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The US should be worried by the UK's fintech potential

Zeiad Idris
May 10, 2022

The US has long been the leader in fintech investment. However, as the UK positions itself as the primary challenger from its recent history as the financial capital of the world, US policy-makers and businesses are increasingly looking across the pond for inspiration in this field. They are right to do so – if the US wants to remain a fintech industry leader, they'd be well placed to keep an eye on the UK's developments, writes Zeiad Idris.

Late into the 1990s, a Harvard professor published a number of influential reports on the value to a country's economy of building company 'clusters.' These are groups of corporations all working in the same field and the same location – the idea being that brushing shoulders with similar companies would boost cooperation, competition and the exchange of innovative ideas. In the UK, London's Old Street roundabout – close in proximity to the City of London's financial centre – was designated as the new 'Tech City' hub. It is hoped that this will evolve to mirror the success of California's Silicon Valley – hence the tongue-in-cheek nickname given to it: Silicon Roundabout.

Charlotte Crosswell, CEO of Innovate Finance, suggests that the clustered, London-centric nature of the UK's tech and financial services is a key strength that the US lacks. In the US, financial services generally congregate on the East Coast, while tech services are more concentrated on the West Coast.

Similarly, US fintech growth is almost burdened by the over-abundance of US financial institutions, which spans from global banks to local community banks. By comparison, the UK has a significantly more concentrated market. This points to an underlying issue with the relationship between state and federal law, which causes numerous regulatory and data security complexities for fintech firms. For example, it is much harder to get a banking license in the US, as highlighted by the fact that US regulators have not approved a new bank charter in ten years. These stricter regulations force many US banks to partner with existing institutions instead of forging their own paths. By contrast, the UK has a much more streamlined regulatory environment for issuing banking licenses and charters.

Aside from this, one of the biggest lessons the US fintech industry can learn from the UK can be found in its 'open banking' system. This requires the UK's biggest banks to share their data with licensed start-ups, which levels the playing field and facilitates faster growth for these newer companies. Another conversation the UK is leading on its commitment to becoming the world's first net-zero-aligned financial centre – with former Bank of England Governor Mark Carney leading the charge.

Karen Mills, the administrator of the US Small Business Administration for President Obama, underlined how open data and open banking are crucial to stimulate innovation across a variety of financial institutions. Otherwise, if this data is kept by a handful of larger corporations, smaller fintech companies are at a severe disadvantage, and their growth is stunted. The US treasury acknowledged that it has a lot to learn from the UK's open banking system. Some banks, such as Capital One and Citi, have finally started to embrace open banking.

The UK also leads the way in cyber-security, which is partly due to the UK fintech industry's implementation of the cloud. Equally, a number of UK digital-only companies offer comparatively low exchange rates to customers, and provide new ways to keep a closer eye on expenses while travelling and sending money globally. This is one reason why the UK is more effectively connecting with younger and lower-income demographics. In addition, UK corporations have started to introduce disposable virtual cards, which are disabled forever after being used for a number of transactions, thereby shielding users from hacking threats.

It could be argued that the crypto-currency and NFT market is currently the most hotly contested industry in the world. As various nations jostle for position, Chancellor of the Exchequer Rishi Sunak is placing the UK at the forefront with his forward-thinking calls for the Royal Mint to produce an NFT. The Bank of England has also announced plans to roll out a national digital currency, which would entail 'Stablecoins' being accepted as valid forms of payment in the UK. These would be different from other cryptocurrencies in that they would be inextricably linked to the national currency, and would therefore only fluctuate in value in accordance with the sterling's price changes. This adds security and stability compared to cryptocurrencies such as Bitcoin, the value of which can be highly volatile.

Biden's decision to sign an executive order for government agencies to explore the creation of a US equivalent is a positive move. However, the US is only at the research and development stage, while the UK is already well primed to release the new digital currency. This could see London becoming the financial crypto-capital of the world.

The US still dominates the fintech market in terms of sheer size – propelled by its superior funding infrastructure, which the UK has identified as a gap through Ron Kalifa's recent review into fintech. However, the UK's rapid pace of growth in this industry means it is unsurprising that Biden is looking over his shoulder and across the pond to see what the future of fintech holds.

Zeiad Idris is the Co-Founder and CEO of Algbra, a London-based fintech firm backed by figures including ex-Chancellor Phillip Hammond.
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