Guest Blog: Fintech - The Future of Financial Services

Thanks to Mark Wesker, partner and international financial services sector leader at Osborne Clarke for this guest blog on the future of fintech. 

In July 2021, in his then role as Chancellor of the Exchequer, Rishi Sunak heralded, in his Mansion House speech, “a new chapter for financial services”.  He described the UK’s financial services sector as one of the most open, innovative and dynamic in the world.

“It is not just an industry in its own right”, he said, “but the engine of our economy”.  He wanted an “open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth.”

No one would disagree with these aspirations. Financial services and related professional services contribute £10 in every £100 of economic output and 1 in 14 of us works in the industry.

A healthy and competitive financial services market is vital to the UK economy. The South West of England has a particularly large financial services sector – on some measures, it is one of the largest private sector employers in the region. The region is home to some of the largest and well-known financial services businesses in the UK.

Perhaps more than many other industry sectors, the financial services industry has been the subject of significant change in recent years.

Many of these changes result from the significant challenges that businesses and the economy has had to face – including societal, demographic, health, geopolitical, economic and other factors. The cost of living crisis over the last 12 months or so has also required the financial services industry to respond to the changing needs of customers and increasingly vulnerable customers.

As well as these challenges, there are huge opportunities for changing business models and, in particular, the use of technology.

Technology in financial services (fintech) has the potential to create entirely new business models, new products, or dramatically change existing businesses.  This can provide new or improved services for customers, for example, by providing access to debt, improving visibility of financial position or just making customer journeys easier and quicker. 

Regulation does, of course, put limits on innovation. There is more regulation in the financial services sector, understandably than in many other industries. And it is sometimes difficult for innovative business models or products to fit within existing regulatory requirements.

Even getting advice as to whether or not a product or service requires regulation can be expensive, so there is a barrier to entry. And when regulation changes, such as the introduction of the new Consumer Duty by the Financial Conduct Authority, this can impose yet more obligations on businesses.

But the UK financial services regulatory authorities are well regarded around the world for their professionalism, forward-looking nature, and regulatory system which is, on the whole, well thought through and proportionate. Businesses and investors welcome the stability and effectiveness of the UK regulatory regime.

However, it is clear that further changes are going to be made, which may well be welcome, such as the “Edinburgh Reforms” (announced at the end of last year). These reforms aim to make the UK more internationally competitive, alongside a host of other areas where reform is currently being consulted on, such as consumer credit.

It should be noted that regulation can also drive innovation and change. For example, regulatory reforms to encourage the sharing of information between financial services businesses have paved the way for Open Banking (and its successor, Open Finance) whereby it should in future be much easier for us to see all of our financial products in one place, thereby giving us greater visibility of our financial position.

As well as Open Finance, key areas of growth in fintech include the use of artificial intelligence (AI) to process data and, increasingly, make decisions and give advice. Understandably, this is an area subject to increasing regulatory focus. New payment methodologies and the disintermediation of traditional financial services businesses are also becoming increasingly common and often combined with other business models, such as consumer credit (for example buy-now-pay-later models).  

Fintechs require innovative thinking, creativity, and an understanding of technology. But they also need an understanding of regulation and the right culture and approach to treating customers fairly and appropriately. These are combinations of skills and experience that are not available everywhere and tend to be clustered in areas where there are a number of similar businesses. Often in regions with universities and a supporting ecosystem. The South West is fortunate to have a number of fintech clusters and a rapidly growing ecosystem that supports those businesses.