“In London and the UK, we have a healthy ecosystem learning how to build successful fintech organisations”

October 2015

Strange bedfellows they are not. CEO Lawrence Wintermeyer explains how Innovate Finance, a nonprofit organisation, has created an unexpected alliance between banks and disruptors in the United Kingdom with the participation of venture capitalists and the government regulator, Financial Conduct Authority.

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The Asian Banker’s Emmanuel Daniel sat down with Lawrence Wintermeyer, CEO, Innovate Finance on the sidelines of Sibos 2015, to talk about financial technology (fintech) trends in the United Kingdom (UK) and Innovate Finance, an association of seed startups and financial institutions. He lays to rest the concern that there is much tension in the disruptor institutional environment, saying banks are themselves keen to see how fintech can ultimately transform their own propositions to customers or partners. Wintermeyer states that unlike in the dot-com era, with fintech, the capital is predominantly institutional. For the most part, there is no retail investment, so if there is a bubble, or if there would be a seismic event that would put a strain on liquidity, the only people who are going to lose are institutions or smart money.

Emmanuel Daniel (ED): I’m very pleased to be able to speak with Lawrence Wintermeyer, the chief executive of Innovate Finance, an independent, nonprofit, membership-based organisation that brings together the fintech companies in the United Kingdom (UK). The reason this conversation is very important is because fintech is touted to disintermediate financial services as we know them today. Maybe we can start with just getting a sense of your organisation, Innovate Finance. What is it? Is it an association of fintech companies in the UK?

Lawrence Wintermeyer (LW): It is. Innovate Finance is an independent, not-for-profit association and is a little over a year old. It was the idea of the Number 10 Policy Unit in the UK to create an organisation that represents fintech, an idea or decision that looks very prescient given history and the fact that it is a bull market in fintech right now. In essence we represent everyone—from seed startups, hipsters or innovators, to large financial institutions.

Our primary role is not just to build an ecosystem, but to build a collaborative and inclusive environment where we can put together disruptors with institutional executives, regulators, venture capitalists, and other professional service providers to work together, collaborate, and move fintech forward.

ED: Okay, that is very good. That’s basically the ecosystem of all the different players in fintech. Give us a sense of your membership; is the membership tiered, where as a seed you pay a certain amount, and if you’re a pre-IPO you pay a certain amount?

LW: Yes, it is tiered. Being not-for-profit, we are funded partially by the City of London, Canary Wharf Group, and the British Business Bank in order to help us make ends meet. I actually have a fairly small team of 14 people. We undertake policy shaping and directing but the heavy lifting is done in essence by our members.

The institutional members, or the big banks or insurance companies, are very important to the membership as they pay an annual subscription that helps us subsidize and provide support for the startup of the seed community. Generally, the seed or startup players pay a very low fee to connect to the community and to connect to the activities that we have for them, because ultimately, we are trying to support and build a healthy fintech ecosystem, and that starts right at the seed level.

ED: I’m very interested in the way your organisation came about, as that would give a sense of how the dynamics between the supply side and the demand side of fintech is evolving. You say that the banks support the association substantially. How did you get them to do that? I’m sure that is a hurdle that you needed to get over, with banks thinking they can corner a little bit of the fintech market and take a proprietary view of how they will succeed in fintech. What do they get out of being a member of an association like Innovate Finance?

LW: That’s a really good question. From where we sit, I think that most large institutions are actually quite cooperative and are focused on the benefits of what fintech might have to offer, but because it is still early in the stage of fintech development, many of them are not sure. I think it is fair to say none of us is really sure what the answer is, or the right set of answers, so they are all collaborating or participating in an open way to help understand how fintech may be able to ultimately transform their own propositions to customers or partners. So there is not as much tension in the disruptor institutional environment as people think.

