London has long been heralded as the financial technology capital of the world. Even though “Brexit” has been hanging over the city like a dark, thunderous cloud, London still retains its title as the number one fintech hub.
And it will take some time to knock it off the podium. With the world’s largest financial services sector, an exploding tech industry, prime global positioning and a diverse talent pool, London is the epitome of what a fintech hub should look like.
It is therefore not surprising that some of the world’s largest fintech companies have set up shop here, including Funding Circle and TransferWise, both valued at over $1 billion.
There are many other cities across the globe that are biting at London’s heels, trying to close the gap. However, the UK capital remains top of its game, thanks to a perfect mix of four elements. EY lists these elements as talent, capital, policy and demand.
Talent
London has the ability to attract top-quality talent from around the world through higher than average salaries, good quality of life, easy access to basic amenities (healthcare, social and cultural attractions, public transport, etc.) and the promise of career progression, especially within the finance sector.
This ability to attract talented employees makes London a truly global and diverse city. According to the City of London Economic Research, 37% of London’s workforce is non-native, meaning over a third of workers were born outside of the UK.
Diversity is important. It brings with it out-of-the-box thinking which is crucial for innovative startups to break through technological borders.
As of 2015, 44,000 individuals worked within the fintech industry in London. It might not sound like a lot if you compare it to the city’s population of nearly 9 million. But if you compare it to the fintech workforce of global fintech hubs like New York and Silicon Valley, which is 43,000 and 11,000 respectively, it does indicate London’s dominance in the growing fintech landscape.
Influential business membership organisations, like London First, further establish London as one of the best cities in the world to do business in. Their focus on immigration, apprenticeships, and skill building ensure that London employers have a healthy talent pool to rely on.
Capital
London’s fintech industry enjoys strong backing from venture capital investment with access to liquid capital markets.
During 2016, £936m was invested in UK fintech and £820m of that related to London alone. Although this is slightly down from the 2015 figures, it still towers over 2014’s figure of £620m.
These figures are important because it shows London’s commitment to grow as a financial technology hub. Investment allows fintech startups to test and run analysis on their products. And the success of this is evident.
Three of London’s top fintech startups received a combined total of $210m in investment during 2016.
Starling Bank, a digital only, “challenger” bank, raised $101m.
iwoca, an alternative lender that provides fast, online credit to small businesses, raised $57m, and popular robo-advisory startup, Nutmeg, raised $52m during 2016.
And 2017 got off to a good start for London fintech investment as well. Funding Circle (mentioned above) raised $100m in equity capital at the beginning of the year. And Monzo and Currencycloud both raised more than $25m in funding each.
London is also a leading, global financial centre, trading in markets like international insurance, foreign-exchange trading, OTC derivatives and cross-border bank lending.
This strong financial presence is a key factor in London’s dominance as a fintech hub.
In order for established financial services institutions to stay competitive, they will need to invest in the development of innovative financial products (either in-house or through collaboration with external fintech startups) that further fuels the growth of the fintech industry.
Policy
The UK has very favourable fintech policies with strong support from the Financial Conduct Authority (FCA). In addition, it has encouraging tax incentives with a variety of government-backed programs aiming to promote competition and innovation.
The FCA started Project Innovate in 2014 and some of its core focusses include a regulatory sandbox (providing a testing ground for fintech startups), direct support and a dedicated advice unit.
They further encourage fintech innovation by engaging with firms of all shapes and sizes across the country, and beyond its borders.
The government also implemented tax incentives, which is crucial for the survival of early stage fintech startups.
This includes the Seed Enterprise Investment Scheme (SEIS) which encourages individuals to invest in small businesses by allowing them to offset part of their investment against their UK income tax liability.
In addition to this, they have implemented Entrepreneur’s Relief (ER), which is available to reduce the effective rate of Capital Gains tax to 10% in certain circumstances and Research and Development relief which reduces the corporate tax liability for qualifying companies.
These programs and incentives have a direct, positive impact on fintech companies looking to start their business in London.
Demand
The demand for innovative fintech solutions in London is another key growth factor that’s enabled it to become the number one financial technology hub.
Many established financial institutions still rely heavily on outdated, legacy systems. With the world’s highest concentration of banks, asset managers, insurance and trading organisations, London provide excellent opportunities for fintech startups to innovate and disrupt.
The demand is further highlighted by the increase in job vacancies. According to Joblift, there’s been an average monthly growth of 5% in the number of fintech jobs posted in the UK in the past year, with London alone advertising 5,416 fintech positions.
It also shows that the largest fintech employer in the UK is Worldpay, a payment processing company that’s a member of the FTSE 100 index, and advertised a total of 264 fintech related jobs.
Conclusion
According to the EY FinTech Adoption Index 2017, UK’s fintech adoption rate is 42%, well above the global average of 33%. Furthermore, FinTech City’s annual FinTech50 guide shows that more than half of the top fintech companies call London home (31 in 2017, compared to 29 in 2016).
A lot has been said about Brexit and how the UK’s decision to leave the EU will be the deathblow to London’s fintech dominance. However, at least for now, it would seem that UK’s fintech industry is just keeping calm and carrying on.
Marcel Va, FintechFans.com
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