The government is preparing an industrial strategy and it will focus on the sectors which offer the highest growth opportunity for the economy and business. Eight growth-driving sectors have been identified. Mickledore has considered the drivers of change in these sectors and the implications for business support and investment.
What are financial services businesses?
As ever, umbrella terms can muddy our ability to focus on the local businesses and investment opportunities. The financial services industry can be segmented into four main areas: banking (including commercial and investment banking), insurance, investment management, and fintech (financial technology). This sector has been significantly disrupted over the last 20 years; however, in many cases, it is challenging to distinguish fintech companies from traditional financial services providers.
Drivers of change
- Technology is changing everything. The rise of digital channels, mobile banking, and online platforms are reshaping how financial services are delivered and consumed. Online solutions do not only change the customer interface, but they have also allowed easier business scalability and cost-effectiveness in infrastructure and operations. This has allowed a widening of the consumer offer and dynamic growth from an industry that had hitherto reached maturity.
- Security & Data create challenges. As services have migrated online, new systems have been able to leverage data to gain insights into customers; however, new approaches to security have also been required to protect identities and funds. Fraud detection, the protection of personal data, and the avoidance of money laundering are key elements of the industry.
- Customers expect immediacy. Customers now expect seamless online tools which further drive digitalisation, and this trend is reducing the relevance of expensive physical branch infrastructure.
- Competitors are everywhere. From a position 20 years ago, when banking, wealth management, and insurance (particularly personal insurance) were in the hands of a few venerable institutions, the new online world has blown the doors wide open.
UK Position - opportunities and issues
For people working outside of the sector, it is easy to overlook that the UK is the largest financial centre outside the US, the most globally connected banking hub, and the second-largest exporter of financial services in the G7. Whilst the UK publishes bluster about many sectors, financial services is a sector of enormous strength for the economy. This is one sector within the UK economy where large numbers of overseas businesses may believe they are missing out if they do not have a UK presence.
London, in particular, has built on its historic critical mass, arising from its leadership in banking and markets, with economies of agglomeration and a supportive regulatory environment, to emerge as a centre for fintech. The interconnected financial ecosystem encompassing banking, insurance, asset management, and capital markets has helped support these innovations. As disruptors, however, fintech businesses have increasingly been establishing their bases outside the traditional City of London environment.
The 2008/09 Western financial crisis was a pivotal moment when the UK sought to move away from over-reliance on a small number of large financial institutions. Almost two decades later, the UK has a new generation of digital providers and financial services businesses that have built their capitalisation and are expanding internationally and domestically.
Securing growth and investment at local level
Significant financial services investment is no longer the preserve of London and the handful of other UK cities that have traditionally secured the majority of back-office investments. A compelling investment case can be made by any regional centre accessible by a large catchment labour force and with demonstrable digital skills.
There are several dozen disruptive challenger banks expanding into various locations across the UK, with similar trends emerging in wealth management and among alternative lenders. Investment is also being undertaken by software businesses, which provide the online services that underpin consumer platforms, as well as data analytics and security businesses that support the industry.
An investment case to present to the industry will need to focus on evidence of workforce skills, the scale of the catchment area, as well as, ideally, an ability to attract the next generation of skills, available office space, and links to London, where key relationships remain.
Conclusion
Disruption and growth in the financial services industry are good news for regional economies. The industry remains skills-dependent and as a result, the locations which will secure investment are likely to be able to demonstrate digital skills and to be at the confluence of major transport routes, but the challenger activity which emerged from the 2008/09 financial crisis has an increasing potential to widen the economic benefits away from London where the UK’s differentiation in the sector has previously been focused.
Mickledore is an economic advisory business focused on strategy, investment, business cases and evaluation. We have worked on sector strategies across the UK. For more information or a discussion about specific local circumstances contact Nigel Wilcock at nwilcock@regionaldevelopment.co.uk