By Iliass Ikhanjal, Senior Software Consultant, Leyton UK
During the last decade, the UK has undergone a fintech revolution, seeing increasing opportunities in global trade, jobs, and innovation to become the global hub that it is today. Yet for many, the image of fintech is stuck in Shoreditch, an area of East London populated by start-ups catering to young entrepreneurs. The fintech sector has been among the UK’s most innovative, and despite recent economic challenges brought about by Brexit and COVID-19, the industry continues to grow by leaps and bounds.
Just a few years ago, it took several days to open a bank account, now you can be onboarded safely and securely in a matter of minutes by leveraging regtech solutions. Previously, there were only limited options for people to manage their savings and pensions, now there is a plethora of choices with mobile wealth managers enabling consumers to view and amend their savings with the touch of a finger. For new businesses seeking SME financing, providers on the high street used to dominate the market with a relatively slow decision-making process. Today, there is digital access to a wide array of lenders who leverage machine learning and AI to provide immediate decisions on loans or financing opportunities.
The UK today is a leading fintech hub, with its government and regulators admired around the globe for building an enabling environment that puts innovation at the top of its agenda. More and more businesses are now looking at ways to enhance performance and drive innovation. To come up with innovative solutions, a fintech company will need to invest significantly in R&D, to provide results that can make informed decisions as well as provide better services to their users.
Incentives such as R&D tax credits promote the country’s fintech growth by providing entrepreneurs and businesses with reassurance that they can secure funding or reduce the risk of trying new ways of doing things. R&D tax relief enables companies to recoup costs from innovation – whether the innovation was successful or not. The scheme allows companies to reduce their corporate tax bill or receive a tax refund based on a proportion of their R&D expenditure, as well as receive a cash injection in the case of loss-making companies.
Since the introduction of the scheme in 2000, the R&D tax credit system has been deemed by many as a success. However, whilst many fintechs across the country have saved tens of thousands of pounds a year through the scheme, the reality is that far too few are claiming under the scheme. Why? Because many fintechs, despite being eligible for such benefits, do not know the scheme exists.
The Kalifa Review of UK Fintech’s recommendation to broaden the application of existing UK state-aid tax incentive schemes would increase partnership opportunities and encourage capital intensive early-stage investment which is critical to developing and scaling fintechs. The Government could go one step further by allowing cloud hosting and cloud computing to be included in the R&D tax credits as it would benefit many fintech firms which have cut down on R&D spending. However, the plan to expand R&D tax credits to accommodate the cost of financial data sets that is pivotal to fintechs business model is a laudable recommendation in the right direction to promote and sustain the growth of Fintech in the UK.
The current system discourages financial incumbents from partnering with fintech. This is mainly because the full regulatory burden of an incumbent falls on the fintech where ownership levels are above 20%, irrespective of their size. UK banks are open to joining arms with fintech to develop innovative products such as the Barclays’ fintech accelerator and UK financial services firms are eligible for R&D tax credits. However, unlike in the US, UK banks’ technology spend related to new product innovation, in contrast to new technology innovation, does not always qualify for significant R&D tax claims, hindering their ability to partner effectively with the fintech ecosystem. This highlights the need for some reform to the application of R&D tax credits, so that product innovation can really be encouraged across all sizes and sectors.
It is crucial that the UK retains its position as a global fintech leader and attracts investment into the sector as we emerge from one of the deepest recessions on record. With digitisation of financial services reaching new heights because of the pandemic, the Government must take proactive measures to nurture fintech clusters that are pushing ahead and offering innovative solutions to the financial concerns of consumers.