Global Investment Strategy | Global Financial Services

While there is constant talk about the FinTech and digital banking sectors, which have revolutionised the financial sector, many believe we are just scratching the surface. It's important to differentiate between the two services. FinTech refers to the integration of technology into offerings by financial services companies. Digital banking is the provision of banking services that allow consumers to carry out transactions through electronic means. Sounds simple, but how big are these sectors?

FinTech and digital banking, their impact on the UK

We often hear about investment in FinTech and digital banking but very little about their impact on the economy and the jobs market.

FinTech sector

Currently, the UK FinTech sector contributes around £11 billion to the economy and supports more than 76,000 jobs in the UK. The leading light in the European FinTech market, investment has been volatile over the last few years, falling by 56% in 2022, from $39 billion down to $17.4 billion. However, positioned second behind the US and still attracting significant interest, the UK FinTech sector is in a very strong position.

Digital banking

Globally, the size of the digital banking sector is estimated at around $10.9 trillion and is expected to hit $15.4 trillion by 2032, a CAGR of just over 3%. Dominated by the Asia-Pacific market, with a 69% share, digital banking is very popular in the UK, with around 86% of UK adults using some form of online banking. To put this into perspective, net interest income in the UK digital banking market is anticipated to hit $106.3 billion in 2024.

The evolution of FinTech and digital banking in the UK

In the fast-moving world of technology, it is interesting to look back and consider the significant milestones that have shaped the UK FinTech and digital banking sectors. When it comes to FinTech, there are two important milestones:-

2015: The UK government launched the FinTech Delivery Panel with one specific aim: to promote the industry through collective collaboration.

2019: The UK government established the US/UK Financial Innovative Partnership to encourage collaboration in the private sector and facilitate the sharing of expertise in regulatory practices.

When we look at digital banking, there is one milestone which stands out from the rest:-

2017: Open Banking was launched as part of a broader package to improve access to the banking sector after a Competition and Markets Authority investigation.

While not yet as popular in the UK as many hoped, Open Banking is making a difference, especially amongst FinTech start-ups utilising access to shared customer data. A little-known fact, did you know that the Royal Bank of Scotland was the first UK bank to launch a complete Internet banking service back in 1997?

Regulatory protection

The Financial Conduct Authority (FCA) regulates FinTech and digital banking, and Innovate Finance provides tailored support to the FinTech sector. It is fair to say that the regulators have found it challenging to find a balance between consumer protection and not stifling world-leading innovation in these areas.

While the FinTech industry has benefited from cutting-edge services and a degree of protection for consumers, as mentioned above, acceptance of Open Banking has been a little slower than expected. However, there are high hopes that the introduction of new FinTech start-ups accessing shared data will bring this more into the spotlight, highlight the protections already in place, and the long-term benefits for individuals and businesses.

Summary

While there is debate as to whether Brexit will impact the UK FinTech and digital banking sectors in the future, at the moment, it's a case of so far, so good. It's also important to remember that while Brexit does present a number of regulatory and cooperative challenges, it is in the best interests of all parties to work together.

These are substantial investment sectors that are already having a positive impact on the weighting of technology and cutting-edge financial services in indices such as the FTSE 100, FTSE 250, and small-cap markets. The UK has struggled in recent times in this area, failing to keep up with changes in the US and stock markets further afield, although ongoing changes to UK listing regulations will certainly help.