House of Commons Business, Innovation and Skills Select Committee

House of Commons Business, Innovation and Skills Select Committee

Digital Economy inquiry – response from Barclays Bank PLC

About Barclays

Barclays is an international financial services provider engaged in personal, corporate and investment banking, credit cards and wealth management with an extensive presence in Europe, the Americas, Africa and Asia. Barclays’ purpose is to help people achieve their ambitions – in the right way.
With 325 years of history and expertise in banking, Barclays operates in over 50 countries and employs over 130,000 people. Barclays moves, lends, invests and protects money for customers and clients worldwide.
For further information about Barclays, please visit our website

Summary

Barclays welcomes the opportunity to respond to the Committee’s call for evidence. The digital economy is a global one, with Google, Facebook and other major, large scale and well-resourced technology businesses competing and innovating at pace. It has also been one of the UK’s success stories in recent years and we believe the country is well placed to continue developing a strong and vibrant sector that drives growth right across the economy, not least because of the UK’s strength in financial services. However, there are some significant challenges on the medium- to long-term horizon which theGovernment, regulators, law enforcement, industry and other playersshould look to tackle together, and sooner rather than later.
Key amongst these is the need to take a holistic approach to digital. Given its importance for maintaining the UK’s international competitiveness, support for the development of transformative, digital technologies should be rooted in the culture of public and private sector organisations alike. There is much the Government can do to set the agenda, provide a forum for experts to collaborate and raise the profile of new innovations by vocally supporting industry’s work, and it can also accelerate adoption of new tech by rolling it out through Government departments and other organisations. The introduction of contactless payment technology by Transport for London is a case in point as take up of contactless merchant acquiring terminals in the surrounding local economy immediately ballooned as a consequence.
Equally important will be the other side of the innovation equation though – providing the legal and regulatory environment in which it can thrive. For example, the EU Commission has launched a series of initiatives under the banner of achievinga Digital Single Market (such as completion of the General Data Protection Regulation), but there are many other policy files which could have a major impact on digital innovationsuch as Capital Markets Union, the soon to be published Retail Financial Services Green Paper and others more focused on non-financial service industries. Establishing guiding principles for addressing privacy, security and trust concerns, putting consumers at the heart of innovation and guaranteeing a level playing field for all participants which then informs all future policy and regulatory design both in the EU and UK will be crucial for encouraginginnovation.
Similarly, regulators can nurture innovation by providing a safe environment for the private sector to experiment with new innovations without immediately incurring normal regulatory consequences, supporting the development of industry standards (which are crucial for allowing interoperability of digital technologies) and by fundamentally regulating in a manner which supports digital processes, not just physical ones. Regulators in the UK have a good record of aiding innovation by engaging proactively, identifying barriers to growth and innovation, feeding back concerns to those driving innovation as technologies are being developed and allowing the development of industry-led solutions. Using ex ante regulation to deliver specific and targeted outcomes in complex and dynamic markets has proven to be a less successful model in the past and we would advise caution before seeking to adopt this approach to stimulating growth in digital services.
Finally, there is a considerable challenge around digital skills and education. On the one hand, consumers need to be digitally savvy so they can take advantage of the benefits digital offers. On the other, we need to ensure industry has access to people with the required skills for the economy of the future, whether it is through UK schools and universities producing tech trained graduates or by allowing labour with specialist skills fast-tracked access to the country.

Questions

Q1: What are the major barriers to UK business success in the digital economy? What steps could the Government take to help businesses to overcome these barriers?

We discussa number of specific issues we believe would create opportunities for success in the digital economy in response to later questions, but from the perspective of removing blockers forthe financial services industryBarclays’ recent response to the FCA’s call for input regarding regulatory barriers to innovation in digital and mobile solutions raised points that are equally applicable here.
In summary, we called for the regulator to create an optimal environment for facilitating the accelerated roll out of new innovation, in particular ways to meet Know Your Customer (KYC)and Anti-Money Laundering (AML) requirementsthat would enhance the roll-out of existing services and encourage the development of wholly new ones (see our response to Question 5 for further details).
In addition, we would encourage the Government to look more broadly at the structure of regulation and the scope of regulators. Given customers’ increasing use of the internet and other digital delivery channels to engage with financial services, there is a risk of confusion over regulatory responsibilities, with the FCA, Ofcom, the ICO and the CMA all potentially accountable for addressing consumer protection matters. The debate on an appropriate structure and approachto regulation in a converged digital communications sector has stalled since 2003 with the implementation of the Communications Act, and although the UK Regulators Network is working to address cross-regulator issues, there is at least a good argument for the Government to take a more holistic approach given the vast number of previously discrete sectors which are now core components of the digital economy.
We would also like greater flexibility in using digital as a communication channel to reflect consumer preferences. Banking online and through smartphones has become the number one way in which customers choose to interact with their bank, and they expect us to reflect their own channel preferences in our engagement with them. We consider it essential that firms are able to adapt their communication approach with confidence.
More generally, we would like to see regulation evolve in a manner which allows industry spaceto innovate and, whenregulatory change is required, time to plan strategically for it. Short implementation deadlines and last minute modifications stifle industry innovation by demanding more resource allocation and denying firms the latitude to find creative and innovative solutions. Good dialogue between regulators and industry, Governments and non-financial services regulators at a domestic and European level (and often international level for digital developments) is vital for achieving this.
We would very much welcome the Government supporting these suggestions.