Innovators generally are outside of the regulatory environment, generally in the payment space or peer-to-peer space. They’re developing solutions without a lot of regulatory friction, and that is broadly where the institutional venture capital has gone. Institutions are generally focused on balance sheet, risk measures, and P&L, and even with their own compliance obligations, they are not really motivated or measured to be disruptive in an innovative way. Hence, they need the innovators who are sitting outside of the ecosystem to help them think about how they are going to change.

It’s the first time in 25 years that I’ve seen bankers and insurance executives not just in London, but globally, behave a bit more like Californians, in that most people have a fairly open and collaborative approach to this. In London and the UK, we have a fairly healthy ecosystem. People are all participating because we are all learning how to build successful fintech organisations.

  If you were an investor or a private equity player, the way you look at your portfolio is that you would not invest in ideas unless they are going to be transformational. Some investors take an incremental view. In the ecosystem that you have created within the association, how do you deal with them being an association rather than an investor?

LW: Well, if we just focus on the capital side of things, there are broadly two pieces to the capital picture. One is venture capital, the other is corporate venture. In the venture capital space, the volume of venture capital is coming from institutional venture capital, often US West Coast-based. That’s the capital that backs a lot of the momentum in the community in the UK.

For the seed level or the seed investor at the entrepreneur level, the UK has a number of tax incentives for both seed and tech investment that encourage entrepreneurs or de-risk some of the capital outlay for entrepreneurs. This is very helpful, I think, to get local innovation and the local innovation hubs fostered.

On the corporate venture side, there is HSBC for the big banks. Most of them have a significant investment going on in disruptive innovation, which can be in one or a number of things ranging from a corporate venture fund—Barclays and Techstars are great examples of an accelerated collaboration of corporation venture funds—to innovation labs, where institutions have labs in the US or Europe that are outside of the main institution. These are motivated and focused on disruptive innovation outside of the organisation, on digital mergers and acquisitions, and include talent scouts. Quite often, internal innovation labs exist where disruptive innovation goes on inside the organisation, but in a controlled lab fashion involving staff.

Lloyds Banking Group is an excellent example of an organisation that is doing internal innovation or disruptive innovation using their own staff, but with a collection of designers, technologists, specialists, and staff coming together to create incremental disruption.

ED: How do you guide the startups that come on board, are they guided through the process, or Innovate Finance just provides the ecosystem, and they fail or succeed on their own?

LW: We provide a number of things. First and foremost we have a connected community, so it is a place for them to come get answers to questions around anything from how do I raise capital, focus on exits, deal with some of the regulatory friction that is in the environment, or communicate to the public if I’ve got a direct-to-consumer place. We do a lot of work just helping them understand how to communicate, so there is a practical working ecosystem of practitioners around to help them with those things.

On the more material side of things, particularly in the UK, we actively lobby on behalf of the community. The Open API (publicly available application programming interface) is a big move on the government to set up an open payments infrastructure for all fintech players, whether institutions or startups, to participate in. On areas of regulation or legislation in particular, startups do not have the compliance or risk teams, nor knowledge of that space, so they are heavily reliant on us for things like that.

ED: That is a little bit mobile, this Open API, for payments. What did it require you to do? Did you work with the regulators through the banking regulators? Who drives it, and where is it today?

LW: Open API is a classic example of a government announcement or policy that goes through a pre-legislative consultation process that is out in the community. It was initiated by the government as a means of making sure that we are promoting inclusiveness in the number of new entrants into the financial services space.

Our particular role is to help members not just through the consultation process post-legislation, but through an API working group that is in play with the Treasury. We’re one of the secretariats on that, and the working group has a mandate to put together the initial blueprint of how that is going to work. The first phase will be done by the end of this year.

ED: How do you measure its performance: the number of applications developed within that ecosystem?

LW: Well, it is not there yet, so we will have to wait and see what the working group delivers by the end of the year in terms of its overall view of how the API should work. Ultimately, however, the principle is to put an Open API structure in place with an interoperable protocol so that anybody who is registered to participate in the community can ultimately have a frictionless payment transfer system.

