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Pile of money representing Fintech R&D

In the past, financial services firms were generally slow to embrace change and adopt new technologies. That has changed in recent years in a spectacular whirlwind of bright ideas and inward investment into financial technology.

Now, the pace of technological advancement has accelerated and financial services seem far more open to accepting technology. They recognise it can make them more efficient and more profitable, as well as enriching their customer experience.

You can throw new players and disruptive technologies into the mix. Ones that aren’t giving the established players any choice, like Bitcoin and various crowdfunding platforms. These are shaking up the way traditional systems operate.

Embracing FinTech innovation

We are going to explore what FinTech is, where FinTech is happening, and some of the exciting examples of FinTech being developed right now. Plus, how you can benefit from R&D tax credits if you are innovating in the FinTech sector.

What is FinTech?

FinTech – a portmanteau of the words financial and technology – has become something of a catch-all term for innovation in finance.

And FinTech is a huge area of research and development

Where is the R&D in FinTech?

The FinTech sector is largely digital but encompasses a huge number of themes that have the potential to qualify for R&D tax credits. If you are developing new or improved products, services or processes and there is an element of risk in the outcome then you could be eligible for this generous government support. It is worth up to 33p for every pound you spend on qualifying R&D.

Areas of R&D in the FinTech sector include:

  • Payments and transactions
  • Big data
  • Mobile banking
  • Trading, commodities markets and FX
  • Peer-to-peer lending and crowdfunding
  • Retail banking
  • Risk and compliance
  • Privacy and security – encryption, log-in & authorisation
  • Alternative and digital currencies
  • Blockchain
  • Digital wallets
  • Advice and insurance
  • APIs
  • SDKs
  • Database management
  • Tokenisation
  • Stress testing
  • Algorithms
  • Hardware development
  • AI

The above are common types of R&D in FinTech but it is not an exhaustive list. You can talk to us if you want to explore if FinTech R&D relief is relevant for your specific financial technology project.

Next we will look at some practical examples of how FinTech relates to the real world. We find it can help to demonstrate what qualifies for R&D tax credits when you see how the technological advances translate to everyday life.

Money problems that FinTech is solving

One of the most exciting elements of this innovation is the potential to overcome problems entrenched in our lives. Here are just a few examples of the kind of problems that FinTech is solving.

Easyshare: Splitting up the bills, not your friendships.

If you have ever lived in a shared house you may be familiar with a whole host of domestic tensions: who does and doesn’t do the washing up, how long your housemates spend in the bathroom and how the household bills are split-up.

One Australian FinTech start-up, Easyshare has tackled this tricky problem by developing a platform that allows housemates to allocate how rent and other bills will be split, set up individual payment methods and then, of course, pay the money. It also adds communication functionality so that housemates can talk to each other, and get in touch with their landlords regarding maintenance issues.

Aire: Credit where a credit score is due.

The inspiration behind Aire – a London-based FinTech start-up – was the founders’ frustrations with credit scoring. It’s a problem for millions of people in the UK alone.

A credit score is essentially a prediction of how likely a given person is to pay back money that they are loaned. Traditionally, it is produced by analysing previous financial behaviour. But what if you have no financial history? Or you have a chequered financial past but your circumstances have improved?

Instead of relying on your financial history, Aire’s approach is one based upon data-driven algorithms using basic information about you. If this yields insufficient information the system initiates a virtual interview. It packages all the information up for lenders and claims to provide a credit acceptance uplift of 14% without altering a risk profile.

So FinTech innovation in this area could have a huge positive impact on people’s lives. Aire’s research and development led them to be cited as one of Europe’s hot ten Europe FinTech start-ups and a TOP150 global start-up.

Funding Circle: Fintech helping small businesses get funding and investors make a return.

When Funding Circle launched, it was because the founders felt the contemporary system for getting finance to small businesses was broken. This meant that businesses couldn’t get the cash they needed to grow, and investors could not get the returns that they were seeking. So Funding Circle was founded to create a platform where they could help each other.

The technology helps to analyse the creditworthiness of small businesses and then connect them with retail investors through an ISA or classic account, or institutional investors. It is a fast moving world and innovation is at the heart of the latest data analytics, user experience, security and systems integration.

Funding Circle has lent £5 billion to 51,000 small businesses globally, and in 2017 the money it raised created and sustained 75,000 jobs.

