Innovation relief is at hand for FinTech sectorThursday, 9th April 2020
Guest blog by Wendy Smith, Innovation Funding Specialist – ABGI UK and chair of pro-manchester’s Manufacturing committee.
As Coronavirus dominates the agenda, with the Chancellor announcing £330 billion in relief measures to deal with its impact, it’s positive to see the UK Government also focusing on the longer term economy by helping develop the nation’s burgeoning FinTech sector. In his first Budget last month, Rishi Sunak focused a great deal of time and money on innovation-related measures. His plans to significantly increase public R&D investment to £22 billion per year by 2024-25 are a welcome development that should have a significant and positive impact on FinTech companies. While it’s impossible to ignore the current implications of the global Covid-19 pandemic, it is encouraging to see the UK Government recognising a sector that will be one of the leading lights in driving economic growth in the longer term.
Across the UK, more than £7.6bn was raised by UK-based FinTechs between 2014 and 2018. Investment within the UK sector more than trebled from £685.3m in 2014 to almost £2.4bn in 2018.
Here in the North West, a new report from Whitecap Consulting has highlighted how Greater Manchester has developed the largest regional FinTech ecosystem in England outside of London. This includes a number of well-known firms such as Adyen, Crowdcube, Funding Circle, Greensill, Klarna, MoneySuperMarket, OakNorth, and Raisin which all have a presence in the area.
In addition to the 109 active FinTechs within the region, the report also identified and researched 39 FinTech startup and scaleup businesses within the Greater Manchester ecosystem, more than any other UK region. It estimates that 9,685 people are currently directly employed within FinTech related roles across Greater Manchester, also ahead of any other UK region, with the sector contributing £540.6m GVA to the regional economy.
The additional investment set out in the March Budget adds to the package of innovation incentives and other forms of financial support available to aspirational FinTech businesses. The UK Government’s R&D (research and development) tax relief scheme offers innovative companies – and there are many within the FinTech sector – up to 33p for every pound spent on qualifying R&D (dependant on the company status and its financial position). In a drive to maintain the country’s position as a global leader in science and technology, the scheme offers those investing in product or process improvements significant tax breaks provided they meet the required criteria.
Not all innovation-related projects carried out by FinTech will, however, qualify for R&D tax relief. Companies must invest in clever and innovative projects designed to build and perfect their product if they wish to secure this relief. These can include projects focused on improving underlying software technology that supports innovative financial services operations including payments and transactions, mobile banking, peer-to-peer lending and crowdfunding, and retail banking. Developments in big data and projects seeking to make advances in text analytics and language processing, aimed at finding better means of using technology to read documents, are also likely to secure a rebate.
Making a claim for those areas of FinTech innovation can deliver significant financial rewards, which can be especially critical for businesses in their early development stages. It’s therefore important to gain an understanding of the scheme and ensure accuracy in the application process.
In addition to tax incentives which can benefit FinTechs, there are also other means of financial support available including targeted loans packages. Lombard’s Software Asset Funding product provides 3 – 5 year loans which can support companies which have invested in developing their own software for either internal operational use or for sale to third parties.
This asset is then valued and used as collateral but it remains the property of the borrower over the period of the loan. There are also no restrictions on how companies use the loan. While Lombard is the only bank currently offering such a facility, it’s anticipated others will develop similar products as the number of companies that actually have fixed assets they can secure borrowing against continues to decline.
FinTech is currently well-serviced in terms of private and equity investment. But while there are currently no sector-specific grants available, companies may be eligible for Innovate UK Smart grants which are open to any technology business. These are available ‘game-changing and disruptive’ innovations where an applicant can provide evidence of it creating an economic impact and leading to a considerable increase in market share.
As the FinTech sector continues to develop in Greater Manchester and across the rest of the UK during this time of international crisis, Government incentives along with other forms of financial support will be increasingly essential in fuelling further investment and growth. The Chancellor’s latest pledge to provide more Government support in this area is therefore hugely welcome.
Going forward, FinTech companies require a strong understanding of how to successfully secure these Government incentives and get access to other finance-raising opportunities if they are to reach their full potential.