Back in April – as much of the country’s attention remained on Rishi Sunak's famously generous pandemic support measures – the Chancellor gave a speech to an online gathering of fintech entrepreneurs. ‘Our vision is for a more open, greener and more technologically advanced financial services sector,’ he declared, promising that his Treasury would seek to make Britain the best home possible for fintech disruptors.
Sunak was, of course, hardly the first Tory chancellor to sing the praises of the City of London and its financial innovators. But do politicians really understand the rapidly-changing fintech market? And have their warm words made any difference? Those were the questions at the top of the list as The Spectator hosted a breakfast discussion – in conjunction with our sponsors, Klarna – at this year’s Conservative party conference.
Klarna, which offers flexible payment services in more than 170 countries, is one of Europe's fastest growing fintechs, with an estimated valuation of more than $40bn. Furthermore, as the company had recently expanded its presence in London it was ideally placed to weigh in on the UK’s purported status as one of the world’s great fintech centres – and the Chancellor’s efforts to make it so.
‘I think the real positive for us in the last year or so has been the growing understanding of what we’re doing – as well as the desire to support that,’ said Alex Marsh, Klarna’s head of UK. He also praised UK regulators (who face the unenviable task of protecting consumer interests in a marketplace defined by disruptors) for being willing to engage with fintechs. ‘For us the chance to support the development of outcome-based and proportionate-regulation is very exciting [for the Buy Now Pay Later (BNPL) sector],’ he added.
Aside from regulation, though, there were other advantages to the UK. As the second largest economy in Europe, Britain was a natural market for any retail finance product. But it was also ripe for disruption. ‘I think the UK is really poorly served by credit reference agencies,’ said Marsh. ‘Most of them are built on a very traditional model that is reliant on people having regular monthly salaries. Or they rely on someone having a credit card to build up their credit score, when, in reality, someone on a variable income might not want to do that.’ There were strong indications, too, that customers were unhappy with the legacy banks. ‘When you look at the Trustpilot scores of the big banks, they’re not very high at all,’ he said.
Of course, with its focus on consumer lending, Klarna’s product was one that was always going to attract attention from regulators and politicians. Yet Marsh set out his case that, despite being less well known than credit cards, Klarna was actually a better – and safer – model. ‘If every customer of a credit card company paid their bills on time, the company would go bust,’ he said. ‘They rely on someone having to pay interest.’ By contrast, Klarna’s model passes the costs of borrowing onto retailers: who are willing to pay a fee to provide customers with a flexible payment option. Buyers do not pay interest or fees.
That meant the platform had a clear business interest to make ‘responsible lending decisions’. It was a point of particular interest to Iain Duncan Smith, who, as well as founding the Centre for Social Justice think tank, was also the author of a government-backed report (the ‘TIGGR’ report – or the Taskforce on Innovation, Growth and Regulatory Reform) on how the UK could maximise the regulatory freedoms from Brexit, including in the fintech sphere. ‘I think we have to make sure the UK becomes a natural home for fintech companies like this,’ he said. ‘But there is also a question around the checks and balances with consumer credit. Even if models like Klarna transfer the risk onto the retailer, you still have to worry about what happens to the individual that is in debt already and then goes on buying and borrowing.’
He recognised advantages, though, in fintech’s potential to use customers’ data to make more responsible lending decisions. ‘With a fintech, you can know who the person is and how they manage their money – unlike a credit company that doesn't always know the customers’ personal circumstances,’ he said. With a sensible regulatory regime in place, he added, companies like Klarna could have significant advantages. ‘It could possibly help lower income groups to understand their money and improve their ability to manage any borrowing,’ he said.
The ‘TIGGR’ report had called for a bold departure from EU regulations in order to create a more conducive environment for fintechs. Was the Treasury doing its bit to make that happen, asked Kate Andrews, The Spectator’s economics editor. ‘I think everyone knows what a big opportunity fintech is,’ said Alan Mak – a Conservative MP since 2015, who says he's an active supporter of UK technology leadership. ‘Of course we commissioned the Hill report – on reforming the stock-market to attract more high-growth listings. There are a number of things coming out of both reports that will hopefully help make the UK the strongest market-place for fintech innovation.’ But as Charlotte Croswell, the new chair of the organisation Open Banking pointed out, the responsibility for this cut across government: with DCMS and BEIS also having significant stakes.
For Tom Sleigh, vice-chair of the City of London Corporation’s policy and resources committee (also head of public sector for Amazon UK), there were plenty of opportunities for further disruption. ‘We’ve still got five banks processing trillions of transactions every week – and charging a significant margin too,’ he said. He also agreed with Iain Duncan Smith that there were opportunities in the UK setting its own data protection rules. ‘One of the other problems with our model is that it's very difficult to change banks, which means that too many customers just stay with the default,’ said Joy Morrissey, a member of the Tories’ Free Market Forum.
There was agreement, too, that – while the specific regulations would inevitably depend on the context – having the right principles underlying them would ultimately make the difference. ‘Prescriptive regulation would dictate the exact questions we needed to ask before lending to someone – even though they might not be the most appropriate questions for all customers,’ said Marsh. Whereas, by contrast, a ‘principle-based approach’ would set out the factors which should guide that assessment. For Iain Duncan-Smith, this was the point of the UK’s historic ‘common law’ approach: that rules would grow over time to deal with the changing situation. ‘The whole point of Brexit was getting the right to set our own regulatory process,’ he said. And fintech was a chance to put that into practice.