The UK is home to some of the largest payments companies and most successful neobanks in the world, Wise, Starling, and Monzo among them. That success has been bolstered by the fact that the UK is among the world’s most innovative financial services regulatory environments.
Regulation is generally a blocker to innovation. But the UK has used it to foster domestic competition and successfully grow its global presence. If Europe is the world’s regulatory superpower, then the UK has quietly become Europe’s financial regulatory superpower (even post-Brexit).
The UK is the goldilocks of financial services: big enough to be meaningful on a global scale, but small enough to make decisions much faster than the U.S. or the rest of Europe. If you want to see the future of financial services regulation, look to the UK
In 2010, the UK was dominated by a small handful of large banks. In the wake of the financial crisis, the government nationalized one of the largest banks and had to intervene in several others. To counter this “too big to fail” risk—and to promote the UK as a global tech hub—the UK kicked off a policy initiative to become a global superpower in financial services and technology.
To do this, it played to its structural strengths:
The UK has had real-time payments since 2005, via the Faster Payments network. In 2007, it became one of the first markets in the world to issue contactless (tap-to-pay) cards. (A full 8 years earlier than the U.S.) Today, consumers in the UK use contactless payments for nearly 90% of face-to-face payment transactions. And UK institutions continue to invest: This summer, Mastercard, Barclays and the London Stock Exchange Group announced a £1 billion fintech fund to back British growth-stage fintech companies.
There are very few cities on the global stage where you could walk from the central bank to Parliament to the head office of the world’s largest banks and tech companies. The UK is a global financial center.
The vast majority of international trade happens in UK law. Common law is very sensible. Judges are required to attempt to make a “common sense” reading of the facts and circumstances. While it uses case law as a base, it is far less mechanical than U.S. law. Therefore, it is generally perceived as fair and neutral.
The UK is almost ideally placed for international offices for time zone overlap.
These advantages laid the groundwork for the UK to position itself as a global leader in fintech. UK regulatory bodies have advanced that vision through various initiatives—including advancing Open Banking, enacting trust-instilling consumer protections, and supporting emerging fintech companies at early stages.
Becoming a bank has a cold start problem.
You can’t get a license without capital to absorb potential losses and be financially sound. And you can’t get funding to build a bank without getting a license. So the UK did something elegant. It split the process in two.
Many digital banks, like Starling and Monzo, got a banking license “with restrictions” designed for start-up companies that do not yet have the required regulatory capital. This enabled them to unlock further funding as VC-backed growth companies over time.
In the U.S., only banks can access systems like Fedwire, and funds must be stored at a bank. As we saw with the recent banking crisis, despite protections, this is not always a guarantee of security. Access to the central bank would reduce the risk for fintech company deposits and create pricing competition with the banking sector.
In the UK, fintech companies can get accounts with the central bank and access its payments systems. Companies like Wise, Modulr, and Form3 have unlocked this capability for fintech and non-finance companies.
In the U.S., Open Banking is a market-led movement, which has limitations: conversion via open banking drops below 60% in many cases, especially with the largest banks. In 2018, EU regulators enacted the second Payment Services Directive (PSD2), which created rules for third parties to access payment account data. If PSD2 got people thinking about Open Banking and the potential for tech to disrupt financial services, the Open Banking Implementation Entity—a UK company that created a model for future data sharing and set Open Banking API standards—clearly defined how it would work.
Screen scraping (using your login credentials to let software login and retrieve your data) had been around for 5 years—with limited uptake. The whole point of Open Banking was that it was official and secure.
Companies like Truelayer, Yapily, and Credit Kudos (acquired by Apple) benefited from these standards. In the UK, you can pay your tax bill with HM Revenue and Customs with an open banking initiated payment. The UK has built on this capability with a service called Variable Recurring Payments (VRP), a form of payment instruction that enables a merchant to securely offer subscriptions (or auto-pay) with a single click, direct from a user’s bank account.
The UK was the first market in the world to create a regulatory sandbox. The Sandbox helps firms at earlier stages of their growth with support, such as individual guidance for how regulation might apply and waivers or modifications to rules if your company tests something novel or innovative. Since its launch, companies as diverse as BNPL provider Zilch, Open Banking provider Bud, the London Stock Exchange, and Barclays have entered the Sandbox.
The sandbox has now been made “digital.” This means companies can access synthetic data based on real bank customers (such as Barclays or Lloyds), allowing them to prove their effectiveness beforehand. The UK has also launched a digital assets Sandbox for tokenized securities, helping to make the complex requirements around securities more available to innovators.
In June 2023, the UK passed the Financial Services and Markets Act, which classifies crypto as a regulated financial activity and empowers regulators to supervise its adoption. The act provides capital requirements for Stablecoin issuers, defines consumer rights, and gives legal certainty to consumer protections.
The last decade saw a generation of iconic global brands coming to the market. UK regulators’ forward-looking policies—introducing a permanent digital sandbox, providing licensing for digital asset businesses, and introducing innovations like VRP—provide the ultimate “why now.” Moreover, neobanks are profitable in a market with low card-swipe fee revenue, indicating the maturity of the regulation built over the past decade.
The new and old regulatory innovations are accelerating fintech’s success. The creativity of UK entrepreneurs has and will continue to disrupt the status quo in financial services.
See a16z.com/global-payments for more.