TransferWise: FinTech allowing peer-to-peer foreign currency exchange

TransferWise is one of the more established FinTech start-ups. The problem they were looking to solve was helping people bypass the expense of international bank transfers.

In a charming start-up story, one of the Estonian founders lived in London but was paid in Euros. The other was paid in pounds but needed to pay a mortgage in Estonia in Euros. After spending a lot of time and money arranging their own international transfers, they hatched a plan.

They would check the actual exchange rate, and then deposit the appropriate value of Pounds and Euros into each other’s bank accounts each month. They cut out the charges associated with exchanges, the waiting for the transaction to complete and the stress. A few years and a lot of technology later, TransferWise now does this on a global scale moving more than $1 billion a month.

Their idea and technology makes it low cost, easy, secure and fast to make international payments using a peer-to-peer platform.

Onescan: From looking to buying in just ten seconds.

Onescan, owned by UK tech company Ensygnia, is a mobile payment platform predicted to make a big splash. At the World Mobile Congress in Barcelona it was voted amongst the innovations likely to have the greatest impact on the global mobile industry over the next 10 years. Since starting up in 2012 they have won a string of awards in the ‘start-up’ and ‘tech’ spheres.

So what does Onescan do? Put simply it allows you to make mobile payments online in seconds. An app on your phone stores your personal details (but not financial details: these are tokenised on Ensygnia’s identity management platform and can only be accessed via a smartphone lock and key system).

If you are shopping on a website signed up to the Onescan platform, you will get a QR code next to your desired product which you zap with your phone. Data is securely swapped between app and website and ten seconds later you have made the purchase. It’s a frictionless transaction – no usernames, no passwords, no card details.

The UK-based company has innovated in the fields of log-in and payment applications which is demonstrated by two successful UK patents. Again security is paramount so we see multiple layers of protection including tokenisation, digital signatures and integration with smartphones fingerprint readers to name a few.

Ensygnia cite their achievement in overcoming the traditional trade-off between ease of use and security that is typically present in financial transactions – the easier it is to use something, the more vulnerable it is to fraudsters.

Where is FinTech happening?

After the financial crash, banks – undertaking industrial levels of cost-cutting – shed many of their in-house developers. Since then, we have seen many of these experts forming disruptive FinTech start-ups to sell their innovative products back to the banks.

They are in a sweet spot of knowing what the banks need and what today’s technology is capable of achieving.

London’s FinTech scene

There is an absolutely thriving FinTech start-up culture, bursting at the seams with innovation. It’s happening all over the world, but London acts as a major FinTech innovation hub.

With London’s dominant position in global finance, it was always going to be a likely contender to lead the way in FinTech too. And that is exactly what has happened – in Europe at least. To highlight this long-term trend, in the third quarter of 2017, London accounted for seven of the top ten European deals for FinTech companies. Globally though, America and in particular Silicon Valley lead the way.

In London there is an annual FinTech festival called London FinTech Week, and there are a number of FinTech hubs and accelerators that offer support to the sector.

One of the most prominent is Level 39. Named after the floor it originally occupied in the iconic One Canada Square at Canary Wharf, it offers workspace for FinTech talent as well as mentoring and events. In its first year it welcomed 86 member companies, hosted 3 accelerator programmes and provided more than 340 hours of mentoring. Such is its success that it has expanded to three floors with 80,000 square feet of space.

The FinTech Innovation Lab London is a FinTech accelerator programme offering 12 weeks of mentorship to FinTech companies with IT executives from many of the world’s largest banks. Tens of millions of dollars in funding has been raised to date and alumni companies have created dozens of proofs of concepts for banks. Some notable successes include UTrade Solutions, FinGenius and Logical Glue.

The Startupbootcamp FinTech Accelerator provides funding, office space and mentorship for up to 10 growth stage FinTech companies with access to over 100 industry experts. Partner companies like Lloyds Bank, Mastercard and Route66 provide extensive support.

In 2017, Barclays launched the largest FinTech lab in Europe called Rise. It can be a base for 40 FinTech companies and will facilitate more than 200 hours of learning and events a month. It helps companies develop new business models and prototypes to become live products and services.

Prominent FinTech

FinTech has probably touched all our lives in one way or another in recent years, think FinTech software, mobile banking apps or contactless card payments. But one of the most famous – and disruptive – examples of financial technology of all has been Bitcoin.

