By Fiona Morrill, Financial Services Research Officer in the Economic Development Office
The financial and related professional services sector plays a key, direct role in enabling other firms to grow; through financing investment in capital; supporting the day to day running of their businesses through managing cash flow; providing insurance to protect against risks; and advising firms on strategy, tax and legal issues. But what role does the sector play in terms of supply chain links and demanding services from other industries, indirectly supporting their growth and jobs? This blog looks at the current links between FS and other sectors, with a particular focus on technology services, and how these linkages have changed over time.
The current relationship between financial services and the wider economy
This week (31/07/17), I’ve been looking at the ONS’ Input-Output tables, which enable us to look at industries’ use of products based on industry classifications at the UK level. The data gives an idea of the current links between the financial services sector and other industries, and how these connections have developed and evolved over the past few years. This is particularly apparent looking at the ties between the financial services sector (FS, including finance, insurance and their related activities) and emerging and growing industries like computer programming, telecoms and information services. This is partly driven by increasing efficiencies in existing business, be that secure trading platforms, sophisticated risk management systems, data analysis or cyber security, and the finance sector increasingly leads on the adoption and adaptation of new technology in areas like FinTech, InsurTech and RegTech.
The infographic below shows the kinds of inputs used by the FS sector. Alongside sectors we might expect to have strong linkages with FS - such as asset management, pension funding and insurance and re-insurance, and related activities - we can also see the links between sectors like management consultancy and head office activities (8.6% of FS sector inputs), computer programming (7.6%), and telecommunications services (5.9%).
Source: ONS, Input-Output tables, 2016
NB. ‘Other’ refers to industries with a lower than 2.5% share of FS inputs.
As well as looking at what inputs are demanded by the FS sector, we can look at how much of total demand for those sectors the FS sector accounts for, to get a sense of the role FS plays in supporting growth and demand in other industries. The table below shows the products purchased by the FS sector and the percentage of total demand the FS sector accounts for (with sectors where FS makes up less than 5% of demand excluded), colour coded from red (weaker linkages) to green (stronger linkages).
What does the FS sector purchase and what percentage of demand does it account for? (2014)
Source: ONS, Input-Output tables, 2016 (sectors where FS makes up less than 10% of demand not shown)
While FS accounted for 3% of jobs across the UK in 2014, the sector made a disproportionately high contribution in terms of supporting demand in other sectors. Altogether, finance and its related services account for £136 billion, or 9%, of UK total intermediate demand for all products and services, and if we exclude financial services demand for all types of FS products, this equates to 7% of total demand.
The FS industry plays a key role in generating demand for related professional services, including head office and management consultancy (30%), accountancy and tax (24%), and 17% of legal services. The sector accounted for over a quarter (26%) of total demand for telecommunications, and a fifth of demand for computer programming and information services (22% and 20% respectively), demonstrating the close linkages between financial services and the growing tech sector.
How has the relationship between financial services and technology changed over time?
Financial services and technology have always been closely interlinked, given the development of innovations in FS like credit cards, ATMs, electronic stock trading and online banking. At the City of London level, the changing nature of jobs and work has meant that financial services and technology are more interlinked than ever before, with the development of activities like FinTech, and the clustering of these firms on the City’s fringes reflecting the importance of these industries’ physical proximity to each other. At the UK level, after head office services and management consultancy, computer programming was the second largest category of input (i.e. goods and services demanded) by the FS sector reflecting the technology intensive nature of financial services today.
The chart below shows the development of the links between FS and technology over time. Between 2004 to 2014, the use of computer programming in the FS sector has increased from £5.9 billion in to £10.3 billion, an increase of 76%, with FS’ share of computer programming services rising from 18% to 22%. Likewise, the sector’s use of telecommunications services has risen from £5.5 billion in 2004, to £8.0 billion in 2014, an increase of 45%, while FS’ share of telecommunications services rose from 23% to 26%.
The ties between FS and tech have evolved from the use of technology in providing retail banking and exchange-based trading and broking, to mobile wallets, payment apps, biometrics, robo-advisors and blockchain technologies emerging today. The industry has evolved from small scale start-ups and innovation within existing large FS firms, to new and emergent industries like FinTech, InsurTech and RegTech becoming important sectors in their own right.
Taking FinTech as an example, over the 2008 to 2013 period, the UK and Ireland saw the fastest growth in FinTech investment globally, at an annualised rate of 74 percent from 2008, compared with 27 percent globally and 13 percent in Silicon Valley. During the same period, the value of FinTech investment in the UK and Ireland increased nearly eightfold to $265 million in 2013. The annualised growth rate (51 percent) was nearly twice the global average (26 percent) and more than twice that of Silicon Valley (23 percent), with London emerging as a key European and global FinTech hub. This cluster of activity continues to make a significant contribution to the UK economy, generating an estimated £20 billion of revenue in 2015, and providing 61,000 jobs across the UK, with 44,000 of these based in London. This demonstrates just one of the potential avenues whereby FS and tech working together can make a significant contribution to jobs and growth in the UK.
How might this change in the future, and what does this mean for the economy?
Looking ahead, the links between financial services and technology look set to continue to deepen, with technology facilitating and transforming the FS offer across a range of areas like banking, payment and settlement, investment management and insurance.
According to Deloitte, who named London as a top global FinTech hub, the next 12 months will see the industry forging greater global FinTech connections to continue to support the developed ecosystem in the UK, and realise their global ambitions, and the potential for continued innovation exists across all financial services subsectors.
As well as improving access to financial services for both individuals and SMEs at the customer level, the links between financial services and technology will continue to benefit the wider economy, creating jobs and growth through supply chain linkages.
 ONS, Input-Output tables, available here: https://www.ons.gov.uk/economy/nationalaccounts/supplyandusetables/datasets/inputoutputsupplyandusetables
 City of London Corporation, Tech X the City, available here: https://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Pages/Tech-x-the-city.aspx
 ONS, Workforce Jobs by industry (2014 average), available here: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/workforcejobsbyregionandindustryjobs05
 Accenture analysis of CB Insights data, available here: https://newsroom.accenture.com/subjects/research-surveys/london-is-benefitting-from-fintech-investment-boom-according-to-accenture-study.htm
 EY, UK FinTech on the Cutting Edge, available here: http://www.ey.com/Publication/vwLUAssets/EY-UK-FinTech-On-the-cutting-edge/%24FILE/EY-UK-FinTech-On-the-cutting-edge.pdf
 Deloitte, A tale of 44 cities: Connecting Global FinTech, https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/Innovation/deloitte-uk-connecting-global-FinTech-hub-federation-innotribe-innovate-finance.pdf