Data Protection and Digital Information Bill: Innovate Finance Briefing

About Innovate Finance

Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.

The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception in the era following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses access finance.

What is the Digital Protection and Digital Information Bill?

The Digital Protection and Digital Information (DPDI) Bill has its Second Reading in the House of Commons on 5 September 2022. The Bill will introduce a new UK data protection regime (amending the UK General Data Protection Regulation (UK GDPR)), new objectives for the data regulator (the Information Commissioner’s Office (ICO)), powers to mandate open data in sectors of the economy (as per open banking), and rules to enable the introduction of digital ID.

Why is it relevant to FinTechs?

The UK is a trailblazer in both data regulation and innovation. Today, there are over 4.5 million regular users of open banking in the UK following the CMA Retail Banking Market Investigation 2017. They all benefit from the ability to access and port their financial data in real time through open banking, supporting payments, account switching, and innovative services that bring together financial data from various sources and enable intelligent management of finances. We are also seeing further progress on the pension dashboard which will bring Open Finance to pensions. But the UK cannot afford to rest on its laurels if it seeks to maintain its position as a global leader and unlock the potential of Open Finance and Open Data. The next step is to extend data-sharing into non-banking data to deliver further commercial value and customer benefits; progressing from Open Banking to Open Finance. Smoothing out inefficiencies in exchanging that data could yield significant economic benefit, with an estimated boost in GDP boost of 1% to 1.5% in developed economies like the UK. Below are the critical areas of the Bill that are relevant to (current and potential) UK FinTechs.

Whilst the UK took the lead on open banking, which stimulated significant Fintech innovation and growth in the UK, other countries are now leapfrogging us:

• The Australian Government has already begun forging its path towards Open Finance and beyond through the Consumer Data Right (2019) legislation. This has established the legal framework for sharing customer-driven data-sharing in banking and is due to be expanded beyond the financial services sector to include energy and telecommunications data.
• The Singaporean Government has invested in the world’s first public digital infrastructure to use a national digital identity that enables secure data portability between government agencies and financial institutions. This infrastructure will underpin the transition to Open Data.

The Bill has vital measures that will enable the UK to maintain its global lead in financial innovation and deliver significant economic, environmental and social benefits.

Digital Identification

The Bill makes a provision for Digital ID, providing the regulatory framework for technology that can safely and accurately determine an individual’s identity. Digital ID – or a ‘digital financial passport’ – is cited by most campaigners and activists in the financial inclusion space as having the greatest potential to reduce financial exclusion. The independent Financial Inclusion Commission has called for digital ID as a tool to tackle financial exclusion.

The Bill would also enable public authorities to disclose personal information to trusted digital identity providers for the purpose of identity and eligibility verification. This will enable the introduction of digital ID schemes, including some trust frameworks currently being piloted, and should create new opportunities for innovation including easier customer take-on, addressing financial exclusion and providing greater security for existing and new products.

Digital ID is also emerging as an important component of future roll-out of a central bank digital currency. It would provide user verification for a CBDC; something which would also support further safeguards in the crypto-asset market. Digital ID is therefore a really critical part of the infrastructure of digital financial services and systems – and progressing the legal underpinnings is critical to enabling further innovations.

We therefore strongly support the Bill’s provisions on Digital ID.

Smart data provisions

The powers included in the Bill allow Government departments to establish sector-based Smart Data schemes with supporting regulation, to ensure consumer and business protection. This is the secure and consented sharing of customer data with authorised third-party providers. They will also enable Government to require suppliers of goods, services and digital content specified in the regulations, and other persons who process the relevant data, to provide customers or their authorised representatives with access to data relating to that customer (customer data) and contextual information relating to the goods, services or digital content provided by the supplier (business data).

These provisions could support the development of open finance in sectors other than banking (e.g. insurance) as well as enabling use of data in other sectors for financial applications (e.g retail or search engine data to support credit decisioning or anti-fraud and Environmental, Social and Governance (ESG) products that connect environmental and social impact to financial services).

Small business finance and tackling climate change a two areas that would benefit from smart data provisions:

• Net Zero: Provisions in the Bill to enable open data across the economy will enable the connection of financial data with ‘real economy’ data to enable more accurate, cheaper and faster measurement and reporting of emissions and emission reduction plans and can unlock tech-based solutions that incorporate this into financial markets and transactions to incentivise Net Zero transition pathway plans.
• SME Finance: Smart data provisions will also deliver a host of economic benefits for UK SMEs. Expanding data sharing will enable lenders to build a better credit profile for SMEs who choose to share their financial footprint and who are otherwise unable to demonstrate their creditworthiness. A more open financial ecosystem will also enable SME access to retail credit through alternative credit underwriting, simplified application and onboarding processes, and increased deposit yields through easier account switching.