ED: Did this come about after the UK put in place Masterpay and what we have right now, or is this an afterthought in a way?

LW: I do not think it is an afterthought, but it is part of the government’s proactive agenda of opening up financial services in the European Union. The CMU, or the Capital Markets Union, is coming, and there is a broader legislative framework that is focused on making sure we have an open or a more open and even more competitive financial service system.

ED: For payments, are we looking at peer-to-peer?

LW: Peer-to-peer currently is an area that in many places of the world is not regulated. In the UK, the peer-to-peer community is emerging or starting to focus on areas where some aspect of legislation or regulation might be helpful for consumer protection. Again, if you look at capital inflows from institutional venture into fintech, the two biggest areas globally are payments, and quite often that is the remittance space, which is more of a global money transfer play, and peer-to-peer.

So both areas I think elegantly fit into either new legislation or new infrastructure, in the case of the UK and the Open API; or areas where with peer-to-peer we may find that certain legislative protections on behalf of consumers are good. It’s an emerging story.

ED: What other areas would there be?

LW: The next big area in the UK, which is a trending topic, is what we call the future of advice. Simply put, with the previous retail distribution review, the conclusion was more or less that the cost of advice is generally expensive or prohibitive as a mass market proposition, so either the institutions that offer advice propositions should be in a position to do that competitively; or they need to almost downwardly scale that to a cost that is acceptable to consumers.

I think the community is focused on the benefits that technology has to play in the advice space for savings; for investment; and for helping people with simple outcomes such as saving for and buying things, or putting the children through university, or getting them married. The US calls it the robo-advice space, but quite often even in the robo-advice space—which covers a pretty broad range of execution—it is only discretionary. It is still focused on the US only, on the high-net-worth or the ultra-high net worth market.

ED: Since you did have a lobby function, tell me a little bit about what you see or how you see regulation evolving. I think the temptation initially with the disruption that fintech was bringing into the banking industry was this temptation to regulate it the same way banks are regulated. Do you see a parallel regulation regime evolving, and if you do, what are the elements of regulating the future of finance? How’s that different from the way banks are being regulated today?

LW: In the UK and I think in many territories, there is a singular focus on fintech, or fintech is not being treated any differently than how the other institutions either in banking or insurance are being regulated. In the UK that is not the case; the Financial Conduct Authority (FCA) is the primary regulator that we work with for fintech.

There’s a unified and cohesive view on what that needs to be, but one of the things that makes the London and UK fintech ecosystem, I think, quite different from the US or other parts of the world is that the government is very digitally astute, whether that is through digital culture and the digital identification scheme they are focused on, or whether it is through fintech.

They’re working on things themselves.

LW: Yes, indeed, the UK is very different from most other territories in that in the fintech ecosystem, we have a progressive government and regulator, where the government has its own digital transformation program in play, which includes digital identification. The highest levels of government are fairly knowledgeable about fintech, the distributor ledger, and all of these big technical trends coming through.

The main regulators, the FCA, the new payment systems regulator whom we work with, have an open and collaborative view—more than I think we have ever seen in any historic precedent—of how to work with fintech within the context of banking regulation. So that is something we do differently. For Innovate Finance, our role is to bring together members and regulators as part of the lobby work that we do to try to progress that along.

My personal view is that right-touch regulation will be emerging in financial services, and it is an interesting space to watch as regulators start to themselves innovate and start to take advantage of the available digital tools. Particularly around data or correlation, there are greater opportunities for regulators to plug into banks or insurance companies, understand the data that is online and working right now, and proactively regulate, rather than perform the traditional model of reactive regulation after an event.

ED: What have you seen so far that shows that proactive thinking in regulation?

LW: First, in all of the consultations that we do as part of the legislative assembly or process in the UK, we are in active consultation with the FCA either in roundtables or through members who actively seek the guidance of the community. Second, Project Innovate is in essence an innovation hub within the FCA that has its own sandbox and regulatory environment that consults with fintechs. It does not actually give advice, but in the context of guidance, it helps steer startups on the different approaches to regulation depending on the particular product or service they are offering. I think that is pretty extraordinary; I’ve been very impressed with that myself.

