After the fintech industry’s incredible year, Lord Chris Holmes, Member, Democracy and Digital Technologies Select Committee, UK House of Lords, here shares his fintech wishlist for 2022.
The Covid pandemic, which has caused so much suffering to so many has also turbo charged existing technological trends and had a huge impact on the world of fintech. One of the most striking trends since the beginning of 2020 has been the cross-generational shift to digital channels, banking and beyond. E-commerce accounts, for example, are accounting for a far greater share of total spending.
The Capgemini World Payments Report survey found that before the pandemic, only 24% of respondents had e-commerce accounting for more than half of their monthly spending. During the pandemic, this share increased to 47% of respondents, and this figure remained at 46% even after lockdowns were lifted.
I spent the first half of this year conducting a series of interviews with influential figures from the world of fintech – five minutes each on the subject of fintech trends, opportunities and a look at the year ahead. Simon Taylor pointed out that “with fintech moving – beyond internet banks and changes to user experience – into every part of financial services it’s exciting for the market, it’s exciting for customers and it’s exciting for society.” We have made significant strides, as predicted by Simon, towards enhancing the role financial services plays in making our lives better, but I am confident the most exciting part of the fintech evolution is yet to come. It is the impact on society I am most hopeful about. There is significant potential regarding financial inclusion. Mobile technology and other tech innovations have an almost unprecedenced opportunity for those currently financially excluded to be enabled and included. This must happen. We must make sure it is a basic human right to have access to the services many of us take for granted.
Another key technology is distributed ledger technology (DLT) or blockchain. I have been conscious of the possibilities afforded by DLT for at least a decade now. Back in 2017 I gathered together a group of experts and published a report, Distributed Ledger Technologies for Public Good: leadership, collaboration and innovation, building on the excellent work of Sir Mark Walport, Distributed Ledger Technology: beyond block chain. If the opportunities were there in 2017 and 2018 when I published an update to the original report, they are there in multiples today, and arguably with everything else we are facing as a country the opportunity if we get it right has become an even bigger prize.
One of the obvious use cases for the traceability, accountability and other attributes of DLT are border control, customs, trade and supply chain. The Government is calling on industry to submit their interest in piloting the Ecosystem of Trust concept that was outlined in the 2025 UK Border strategy. The intention is to “use data, technology and trusted relationships to deliver robust upstream compliance which would allow processes to be moved away from the frontier and facilitate improved flow of goods.” I’ve been involved in a wine supply chain pilot with UK and Australian Governments, academics, trade bodies and tech companies which has demonstrated just this value. There is incredible potential for supply chain management and a potentially world leading technology enabled border. The deadline for initial expressions of interest in this Ecosystem of Trust concept is end of January for a 2022 pilot and I will be watching the outcome of this process closely.
Digital currency is another development that has the potential to profoundly change our relationship with money. The Bank of England held their first CBDC engagement forum in November. The Treasury and BoE will understandably be considering regulation with monetary stability as a priority consideration although the opportunity for broader use cases taking in financial inclusion and the social contract between citizen and state are incredibly exciting. The Digital Pound Foundation are doing some interesting work in this space. It is clear that we require tailored regulation for digital or crypto currencies and we need it now. The UK has an unrivalled opportunity to lead in terms of rules, regulations, words and welcome. If the UK can set out clarity in this area we will not only influence the environment in the UK we will give ourselves the best opportunity to influence global policy. Similarly, such certainty would obviously be attractive to firms looking to locate in the UK. Just as the rule of law worked and continues to work such certainty magic for so many businesses who choose to come to the UK and/or structure their dealings under this, so it could be for crypto businesses.
The final item on my wish list and another one to watch for 2022 is distributed digital ID. I took part in a Fintech Times webinar on this very topic earlier this year and I sincerely hope to see more progress in this space. DCMS have published a second iteration of the digital id and trust framework and this is moving in the right direction but we need much more clarity on such key issues as trust and security, costs and compliance, inclusivity, and impact on innovation and competition. It’s another area that holds such incredible potential. Existing KYC (Know-Your-Customer) systems are demanding in terms of compliance but barely fit for purpose in terms of genuine verification. As not just financial services but all essential services move online the opportunity for effective, robust and flexible identity verification and fraud prevention has never been more important.
The challenge in devising a regulatory approach to new technologies is finding the appropriate balance between encouraging innovation and providing regulatory clarity and ensuring that legislation mitigates possible risks raised by the relevant activities. Investors must be protected, competition must be promoted and encouraged. A real source of stability in this space is in the fact that many of those involved are themselves ex-regulators with positive history and hinterland to bring to the debate. Thus, industry engagement must be maximised, as it is crucial to achieve a proportionate and risk-based approach. It is equally crucial for legislators and regulators to continue to become increasingly knowledgeable and involved with opportunities, use cases, benefits and indeed, risks.
The Financial Services Bill that went through Parliament this year gave me the opportunity to table amendments on financial inclusion, blockchain, digital identity and more, unfortunately the Government passed the Bill without accepting any of those amendments although rumours of another Financial Services Bill in Q2 2022 could give me a chance to restate my arguments in Parliament. There are also rumours that Model Law on Electronic Transferable Records (MLETR) could be bought forward in our legislative programme in the next session. There could be a good opportunity here not just to get the UK ahead of the game on applying English and Welsh law in the international arena, but also to get some enabling provisions on the statute book to future proof existing procedures and enable a more flexible approach as technology develops.
It is encouraging that over the decade of discussing fintech with fellow parliamentarians (the fintech parliamentary group I founded and co-chair was established in 2015) the sector is now so much better understood in Westminster. CBDCs are currently at the fore of many of the discussions and debates currently being held in Parliament and although I limited my wish list I could have included open banking, DeFi, NFTs, smart contracts… there is so much fabulous innovation to engage with.
As was the case with fintech over a decade ago, the UK must engender an innovation-friendly business ecosystem by having a principles-based, outcome-focused approach to regulation, so that existing regulatory solutions and frameworks can be adapted quickly, if appropriate and required. It will be the combination of Government positive action on regulation, Bank of England positive action on supporting the development of regulation, industry and policy makers coming together for the wider public good and national interest which will enable and empower future finance now.