At Annex 1 below we have shared a short briefing paper that provides details of some of the ways in which FinTechs are benefiting the UK economy, communities and families, including a range of examples of firms who are supporting our small business sector and green finance solutions, many of which use open banking to do so.

Smart data, by opening up access (with customers consent) to a wider source of data would enable a huge increase in innovation that addresses societal, environmental and economic needs. We therefore strongly support the Bill’s provisions on Smart data.

What more could the UK Government do?

• Government should commit to mandating public sector data owners to open up (with safeguards) their data sets for digital ID to support and accelerate this technology’s adoption – in particular DVLA to enable identity verification, HMRC and DWP (which can also help build an individual’s credit profile).

 Annex 1:

Mapping the Positive Impact of UK FinTech

Introduction

Founders of FinTech companies have always been purpose driven – motivated to make a difference, solve societal challenges and create a fairer and more democratic financial services sector.

Many point to the financial crash of 2008 as the catalyst for the FinTech sector we see today. Startups and scaleups stepped in to respond to the needs of individuals and small businesses for affordable finance, helping to rebuild trust and resilience in the financial services system. Since then, FinTech has played a key role in fostering greater financial wellness and financial inclusion in the UK and across the world.

In the face of the COVID-19 pandemic, FinTech stepped up to the challenge, supporting small firms, assisting people in managing their household finances, enabling safe commerce with contactless payments and online sales, and even helping individuals to bring food and goods to those in need.

FinTechs are supporting industry and society along the road to Net Zero. Across the UK, there are already dozens of sustainable FinTechs helping consumers and businesses achieve Net Zero by funding green innovation, providing companies with better tools to measure and mitigate their climate impact, or by giving consumers the information they need to make more climate-friendly decisions.

And now - in 2022 - FinTechs are looking at how they can assist people and businesses in the face of rapidly rising costs of living and supply chain costs.

This paper catalogues some of the ways in which FinTech firms are making a positive impact for society, the economy and the environment. It highlights core areas of financial services in which FinTech is driving better outcomes for consumers and small businesses. This is designed to provide case studies and bring to life what FinTech is delivering.

It includes tangible examples of how FinTech companies have and are continuing to foster greater financial health and wellness across the UK. It describes the work of FinTech companies which are supporting a fairer, more transparent, and more effective financial services system.

It is clear the FinTech ecosystem is driving forward a number of key areas which are helping to create a better financial services system in the UK that works for all, including:

• Competition and choice: FinTechs are new market entrants challenging the status quo by providing consumers and small businesses with alternatives to the incumbent financial services providers. This creates a better sector for consumers as a whole, as even the heritage financial services players are made to up their game to capture and hold on to market share.

Speed and flexibility: FinTech companies’ infrastructure is built on entirely new technology. This allows them to build and offer new products and services far quicker than traditional banks. It also means FinTech companies can keep their operations running smoothly at a much lower cost.

• Customer experience: The ethos of many FinTech companies is heavily geared towards putting the customer at the centre of the proposition, providing a good customer experience and fostering positive outcomes for the consumer. The digital-first or

digital-only approach of FinTech makes onboarding new customers, responding to their requests, understanding their needs, and personalising services far quicker.

• Reaching the underserved and supporting greater financial inclusion: Many FinTech companies are targeting demographics that have traditionally been poorly served by incumbent financial institutions. This includes SMEs, who have long struggled to get the finance they need for growth. Several FinTech companies have also centred their proposition and business model on improving individual consumers' financial lives, especially those that may have been excluded from or underserved by the current financial services system. These FinTechs are deploying new technologies and using novel approaches with data to achieve their mission-driven desire to make a genuine difference to those less well-off.

• Fostering greater financial health and wellness: FinTech is unlocking opportunities for consumers to better understand, manage, and grow their money. This includes the opportunity for many individuals to build their wealth through savings, pensions and investments in a much cheaper and more transparent way. Thanks to financial innovation, this is no longer the preserve of the wealthiest in society.

Building on the above broad themes, we have outlined five specific areas below (and included use cases and case studies for each of these) where FinTech is making an immediate, positive and tangible impact on UK society, the economy, and the environment.

