Anniversary of the Kalifa Review: What is next for the UK fintech sector?

February 26th marks the one-year anniversary of the Kalifa Review – an independent review into the fintech sector – and how the UK can become a global leader in the industry. Business Leader takes a closer look at the space and explores what impact the review has had.

According to a report by Statista in September last year, investment into UK fintech firms totalled $24.5bn in the first six months of 2021 following the review. And according to professional services firm KPMG, the UK now makes up 10% of the world’s fintech market. But was the review really a success?

Kalifa Review

2021 was a landmark year for the industry – largely due to the impact of the Kalifa Review.

Published in February 2021, the independent report into the fintech sector by Ron Kalifa OBE made suggestions on how to create highly-skilled jobs across the UK, boost trade, and extend the nation’s competitive edge over other leading fintech hubs. It also set out a series of proposals for how the UK can build on its existing strengths, create the right framework for continued innovation, and support UK firms to scale.

Victoria Roberts, Director of Fintech Delivery Panel and Insurtech Board at Tech Nation, comments on the importance of the Review: “The Kalifa Review provides the future strategy to ensure the success of UK fintech over the next decade and beyond. The Review brought the sector together to scope and support the next stages of fintech growth, be it across the whole of the UK, further afield through exports, increasing access to finance or welcoming global talent. It’s great to see so many of the recommendations now springing into action, such as the Financial Conduct Authority’s Scalebox and the Centre for Financial Innovation and Technology.”

Stuart Harrison, Director of FinTech West, explains how the Review has changed the landscape for the wider financial services sector going forward.

He comments: “Fintech, like many tech sectors, saw strong growth and growing interest this year. This was compounded by the high-profile release of the Kalifa Review. It was almost as if, from that point on, fintech became mainstream and front of mind for everyone. We have now reached the point that fintech and financial services are inseparable. A digitally transformed financial services business, without knowing its history, can look and behave like a fintech.

“Fintech is no longer a sub-sector of financial services – it is financial services. Most, if not all, financial services businesses who are not transforming risk are being left behind and will not be viable in today’s mobile banking, payments and money management world.”

A year in review

Daumantas Dvilinskas, the CEO and Co-Founder of TransferGo, a London-based money transfer service for the migrant community, provides his analysis. He notes that while the Review has led to positive changes, like new FCA sandboxes and regulatory environments, the UK can still do more to safeguard its status as a fintech leader. He suggests that the industry must continue to attract diverse talent and that business leaders must look to take advantage of the fast-track visas for scale-ups that Chancellor Rishi Sunak announced last year.

Since the Kalifa Review was published one year ago, the UK fintech industry has seen lots of activity – a wealth of funding rounds, wave of IPO announcements, and many reports of huge valuations.

There’s no doubt either that the Review has led to positive output like the UK Government’s support for a new industry-led Centre for Finance, Innovation and Technology (CFIT) and new FCA scaleboxes, but the UK can do more to safeguard its title as a global fintech leader. One important area to focus on is attracting diverse talent.

We eagerly await details of the fast-track visa for scale-ups that Chancellor Rishi Sunak announced last year which is due to come into place in Spring. Half (49%) of the UK’s fasted-growing start-ups have at least one immigrant co-founder, and as a migrant founder myself supported by several employees from outside the UK – I know all too well the benefit of an international team.

If the Government wants to make the UK a global innovation hub by 2035 it will be imperative to continue attracting overseas talent – not only to London but other parts of the UK as they too focus on levelling-up.

Who is taking control of UK fintech?

Ralph Rogge, CEO and Co-Founder of payment processing company Crezco, discusses the immediate future of the UK fintech sector.

The free movement of labour between the UK and EU ended on 31 December 2020 and two months later on the 26th February, a report commissioned by the Chancellor was published, setting the scene and strategy for FinTech in the UK.

The report: Kalifa Review, written by the ex-CEO of payment giant Worldpay, Ron Kalifa contained 106 pages — was made up of a five-point plan of key recommendations and 15 sub-recommendations on investment in the UK fintech sector, was widely welcomed. The Kalifa Review contained actions for government, regulators and for industry, focused on five key areas: policy and regulation, skills, international, national and investment.

Did the timing of the Kalifa review help?

For those trying to build the next Worldpay (or better, Stripe), it was comforting to read that Whitehall wasn’t solely interested in fisheries and immigration. We should strive for a more diverse economy, both by sector and geography, but we should not underappreciate the value and opportunity FinTech presents to the UK’s future and economy. This is our comparative advantage, and we’d be ill-advised not to play to our strengths. For decades, arguably centuries, the UK has been a pioneer in financial innovation, looking after the unbanked, increasing access to affordable loans, preventing financial fraud and reducing reliance on high-street incumbents, while creating jobs and skilled labourers. Why quit now?

Do you think the report went far enough?

The report isn’t revolutionary. It doesn’t need to be because our track-record in building a strong FinTech ecosystem is positive. But we cannot rest on our laurels or past successes. We must continue to innovate and evolve with progress, highlighting key areas of focus for the Government, such as policy and regulation, skills, and investment. It is easier to suggest something than it is to implement it. Words are cheap, but actions require focus and determination. To the sceptic this could be merely political rhetoric and meaningless words, and these suggestions were written by a corporate operator but implementation rests with the political establishment.

If implementation rests with the political establishment, isn’t this a reason to despair?

