Legacy banks don’t deserve a bigger slice of the pie than fintech businesses
Rishi Sunak plans to slash the bank profit surcharge from 8 per cent to 3 per cent. This is designed to offset the rise in corporation tax to 25 per cent in 2023, but only for the big banks. John Glen, economic secretary to the Treasury, outlined the logic behind the move in September, stating “To be competitive, we have to have competitive tax rates.”
It seems that Sunak and Glen may have neglected to extend this competitiveness to digital banks – an important part of the fintech sector. Digital banks stand to pay 6 per cent more corporation tax and miss out on the surcharge reduction, as it is only levied on profits over twenty-five million pounds. High growth, high investment companies usually operate losses, hence they are missing out. This means that digital banks would seem to be facing a tax rise of 6 per cent compared to the 1 per cent facing the established banks.
How does this disparity compare to government rhetoric on the importance of innovation, competition, and the continuing development of the UK’s fintech industry?
Not well.
Speaking at FinTech Week in April 2021, Sunak highlighted what he saw as the driving force behind growth in financial services, “If we can capture the extraordinary potential of technology, we’ll cement the UK’s position as the world’s pre-eminent financial centre.” It seems this sentiment has perhaps been forgotten. Digital banks and their fintech compadres drive technological advancement. Their innovations have seen the UK establish itself as the world’s leading fintech market and have forced legacy banks to begrudgingly adopt new technologies into their offerings. Would the big banks have started offering digital services had it not been for Monzo, Starling, and Revolut?
This progress is at risk from ill-considered tax changes trailed by the Treasury. When he was made City Minister in 2018, John Glen acknowledged the UK was the “best place in the world” for fintech. He said his role was “to ensure it remains as such.” Giving legacy banks what looks like a 5 per cent tax advantage over their challenger rivals is an idiosyncratic way of achieving this.
We need a tax policy designed to foster the fintech sector. If they do not, the UK will aimlessly wander into a situation where a world leading
industry is stifled just at as it begins to really scale.
Investment of £13.5bn into tech industries in the first half of 2021 saw the UK produce twenty new tech unicorns (companies worth more than £1bn.) This represents a rate of almost one new unicorn being created a week. Of these twenty companies, eleven were financial technology firms, attracting £4.2bn of investment. Slapping a tax increase of 6 per cent onto such firms could well deter investment and reduce opportunities for rapid scale-ups.
Yet again, the big banks have wielded their significant power to claim an outsized slice of government support. Miles Celic, chief executive of the lobbying group TheCityUk, claimed that the UK’s financial services future “rests on a vision based on openness, competitiveness, and connectivity.” Few would disagree with this statement. What I take issue with is the big banks using their influence to secure unfair advantages from government. Rather than open, competitive, and connected markets, we will instead see a gradual slide back to the monopolistic system present before the implementation of Open Banking in 2016.
This is bad for innovation, bad for competition, bad for consumers – who have benefited most from the superior service offered by fintechs. And it’s bad for the economy.
The UK is home to 105 tech unicorns, more than Germany and France combined. There are 153
further companies with the potential to grow into a valuation of £1bn, known as “futurecorns”. The tech industries, including fintech, remain nascent. Government ministers need to break free of old patterns of thinking (and lobbying) that prioritise the big banks. An extension of the proposed tax benefits to digital banks and fintech companies is one basic, and seemingly obvious policy to everyone except Treasury.
Gifting legacy banks a 5 per cent tax advantage over genuine innovators would be an act of self-flagellation. Let us hope that Rishi Sunak and John Glen re-read their previous statements on the importance of fintech development and reconsider. A failure to do so could cost fintech its pre-eminent position globally and sap the momentum from an industry which has consistently delivered growth, innovation, and competition in the UK.