Contribution to the UK economy - fostering job creation and growth:

• The sector’s direct GVA contribution to the economy is estimated to be £13.7bn by 2030, with job creation contributing to 70% of this. (KPMG analysis).
• By 2030, it is expected that 105,500 people will be employed in FinTech. In 2019, it was 76,500. (HM Department for International Trade)

Access to more products at the right time in people’s lives: creating more accessible, better, and cheaper financial services for all

The “digital first” or “digital only” delivery of FinTech products is improving ease of access. Many people find engaging with financial services much easier and more efficient if they can do so via a mobile device.

During the start of the Covid-19 pandemic, six million UK residents downloaded a banking app for the first time, demonstrating the importance that financial technology plays in improving accessibility to core products and services. Technology and financial innovation has improved access for consumers to areas such as affordable credit, savings, other banking services, and payments.

• Access to credit for those without a clear credit history

CreditKudos: Builds credit decisioning products using alternative data, including open banking data, to deliver creditworthiness assessments faster and more accurately for loan providers. Helps consumers without a clear credit history (“thin files”) to access lending products and build their credit score. Clients include: Admiral, Serve & Protect Credit Union, Zilch, CarFinance 247.

Loqbox: Bristol headquartered. Helps to build consumers’ credit scores by encouraging them to lock away monthly savings against a 0% APR loan. Loqbox reports the “loan” repayments to the three credit reference agencies, which demonstrates the customer can handle credit and thereby improves their credit worthiness. After a year, all savings are returned to the customer and they’ll have a higher credit score.

• Access to affordable credit

Zilch: Providing consumers with a means to split the cost of payments into four equal blocks with zero interest and without late payment fees. Helps consumers manage costs and “lumpy” expenditure, often a cheaper alternative, faster alternative to credit cards with a better customer experience. Zilch now has 1.2 million customers in the UK.

Klarna: Online payment platform designed to facilitate cashless payments through instalments. Klarna’s platform offers in-store, mobile, and online payments as well as deliveries and returns services and works on a buy now, pay later model, thereby enabling shoppers to finance bigger

retail purchases credit-free. More than 15 million UK consumers use Klarna, and 17,000 merchants offer Klarna as a checkout option.

• Access to savings

Chip: Developer of an automatic savings app designed to simplify and automate the process of saving funds. Chip’s mobile app uses artificial intelligence, open banking technology and a simple user interface to enable customers to automatically save their money for customers. Chip has more than 400,000 customers in the UK, and employs over 150 people.

• Access to cheaper and more accessible investment products

Moneyfarm: Online wealth management platform that grows and protects customers’ wealth inexpensively and transparently. The company's platform is used for creating investment portfolios based on investment targets, and on how much risk customers are prepared to take, thereby providing customers a recommended, low-cost portfolio. 80,000 investors use Moneyfarm, totalling £2.2bn assets under management.

• Access to bank accounts and banking services

Starling Bank: Starling is a digital-only bank which offers free current account services that can be managed with a mobile device. The mobile app provides customers with real-time spending reports, and a same-day payment service. All its services are paperless. Starling is acting as a real competitor to high street banks: in Q3 2021, it attracted a net of over 15,000 customers via the Current Account Switching Service. Starling now has over two million current account users, and employs over 1,700 people with offices in London, Southampton, Cardiff and Belfast.

Revolut: Financial “super app” that provides multiple financial services, including card payments at home and abroad, budgeting and spending analytics, savings, insurance, stocks and crypto investments, and international currency transfers. Revolut has over 15 million UK customers (2021 figures), and employs more than 3,500 people globally.

Onfido: Making identity verification easier and more reliable. Developer of a platform that automates the identity verification process, so that financial institutions can be sure that people applying for their products and services are who they say they are. Onfido deploys artificial intelligence to check government IDs and facial biometrics from the person applying to ensure that IDs are genuine. In so doing, it speeds up customer onboarding (which is otherwise

paper-based) and roots out potential identity fraudsters. Onfido’s clients include Revolut, Mettle (NatWest) and Curve. It employs over 600 people.

• Access to more convenient and cheaper services, including payments and money transfers

Curve: A digital wallet and card payment system that allows users to combine all debit and credit cards into one. Users can see their spending across all accounts in one place and earn cashback on transactions. Curve has novel features such as “go back in time” allowing users to switch previous payments from one card to another, and “Flex” which allows users to pay in instalments

for previous purchases. Curve has over two million UK customers and employs nearly 500 people.