Q2: How effective are UK financial markets in supporting the digital economy? What actions could the Government take to improve their effectiveness?

The UK is witnessing a rapidly increasing amount of inward investment aimed at creating the successful companies of tomorrow.Businesses are maturing a lot more quickly with financing rounds occurring at shorter intervals.
On the debt side, Barclays’ focus is on delivering a seamless ‘micro to IPO’ service. We support fast-growth potential tech companiesperhaps most directlythrough a tailored debt finance product available through our partnership with the European Investment Fund (EIF) and delivered locally by specialist relationship directors.Over the next two years up to £100 million will be directed to businesses where we are most likely to find transformative growth.
We have also collaborated with Google to launch a unique lending programme that invests in fast-growing UK small and medium enterprises (SMEs) in the technology, media and telecoms (TMT) sector. This deal makes the Google for Work (GfW) suite of work productivity applications available to eligible companies through low-interest financing, enabling them to finance strategic initiatives, hire additional staffand invest in future expansion.
But, more often than not,firmsin all sectors at the start-up, micro- and small business stages in particularneed risk finance, which is why it is important to address the business angel and venture capital (VC) finance equity gap in the UK.
The average time period from conception of an idea to commercialisation and revenue generation in high innovation sectors is found by several studies to be around eight years, though with significant variation (for example, a lower cost, nimbler development model associated with software development may be considerably shorter) and during which time running costs and development expenses must be met, with the probability of that innovation finding a market decreasing the longer the innovation takes to commercialise.
That is why the structure of the finance is a more important question for these innovators. They require finance which does not need interest repayments since they lack revenue to meet them. Since the financer will not have the certainty of a repayment amortisation schedule (or indeed repayment at all), they will expect to have access to the potential upside if the innovation succeeds. As such, the funding requirements for these businesses must be met primarily through equity investment, rather than debt.
Whilst VC liquidity is improving in the UK and Europe more generally, and notably in the tech sector specifically,the data show that there is still a lack of this finance. The SME Finance Monitor reports that only one per cent of UK SMEs use equity from external sources, compared to the six per cent of businesses which several studies (including the well regarded 2009 NESTA report) estimate as being high growth, innovative or subject to significant expansion.
It is worth noting that the most important capital injection a business receives is the capital with which it launches, or receives in its earliest stages. Given the high failure rates of SMEs–only half of businesses make it to five years – having sufficient cash in the bank to absorb a misstep or a failure is crucial. Equity capital can be thought of as providing a sufficient level of protection to allow a business to achieve an ‘escape velocity’ of scale, cash and growth where failures are no longer existentially threatening to a business.
Beyond this level, later stage business angel finance and VC is subject in the UK to generous taxation supports, which have been demonstrated to offer good value to the tax payer. However, the smaller market for equity means that creating efficient, large scale and expert clusters requires a market at a continent wide scale. That is why our view is that the goal should be to address barriers in the EU Single Market to create a genuinely cross border equity finance market where clusters of specialist investors developin areas where there is a matching business focus, and we welcome Government support to accomplish this.
In tech investment, the Silicon Valley market is often held up as an efficient system for channelling finance to start-ups, with anecdotes of venture capitalists spending just hours with an entrepreneur before committing to investing. Whilst these are clearly extreme cases, strong VC market liquidity is only generated by investors having a deep understanding of the technology underpinning a business and the market in which it will be operating or seeking to disrupt.
The lack of a single European market for SMEs, however,hinders this expertise from developing, by requiring VC investors to diversify their portfolio outside of their expert sectors, and by effectively capping the size of individual funds and investments. A single market might see several sector specific clusters develop where the continent’s entrepreneurs gravitate to centres of excellence to raise funds. It would be rational, for example, for the continent’s bio-technology start-ups to go to Cambridge/Oxford/London ‘Golden Triangle’ to raise funding.
Part of the reason for this lack of a single market is a failure of EU member states to achieve harmonisation of the requirements of the VC schemes, so that it is very difficult to raise your first round of funding in one country, and then a second and third wherever that sector’s dominant financial centre is found.
Equally, there are comparatively few physical facilities to encourage low cost, collaborative incubation at the very earliest stage, which is one of the reasons why weestablished Barclays Rise, a global community that connects start-ups, corporates and experts around the world to co-createthe future of financial services, and beyond. Rise consists of physical sites located in the world’s top innovation ecosystems as well as a digital platform that enables the members of the Rise community to connect, collaborate and scale. Rise currently operates sites in London, Manchester and New York, with more sites launching in Europe, Asia and Africa in 2016. By bringing together expertise and resources from Barclays and partnering with a curated range of global experts, we believe we can create an ideal environment to help businesses grow.
In order to amplify Rise’s impact, Barclays has alsopartnered with TechStars to establish our Barclays Accelerator programme at Rise London, located in Whitechapel at the heart of East London’s flourishing FinTech scene.
The Barclays Accelerator is a three month, intensive course designed to deliver breakthrough innovations bymentoringFinTech entrepreneurs, developing their business ideas andmaking them a more investable proposition for VC or indeeda partner for Barclays. 21 start-ups have already gone through the programme in London and more than 80 per cent of these have achieved their self-defined funding goals within months of ‘graduating’, whilst seven out of 10 companies from the most recent London Accelerator cohort are exploring opportunities with Barclays. The Accelerator programme has also now been rolled out to Rise New York and will shortly be launched at newRise sites in Cape Town and Tel Aviv.
We believe this model – of establishing an eco-system of start-ups in a particular sector, having large corporates mentor and share knowledge with them as well as connecting them to other experts in the field, and ultimately looking to bring start-ups into their supply chain or introduce them to relevant investors – is working to support the scaling up of FinTech firms in East London, and there is no reason why it could not be equally effective in other digital sectors in areas of the country more suited to cyber security, digital manufacturing or digital media, for example. Government can play a key role in encouragingthese digital clusters to spring up byconnecting stakeholders and working with them tofoster a supportive environment for entrepreneurship to take root.

