in the case of eligible bodies

without existing business current account offerings) the development of

new propositions

Pool C

4 x £10 million

To facilitate the development of new and existing SME lending

and payments businesses with a particular focus on

facilitating the deployment of new technology to the relevant markets

Pool D

5 x £5 million

To facilitate the commercialisation of financial technology that is

relevant to SMEs

The Capability and Innovation Fund will be administered by the Independent Body. RBS will provide the Independent Body with the £425 million and there will be no further RBS involvement in the Capability and Innovation Fund.

 

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