Wise: Digital platform that provides cross-border money transfers at much cheaper rates than incumbents. Wise allows customers (both consumers and businesses) to hold balances in over 50 currencies, and use a debit card to shop and spend while abroad. Wise is a publicly traded company, with nearly 3,000 employees globally.

Supporting the engine of the UK economy: SMEs

Data compiled by Innovate Finance in September 2021 shows that alternative lenders and challenger banks increased their contribution of the total amount lent to all UK SMEs from 50% in 2014 to 65% in 2019 (from £69bn to £83bn).

Despite initial obstacles and delays to obtaining accreditation for the Coronavirus Business Interruption Loan Scheme (CBILS), alternative lenders and smaller banks provided around 30% of all CBILS Loans to businesses in 2020. Peer-to-peer (P2P) and other FinTech lenders punched above their weight with over 20% of all CBILS loans from when they joined the scheme.

This data reflects the importance of FinTechs in ensuring SMEs across the UK get the financing they need to continue to grow. Beyond financing, FinTechs also support SMEs across a host of other areas including operations, tax, and payments.

• SME lending

FundingCircle: Online platform that delivers finance to creditworthy SMEs. FundingCircle’s machine learning technology means SMEs can complete a loan application and receive a decision in a matter of minutes, enabling them to get funding quickly at an affordable rate. To date, FundingCircle has lent £6.2 billion to SMEs, supporting the creation of 100,000 jobs.

Funding Circle has lent to 116,000 small businesses since 2010, and now employs over 800 people.

iwoca: A credit finance platform that assists small businesses in getting the finance they need. Provides unsecured business loans and short-term cash loans along with access to funding for inventory, technology, employees and international expansion, enabling small businesses to get approved for a loan through an online application process. To date, iwoca has lent £2 billion to over 50,000 small businesses. It has nearly 300 employees.

Atom Bank: Mobile-only bank headquartered in County Durham. Offers secured business lending for SMEs, funded by consumer savings accounts and mortgages. To date, it has lent over

£1bn through more than 1,000 loans, and it participated in CBILs and RLS. Employs nearly 500 people.

• Equity crowdfunding

Seedrs: Equity crowdfunding platform for investing in startups and other growth companies. Seedrs' platform handles all of the legal documentation and due diligence to ensure that businesses are set up for success, enabling “the crowd” of private and retail investors to invest in any of the startups on the platform and advise the businesses on how to earn equity returns if the business is sold, floats or pays a dividend. Seedrs helps over 250 companies a year raise equity, with a total of around £300m invested on the platform each year. Companies such as Chapel Down (wine producer), AFC Wimbledon and Revolut have run crowdfunding campaigns on Seedrs. In 2021, Seedrs was bought by US company Republic for USD100m.

• Financial services for SMEs: supporting growth and productivity

SaltPay: Builder of payments and operations technology designed specifically for small businesses. Helps small businesses owners manage and accept payments of any kind in-store, and other services such as automated stock and inventory management and customer loyalty programmes - thereby improving small businesses revenues, operational efficiency and customer engagement. SaltPay currently has 400 employees across 12 countries, with its headquarters in the UK. The company has raised around £770m to date.

Financial management: helping individuals increase their financial health and financial wellness

FinTech solutions have played a critical role in enabling larger segments of the population to make their money ‘work for them’, allowing more individuals the opportunity to save, build and grow their wealth. Many FinTechs also serve to drive greater awareness and education around financial services for all age levels, fostering greater financial health.

• Pensions

Pension Bee: Online pension provider, which helps people transfer all their pensions for all former employers into one single plan, that they can easily manage digitally. Gives customers simple options to manage their pension according to their age risk appetite, and provides a much easier way to understand current retirement savings and projected retirement income. PensionBee now has around 650,000 customers and more than £2bn assets under management

• Tools to enable better financial management

gohenry: Developer of a money management platform for children and teenagers, intended to empower young people to take part in the digital economy. The company's platform uses a

pre-paid card and application with unique parental controls, including spending limits to decide where their child can spend money. Delivers financial education to young people to help them learn how to earn, save, spend, and give, and apply this knowledge in the real world. gohenry has around 1.2 million customers (including parents and children).

Wagestream: App that enables employees to access their wages at any point, rather than waiting till the end of the month. Helps consumers manage “lumpy” expenditure or a significant emergency purchase (e.g. for white goods) without having to take out a loan or other credit

product, and builds their financial resilience with automated micro-savings and financial advice. Wagestream’s customers include the Royal Surrey NHS Trust, Casual Dining Group, and Camden Town Brewery.

