London is currently hailed as the global centre of fintech. This should come as no surprise, as it is by tradition a financial centre, with most of the leading banks operating in the European and African markets headquartered in the capital.
Similarly, leading disrupting actors such as Funding Circle, Transferwise, Nutmeg, and Mondo have chosen London as their home, creating a stimulating ecosystem that other fintech startups can benefit from. The British capital currently hosts 17 of the top 50 fintech companies in the world (Currency Cloud, Revolut, Property Partners, GoCardless, Elliptic, Bankable, Ebury, iZettle to mention a few), and it is the biggest existing cluster of successful fintech companies, ahead of San Francisco, which is the home for 16 of these startups.
But will London manage to maintain its leading position in the fintech space?
YES — London will remain the leading fintech hub
1. London already possesses the infrastructure and the know-how. Leading on online access to financial services, it also benefits from high levels of internet connectivity and superfast broadband. A diverse capital, London attracts worldwide talents, with more than 44,000 individuals currently working on the most innovative projects in the fintech industry – more than in New York City or San Francisco.
2. Policy-makers will ensure future policies favour the ecosystem, with the adoption of initiatives such as the Innovative Finance ISA (tax-free interests for loans arranged through P2P lending). With compliance regulations already more flexible than in the US, the UK will strive to balance necessary regulations without constraining innovation: the FCA launched in May a regulatory sandbox to provide tailored authorisation processes to accelerate innovation. The financial authority plans to release its conclusive regulations on fintech in 2017 after an initial white paper.
3. Finally, London benefits from an un-replicable strategic position. Geographically situated between Europe and the USA, two of the current most mature and organised markets in the world, London offers fintech companies access to two streams of capital. More than half of all fintech investments in Europe are centralised in London with £357m poured in fintech start-ups in 2015, and London has recently seen the multiplication of new tech funds such as Santander (£60m), Index Ventures (£328m), Google Ventures (£76m) and Axa Ventures (€230m) focusing on innovative financial technologies. Furthermore, London-based fintech startups have the potential to capture a highly attractive combined total market of 900 million potential customers.
BUT — London will face increased challenges
1. Brexit – Whether the UK votes to exit the European Union on June 23rd remains to be seen. If such is the case, it should not kill London’s fintech industry. An exit would however bring much uncertainty. The flow of investment could be reduced in the short term and the currency devaluation would be unfavourable for investment and operations. An exit will undeniably impact the UK’s attractiveness for young talent who can currently freely travel. More importantly, the UK could be excluded from the Digital Single Market and SEPA. Several highflying fintech companies have expressed concern, and declared they could relocate their headquarters.
2. Competing fintech hubs are rising in peripheral markets. In the rest of Europe, Africa and Asia, new centres of financial innovation are emerging. Ambitious entrepreneurs are driving technological leapfrog in Berlin, Zurich, Tel-Aviv or Shanghai, challenging London’s central position. Out of the top 100 fintech companies identified by H2 Ventures and KPMG in 2015, 42% were non western, with 20% established in the EMEA region. While Asia possesses capital to deploy and a huge market size, Africa hosts incredible talent and an attractive market growth which will support the establishment of new fintech centres.
3. As a result, international venture capital will be redeployed to these new centres. While London currently benefits from strong streams of US investments, it will increasingly compete with other centres. Already, the Asian tech scene is garnering significant investment, with $4,8 billion raised at the beginning of 2015. Asian VCs currently deploying a large part of their capital in other markets with reroute investments to support challengers (the Chinese fintech startups ZhongAn, Qufenqi) in their local markets, which will ultimately redefine the geographic flow of capital.
The current focus on fintech is justified, and London will remain the centre of it in the foreseeable future, due to its current leading position and the potential for innovation around various further verticals. However, the fintech industry is deemed to reach a level of maturity at some point. When the big players will have fully integrated innovation and startups will have themselves become big corporations, the industry will become much less hype and entrepreneurs will move towards a new more challenging sector. At this point, London better be prepared, if not to (Br)exit, at least to pivot.
By Antoine Baschiera, Founder and CEO of Early Metrics