Beyond the sandbox: A deeper collaboration between fintech and government

UK fintech is a notable success story, thriving during the pandemic while many other sectors were stuck in limbo. Its growth is nothing short of remarkable: UK fintech firms attracted $5.7bn worth of venture capital investment in the first half of the year. This topped the $4.3bn secured across the whole of 2020.

But this hasn’t happened without support. The UK Government has played a huge role in making the fintech industry a key pillar of the country’s future economy. Regulatory sandboxes – a means to trial new products, services and business models in a real-world environment – have created conditions for ground-breaking innovation, setting firms up for success. And through its own crowdfund, Future Fund, supporting small and medium enterprises (SMEs) and its work with independent bodies like Innovate Finance, the Government has helped to make London and other fintech hubs like Silicon Canal in The Midlands, leaders in global fintech innovation.

Yet its assistance for the fintech sector cannot end here. The role of government must widen to catalyse the UK’s fintech success in the long run.

How? A key part of this comes in deploying the innovation it has cultivated on its own front lawn.

The Government is certainly moving beyond the sandbox and driving fintech innovation in new ways.

We can see an example of this in the evolution of Open Banking, which is starting to broaden in scope to ‘Open Finance’. This allows a consumer’s financial data (think mortgages, savings, pensions and more) to be visible to trusted third parties, enabling new entrants to bring improved services quickly to market and promoting healthy competition between banks and other providers.

Along with practical innovations like Confirmation of Payee to Request to Pay, through Pay.UK’s New Payments Architecture programme, the Government is fuelling one of the biggest changes to national banking infrastructure in the world – further buttressing the strong foundations that UK fintechs are built upon.

The Government is also intervening through its support for Banking-as-a-Service (BaaS) and embedded finance, allowing more firms to offer regulated financial products and boosting competition. 

The hand of the Government must reach beyond supporting innovation to ensure the sustainability of the sector as it continues to evolve and grow.

For example, after the Wirecard scandal, the FCA produced more explicit guidelines on how fintech businesses should manage customer funds. And early next year it will publish more rules and guidance to strengthen operational resilience in the financial services sector. This will help to safeguard new innovations and avoid single points of failure, critical to maintaining trust in the sector as it continues to grow.

Similarly, the Government will also no doubt need to play an ongoing role in helping to maintain operational resilience within individual institutions, big tech and e-retailers – especially given the significant rise in digital spend during the pandemic.

However, regulatory intervention should be only part of the picture.

The success of the sector is not just predicated on government advocacy. It also relies on government adoption of fintech innovation - applying the creativity and energy of this sector to solving big challenges for commerce and society.

We’ve had a taste of this during the pandemic. Last year we saw how fintechs were critical in accelerating the delivery of CBILS loans to SMEs - providing critical support at crunch time.

From our perspective, this kind of support for SMEs is vital. Our work with Tide is designed to improve access to digital banking and payments services for this group. We’ve also been collaborating with a government department and a trusted consumer payments brand to help improve payments for benefit recipients, many of whom are unbanked.

Over the next few years, we need to see more government adoption of fintech. For example, central bank digital currencies (CBDCs) will be critical to the Government’s monetary policy and allow fintechs to modernise payments and widen participation in the digital economy. Getting there is going to require governments to embrace ideas that come from outside of their organisations – this includes the likes of Blockchain and cryptocurrencies. It will also involve them implementing a lot of new technology, as well as collaborating with partners who know this space.

The UK Government is a world-leader in unlocking the enormous potential of fintech, not just by following progressive regulation and oversight innovations such as sandboxes or by legislating for breakthrough change such as Open Banking; but by also leveraging the power of this new sector to solve its wider challenges.

This has created a powerful virtuous circle where the traditionally conservative world of finance is able to quickly improve yet remain strongly controlled and governed.

More challenges lie ahead, including harnessing the power of CBDCs to bring yet more improvement to financial services for the benefit of society. And leading international adoption of fintech to unlock even more benefits by removing barriers to international money flows.

Maintaining and deepening the relationship between government and fintech in the UK is a vital factor in meeting these challenges and opportunities - enabling the UK to lead world thinking in financial evolution as fits its leading position in this critical global industry.

The views and opinions expressed are not necessarily those of AltFi.