Bitcoin’s rollercoaster ride

This cryptocurrency was created by Satoshi Nakamoto and released in January 2009 as open source code. It is a peer-to-peer electronic cash system. Since its launch it has had something of a roller-coaster ride. Its value has fluctuated wildly, making and losing people fortunes overnight. And there have been a slew of rival cryptocurrencies since.

Part of its open-sourced infrastructure sees it relying on an open network of third party computers to verify the transactions by solving increasingly difficult cryptographic problems. In return they are rewarded with bitcoins – the practice is called mining.  The technology used for verifying and recording these transactions is called blockchain, and it is an exciting field in its own right.

In the early days people participated in mining on their laptops, but as the puzzles have become more complicated, more specialist equipment has become necessary to make it worthwhile. There was a case of one person leaving his laptop in the garage mining away, forgetting about and returning to find $12 million worth of Bitcoin on his hard-drive!

What does the future hold for Bitcoin?

Bitcoin has become more established but it is so disruptive no-one really knows what its future will be. On the plus side it offers a low cost way to transfer money across borders and a route to financial services for people in both developing and developed economies who have hitherto had little or no access to bank accounts. However it has also been a useful tool to crooks looking to money-launder, and is a preferred way for computer hackers to extort money from their victims.

Future of FinTech

FinTech for the back office

Whilst most of us are familiar with high-profile FinTech like Bitcoin and contactless payments, much of it is developed for the back office of financial institutions. Be it to execute trading more efficiently, attempting to stay ahead of the curve with cybersecurity or helping multiple client databases talk to each other.

This last point is especially important in an age when firms have to demonstrate to regulators that they ‘know their clients’. In fact there is a whole separate industry around compliance with regulators known as RegTech.

FinTech for social good

Financial services, particularly the banks, have often taken on the role of pantomime villain in recent years. But one of most positive aspects of FinTech is its capacity for social good. Here are three positive ways that it is influencing vulnerable people’s lives:

  • In many of the poorest countries in the world, millions of people have no access to the banking system. Even in the UK it is thought that 4% of households do not have a bank account.  Two companies M-Pesain Kenya, bKash in Bangladesh are giving people access to financial services with mobile-based payment systems.
  • There are 2.3 billion people in the world who do not have a legal identity. Without an identity it is a struggle to access social and financial services that we take for granted. AID:Tech use FinTech blockchain to create unique digital identities and keep permanent records of transactions associated with them. These can then help manage financial and social entitlements. The transparency that comes with this helps people who may previously have seemed beyond help – like Syrian refugees in Lebanon. The data insights that the technology provides allows partners to identify fraud and inefficiencies.
  • Crowdfunding and microfinance have been increasingly popular. Dekiis a charity that facilitates microloans of as little as £10 from the developed world to hardworking entrepreneurs in the developing world. Agricultural loans are provided to enable farmers to purchase seeds and livestock, provide stock for market stalls or make capital equipment purchases. Loans are typically repaid in 6-12 months and business training and support are integral components of the programme.

Kickstarter is an alternative way of funding projects. While the creators keep 100% of the ownership of their work, the supporters normally get something in return – backers of a book may get an early copy, while a bigger pledge to a film may get the donor into the premiere.

Get support for your FinTech project with R&D tax credits

FinTech is a massive area of growth. Globally, nearly $130 billion was invested in FinTech between 2014 and the first quarter of 2018.  Money into British FinTech start-ups alone stood at about £800 million in 2017 – double that of the previous year.

FinTech innovation and R&D go hand in hand. Particularly digital R&D activity that traditionally may not have been recognised as research and development. It absolutely is though – and can often qualify for R&D tax credits worth around one third of the associated costs. For a company investing £200,000 on qualifying activities, that could translate to almost £70,000.

The range of R&D we have explored in this article gives an idea of the kinds of activities that could qualify, but there is much more. If you are developing products or services in any areas of FinTech, get in touch with ForrestBrown. We have considerable experience in advising on, and preparing, FinTech R&D tax credit claims.

We have a large team of chartered tax advisers who specialise in identifying and maximising research and development. They are supported by sector specialists, and other tax professionals such as former-HMRC tax inspectors. Together, we help our clients claim back hundreds of thousands of pounds each year. Why not give us a call today?

Get in touch

If your company is innovating in FinTech contact ForrestBrown to see how R&D tax credits could help you grow your business.

This article was last updated on 2 November 2018.