The financial services landscape is being rapidly redrawn amidst geopolitical, technological and regulatory upheaval. Nation-first politics and the need to adapt to new business models are throwing up several challenges for the industry.
Brexit is a focus for many. The UK will be leaving the European Union (EU) in less than a year. In response, financial organizations are opening new EU hubs. Many within the UK are worrying about a potential loss of talent to rival financial centers and lower foreign investment as the City’s appeal has the potential to fade.
But where there are challenges, there are usually opportunities. According to a recent Prodigy Finance survey, nearly 90% of alternative finance executives see their industry either growing or remaining the same after Brexit. Breaking it down further, the data reveals that a small majority (58%) of respondents believe that the alternative finance industry in the UK will grow post-Brexit, with a further 30% expecting the industry to remain the same.
These bullish findings stand against much of what we read in the media. While Brexit may create limits for the UK economy, it is important that companies in our industry look beyond borders and take on a more global perspective. According to our data, this change appears to be well underway and certainly resonates with the team at Prodigy Finance, a company based on the belief that access to finance should be borderless.
This positive sentiment is further reflected by the 70% of respondents who feel that the UK alternative finance sector is either moderately or very insulated from potential interest rates hikes in the US or the UK. Subsequently, this leaves only a marginal group who expressed concern about the expected rises. In fact, only 10% of respondents see interest rates as the biggest challenge facing companies in the sector.
The survey also highlighted a diverse spread of investors, which will help to keep the sector strong. Respondents think that the next wave of capital into alternative lending is going to come from institutional investment (39%), retail investors (17%) and family offices/UHNWI (11%).
Regulation: friend or foe?
What has been shown to be the greatest concern for the alternative finance sector in the UK is regulation (40%) shortly followed by issues surrounding the maturity of the sector (24%). These findings underscore the ongoing debate of innovation vs regulation; how companies within alternative finance and fintech will be coming under closer regulatory scrutiny as the sector matures and whether this will create, or stifle, opportunity.
Being under the regulatory spotlight is not always detrimental. It can prompt organizations to ensure that they are operating in the best interests of their customers and promotes long-term thinking, a concept that is so important in nascent industries.
I would also make the point that new regulation is benefitting fintech. Open banking came into effect in the UK in January 2018 to increase transparency and competition in financial services. The banks must now share their customer data with third party financial service providers, including alternative finance and fintech platforms. The platforms can then harness open API technology to improve the range of products available in the market, make bespoke recommendations and further increase financial inclusion.
Open banking has been made possible thanks to regulation – specifically the EU’s Second Payments Directive (PSD2), which ensures that the European market is transparent, competitive and secure. It is PSD2 that will empower consumers to confidently, and safely, use third parties to manage their finances and enhance their experience when it comes to accessing financial services.
Financial inclusion and supporting the next generation
Our study also revealed that a number of companies (28%) are engaging in a form of impact investing, with a further 19% of companies considering this approach. The most important criteria of impact investing amongst the respondents is primarily financial inclusion (38%) – which will be so important in tomorrow’s world – followed by environmental causes (31%) and then, social impact (25%).
It is fantastic to see that there is an increasing interest in the world of impact investing, with almost half of the companies surveyed either considering or already engaging in ethical investing to some degree.
This is something that is at the core of what we work hard to do at Prodigy Finance. Through our community platform, alumni, impact investors, and other private qualified entities we are able to invest in prospective students and tomorrow’s leaders, whilst earning a financial and social return.
The post-Brexit environment looks set to have a positive impact on the UK’s alternative finance industry. It is now time to embrace the opportunities on offer in a changing world.