Q3: What lessons can be learned from the Government’s support of tech start-ups and other measures targeted at the digital economy? How is this developing around the regions and nations of the United Kingdom?

The Government has undertaken a series of initiatives aimed at ensuring the UK is the number one destination for tech start-ups, ranging from funding for research and development (R&D) to investment in digital infrastructure. We welcome in particular the creation of Tech City and Tech North, which we believe are important for retaining focus on and advocating the development of the tech industryacross the country.
Tech is a diverse sector, however, and as indicated by our response to Question 2 our view is that an understanding of the local business and community needs in each region will be required. A one-size-fits-all approach to growing the digital economy will notdeliver the greatest impactso it is important to identify dynamic locations with the right infrastructure, skills and knowledge base for creating a successful cluster of companies with particular tech specialisms.
For example, the Bournemouth and Poole area is one of the UK’s leading creative and digital centres. According to Tech City it witnessed a 200 per cent rise in the number of tech companiesincorporating in the area between 2010 and 2013, with a particular focus on digital advertising and marketing, e-commerce, games development and publishing. Many of the skilled workers required for these roles are the product of the local higher education institutions, Bournemouth University and the Arts University Bournemouth, which excel in related academic disciplines.
The right conditions for these companies to thrive in were also shaped by a range of other factors of course, including fast and accessible broadband, good access to finance and strong backing for digital entrepreneurship from the local community, in particular the council (Bournemouth Borough Council is the current Digital Council of the Year according to this year’s Digital Leaders 100 awards), Local Enterprise Partnership (LEP) and wider private sector who have supported hackathons, an open data portal, fast and free Wifi in the town centre and an annual digital conference.
But it is not just entrepreneurs and start-ups that we should look to support. Barclays recognises that it is equally important to develop deep, strategic partnerships with existing companies and organisations to help them keep pace with advances in the digital world. In Salford,we have recently developed a partnership with the local authoritythat goes far beyond the traditional banking relationship and integrates Barclays into the fabric of their organisation by digitising their operations and backing wider community initiatives in the area.
For example, a large proportion of council employees do not have access to a desktop computer, which can make communication with them a challengefor leadership teams. To help overcome this problem and as part of our arrangement with Salford City Council, we have white-labelled and rolled out aBarclays app to their members of staffthatgrantsthemsecure access to councilsystems via a personal smartphone or tablet. We are also exploring how we can extend our cloud capabilities to the council so that they can establish a ‘resident’s well-being portal’ containing medical and educational records, and havedelivered a large number of digital and wider skills initiatives to the local community amongst other things.
In summary, 'digital' is a burgeoning industry in the UK and one the Government has done much to champion in recent years. We would encouragea focus on developing clusters of particular tech and digital excellence, however – in collaboration with the private sector, local Government and academic institutions – and in locations with identifiable labour market and infrastructurecompetitive advantages.As digital breaks down traditional business and sector barriers, it is becoming increasingly important that relationships between organisations that fundamentally understand each other’s strategic aims and values are formed.

Q4: Does the UK’s Intellectual Property regulatory regime provide effective protection for the digital economy and sufficient scope for innovation and competition?