The fact that this report was commissioned is positive, so don’t despair – at least not yet. The rest of the world may have caught up with Open Banking, and we may have been overtaken by some countries, but we are making progress here too (please, don’t stop!). The recent proposed changes to the 90-day re-authorisation requirement of using Open Banking data is a great example of continued progress. Likewise, the Government’s continued recognition of the value of the R&D Tax Credit scheme and expanding inclusion to cover cloud computing and data costs, two essential components of technological innovation. A rising awareness to move regulation from being prescriptive to principled based will allow for more adaptive innovation while ensuring regulatory requirements are the ‘right size’ for each respective business.

How much work still has to be done in implementing a regulatory framework fit for UK FinTech?

Arguably the foundations here were placed long before the Kalifa report was published and the tangible actions deriving from this specific report are hard to locate. There is a lot of talk about Open Finance, which is great, but ask anybody running an Open Banking company and they will tell you how much work is left to be done. Between the Financial Conduct Authority (FCA), the Competition and Markets Authority (CMA), the Payment System Regulator (PSR) and the Open Banking Implementation Entity (OBIE), it remains unclear how the original Open Banking mandate will continue to be regulated going forward and to what degree. There appears to be neither a carrot nor a stick holding the original CMA9 banks accountable. We must not behave like impatient children wanting to start on new projects while leaving prior projects un-finished. Ideas are easy, execution is not.

What about the impact of Brexit – how do you see opportunities for UK FinTech one year on?

The reduced access to the EU market (consumers and labourers) has undoubtedly increased short-term friction, costs and uncertainty. A small start-up likes ours has seen our headcount unnecessarily increase abroad, costs risen by hundreds of thousands of pounds per annum, and hours spent on administrative tasks have doubled. Opportunistic markets in the EU, such as the Netherlands, Lithuania and Ireland, have sensed an opportunity and are looking to build the next FinTech center of Europe. Previously they would never have stood a chance, but there is a very real and lucrative opportunity now. If we do not want the next Revolut and Wise to be built abroad, we must ensure that the UK (now unshackled from the bureaucracy of the Continent), continues to lead the way in FinTech. This isn’t about raising awareness or recommendations, but action. The Ron Kalifa report may be a great five-year strategy plan, but who is taking control now?

Industry reaction

Laurent Descout, founder and CEO at Neo – the payments and FX fintech: “A year ago, the question was – can London stay ahead in fintech despite Brexit? The Kalifa Review sought to maintain the UK’s fintech edge but it looked possible Brexit could have a reverse effect. Thankfully, a year later, the UK has cemented its place as a fintech hub and is working to navigate the Brexit challenges.

“Nowhere is this more evident than in payments. Businesses paying low bank fees for Euro transfers into London found costs soar almost overnight as banks switched to charging international cross-border tariffs. Fintechs stepped in, offering multicurrency accounts, virtual wallets and, most importantly, a viable alternative to the traditional bank-driven model.

“We’re seeing this approach replicated time again and, with UK fintech investment at an all-time high, the Kalifa Review has kindled the flames for future growth.”

Christoph Gugelmann, co-founder and CEO at Tradeteq – the technology provider for bank asset distribution: “A key aim of the Kalifa Review was to help small businesses access more, better and cheaper financial services – and in trade finance, access remains the single biggest issue.

“Many businesses struggle to access the financing they need as the trade finance gap widens. Banks can’t access the liquidity to increase lending due to capital restrictions, so are distributing trade finance to other banks and capital markets. But then investors have limited access to trade finance as an asset class because of cost barriers and the need to repackage portfolio risk.

“A year on from the Kalifa Review and we’re seeing fintech’s potential to reshape global trade – whether that’s parcelling trade finance instruments into investible assets, managing supply chains or automating workflows. These approaches have arisen through banks, fintechs, investors and other players working together – and it is this formula of continual dialogue that will continue to revolutionise this industry.”

Eric Huttman, CEO of MillTechFX, comments: “Financial technology has received record levels of funding. Fintech is no longer a subsidiary of financial services, but rather an omnipresent and essential component of the way we trade and do business. Over the past 12 months, the UK has further consolidated its position as the global fintech hub with over $37bn investment.

“The one-year anniversary of the Kalifa Review, however, is a timely reminder and wake-up call for firms still beholden to outdated legacy processes. We must focus our efforts on using fintech to help develop the real economy. That starts with the treasurers and asset managers who can face huge operational inefficiencies with their FX setups which directly affect their bottom line.

“Now is the time to leverage digital solutions to implement widespread and strategic change. If all parts of the financial services industry are to ‘build back better’ for their customers, the use of these technologies to establish a more efficient, transparent and cost-effective way of doing things will be vital.”

Martin Wilson, CEO of Digital Identity Net, comments: “The first birthday of the Kalifa Review is a timely reminder that the UK must act to maintain its advantage as a global fintech hub. Investment into fintechs rose sevenfold from 2020 and Open Banking, a key part of many fintech services, also had a big year with one million users joining between September 2021 and January 2022. It now has five million regular users.

“Fintech is strategically important for the UK, but while the billions are flowing into fintechs in London, we also need to see the government, businesses and banks adopt and implement these new technologies to improve the way we do business as a country.”

“The UK itself needs to digitise further. We are ahead in areas such as trading technology and payment processing but way behind on digital identity. Other countries are leading the way. Belgium, Norway and Sweden all have digital identity systems connected to their banks to protect consumers data and dramatically reduce fraud, which is a major and growing problem in the UK currently. The Bank-ID service in Sweden is accessed by its adult citizens on average twice a day and the Norwegian service has reportedly reduced payment fraud from 1% of daily value to a staggeringly low 0.00054%.

“The government and banks should consider how we can implement digital identity innovation in order to continue to deliver digital services which positively impact its citizens’ lives.”