In the context of the distributed ledger and the promise of the applications that could be offered in the banking infrastructure, whether it is payments, settlement, know-your-customer, or antimoney laundering, we have the regulator integrated with our own lab, which is all about promoting use cases for interoperability and allowing members to demonstrate that they have use cases or applications for the distributed ledger that are of value to the community.

The governor of the Bank of England is focused on digital currencies. Digital currencies are treated as currencies, and that is quite unique in the world. So there is a whole range of measures. The City of London, which is one of our funders, is proactively focused on making sure that we get the fintech agenda right through the city. So in all levels of government, there is quite a bit of cooperation.

ED: Is the asset under management a zero-sum game where the idea is to have more investments generated out of London, rather than New York, Silicon Valley, or Singapore?

LW: No, in terms of global fintech investment or the pie, I do not even know how it breaks out globally. Broadly, Silicon Valley invented venture capital in tech. Don Valentine and Arthur Rock coming out of Intel singlehandedly invented the modern venture capital industry, so they understand speculative risk, they understand venture capital. In 50 or 60 years they have done a great job of building world-class technology companies and accumulating a lot of wealth for investors or for entrepreneurs. Hence, from our perspective in fintech, the US angle of it is definitely the tech, with a bit of finance. In New York you see a lot of finance.

The relationship between London and New York, I think, is historic in a banking context. We have a lot in common, but Tel Aviv right now has the cipher hub, so Singapore, I think, really has a unique opportunity to set itself out as a fintech hub and a solution hub, because the Singapore regulator has looked at what is going on in the UK. Thus, each hub actually brings a different ingredient and has either a different competency or capital quality about it. It is more globally collaborative than competitive.

  What are your key performance indicators (KPIs)? What are you measured on?

LW: We have a 2020 vision for fintech in the UK, which the government and Prime Minister David Cameron have endorsed as part of a fintech manifesto, and which is focused on three areas. One, we are trying to attract $8 billion in capital, $4 billion in institutional venture, and $4 billion in corporate venture capital to the fintech ecosystem. Two, we want to see 25 momentum plays in the UK by 2020. Three, we want to create an additional 100,000 fintech jobs, in addition to the 130,000 that have been classified as fintech jobs in the Blackett Review.

ED: Given the history of dot-com, is there a way to normalize these objectives against the markets going up and down? Are you afraid of market turmoil taking away the money from these businesses?

LW: Well, I’ve been in financial services for 25 years, so I would not say I’m afraid of market turmoil, but we plan for it. Nobody knows what is going to happen. I think unlike the dot-com era, right now in fintech the capital is predominantly institutional. There’s no retail investment for the most part in it, so if there is a bubble, or if there was a systematic event that would put a strain on liquidity, the only people that are going to lose right now are institutions or smart money. That’s life, that’s the market. But fintech is part of what is going on in digitalisation. Even if we decide fintech is a terrible term and we are embarrassed in two or three years to call it that, fintech is stable.

If you look at the $5 trillion payments market; if you look at the total global lending in retail, corporate or trade finance, or the total pool of assets under management in investment management, those are steady pots of money. They’re growing, and they are growing particularly with a demography that is happening in this part of the world and Asia, so you can see why, from a disruptor’s perspective, it is attractive.

In concluding the interview, Wintermeyer emphasised that “a low entrant or low barrier proposition that starts in an unregulated environment and makes very small progress on a large pot of money can accumulate into quite a significant value in a short period of time.” Hence, any slowdown of new entrants coming in and competing for fintech is not expected any time soon.

“We are very much focused on maintaining the liquidity in a functional ecosystem for fintech and creating momentum in companies that are hopefully going to choose to either IPO or trade sale to UK institutions,” Wintermeyer assured. “We are focused on the economic transformation of the jobs that fintech will create.”

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