MoneyHub: Bristol headquartered Business-to-business Open Finance platform which aims to help financial services companies understand and engage with customers in order to improve their financial wellbeing. Worked with The Big Exchange to create an app for customers to see all of their accounts in one place regardless of where they bank, invest, save or borrow. Includes a service to allow customers to build their credit score from their rental payments. Its clients include Lloyds, Nationwide, and The Big Exchange.

Tackling climate change: creating Net Zero financial markets and services

FinTechs have a key role to play in supporting individuals, SMEs, large businesses, government and the entire UK economy in creating a greener and more sustainable future and reaching our goals around Net Zero. This includes providing consumers with the tools necessary to measure their impact and carbon footprint, take action, and make informed choices.

• FinTech-powered tools and technologies for businesses

OakNorth: OakNorth’s Climate Change Risk Framework is software which provides insights to help US banks and financial institutions get ahead of both the risks and opportunities posed by climate change and related regulation. The software provides portfolio and credit analysis to assess financial risk of climate change. As a credit risk management tool, it looks at the impact of different scenarios of climate change, such as varying degrees of temperature rises (1.5, 2.4 and 2.8 degrees Celsius) across various sub sectors of the US economy and across various timeframes (5, 10, 20 and 30 years). OakNorth employs nearly 1,000 people and is one of the UK’s FinTech “unicorns”.

Eigen Technologies: AI platform that processes documents to extract data across finance, insurance, law, manufacturing and professional services. Eigen’s natural language processing technology provides rigorous assessments of ESG reports and commitments. Eigen’s assessment of the qualitative data underpinning the financial system enables better ESG compliance and makes it easier to identify ‘greenwashing’. Such ESG reporting will support the shift in investment away from carbon intensive activities and towards low/zero-carbon and those businesses implementing science-based targets for transition to Net Zero. Eigen’s clients include global investment banks and major international law firms.

• FinTech-powered tools and technologies for consumers

Clim8: Sustainable investments platform that allows consumers to invest in companies making an impact such as recycling, clean water, sustainable food, clean technology, and other environmental sectors, thereby enabling consumers to promote sustainable development and build their wealth. Clim8 currently has around 16,000 customers.

CoGo and Tink: CoGo is an open banking platform that enables consumers to see the carbon impact of their purchases. The app connects to its customers’ bank accounts and calculates personalised carbon footprint in real-time based on spending habits and transactions. The carbon footprint calculator analyses banking data and matches each transaction to its industry. It then multiplies each transaction by the ‘emissions factor’ for each industry depending on how carbon intensive that industry is. The emissions factors are lower if you use renewable energy providers or second-hand retail vendors and if you do not eat meat, for example. Seeing your carbon footprint, enables consumers to identify which activities are more carbon intensive and helps them make more environmentally-conscious choices. The app can also suggest businesses to support and suggests individual commitments to make positive impacts. CoGo has formed a partnership with NatWest who have integrated CoGo into the core NatWest banking app. This is being facilitated by open banking platform Tink who are providing the money management software that grants NatWest customers access to their climate insights from CoGo.

• Embedding Net Zero into capital markets

Funding Options: SME lending platform that has launched a Green Finance Initiative to drive sustainability into the SME lending market by connecting businesses to the funding they need to reach Net Zero. The initiative matches businesses which participate in renewable or sustainable activities, sell sustainable products or services or are working on green projects with lenders.

Lenders are also required to show a green commitment: e.g. by providing a product specifically tailored to the purchase or leasing of green assets; a proposition developed to support green businesses; varied pricing rates for businesses with renewable or low/zero carbon activities, products or services; and/or a sustainability, ESG or green policy. The initiative provides access to green funding enabling SMEs to reach their Net Zero goals.

Oxbury Bank: The only FinTech dedicated entirely to British agriculture and the food supply chain and has had a commitment to Net Zero from inception. Provides specialised lending and payment solutions exclusively to farmers, agri-food businesses and the rural economy, and delivers capital to the industry through climate initiative lending. This includes lending focussing on specific farming needs such as carbon sequestration projects and animal welfare improvements as well as renewable energy projects and infrastructure and productivity improvements. Oxbury is working on building a payments ecosystem to support the farming community as the solution to net-zero transition for other sectors via nature-based solutions to address the wider economy’s scope three emissions and biodiversity net gain. Oxbury is headquartered in Chester, and employs nearly 100 people.