As much as there can be tradition in something that is less than five years old, London has ‘traditionally’ been considered to be the capital of financial technology (FinTech).
London provides a haven in which FinTechs have been able to grow operational expertise, supported by the combination of significant and sophisticated investment, tech-skilled talent, tech-minded people, a pragmatic and forward-thinking regulator, and a supportive government with its own strategy on FinTech. These have been the key ingredients in establishing the success of this new sub-sector This recipe has resulted in London becoming an echo chamber of its own FinTech success, which has now perpetuated the growth of the greatest number of unicorn FinTech companies in Europe. With 99 days to go until the UK is scheduled to leave the EU, it is more important now than ever for Britain to consider how to best retain its FinTechs.
Retaining the FinTech crown (for now)
London currently boasts more unicorn FinTech companies than the rest of the Europe combined, worth an estimated US$132 billion, and has secured its position as the third global tech start-up ecosystem. London therefore rightly retains the right to wear the crown as the capital of FinTech for now.
On the face of it, investment in FinTech looks significant, with over £12.2 billion invested in the first half of 2018 according to KPMG. However, when dissected, the majority of this comprises the acquisition of the UK’s Worldpay for a whopping £9.8 billion by the U.S. payment processing giant Vantiv. This does not leave a huge amount for the remaining British FinTechs. If FinTechs are to be persuaded to remain, investment must increase, or the UK may suffer from a stark adjustment early next year when it leaves the EU.
Thanks to the efforts of HM Treasury with its FinTech Sector Strategy and industry groups such as Tech UK and Tech Nation, FinTech has stretched out to other parts of the UK to create digital suburbs, not just cities.
Northern Powerhouse – FinTech expanding outside of London
London is base camp to FinTechs, but these companies are now looking to rely on providers outside of the capital. Many start-ups that cannot justify leasing London’s expensive office space have found workarounds to the rises in business rates by bunkering in the multitude of co-working spaces that the city has to offer. Edge-of-town opportunities are also increasing, with the likes of the M23 tech corridor, comprising Croydon, the Gatwick Diamond and all the way down to Brighton, becoming popular.
This remains London-centric, and there is an ever-present danger that FinTechs will start looking to the Continent, rather than our own backyard in the North. Manchester is now home to a flourishing e-commerce cluster, producing as many unicorns as Amsterdam, and is host to 10 accelerators. Further, two unicorns – Sky Betting & Gaming and Skyscanner – were created in Leeds and Edinburgh, respectively. We must therefore increasingly share FinTech with the rest of the country, especially the Northern Powerhouse. It will be harder to maintain focus on the UK becoming a FinTech leader, rather than London just serving as its capital (as well as the capital for financial services, more broadly). If we can share the spoils with the regions, especially in the North, the UK’s FinTech community will continue to thrive.
Passporting and functional equivalence
London has also been the ‘green room’ before a wider entry into the Continent. The single market for financial services includes the valuable ‘passporting’ regime, which allows UK financial services companies to open business in any EU member state without having to apply for a local licence. With Britain’s continued membership of the single market looking increasingly uncertain, there is a real danger that UK-based FinTechs will lose their ability to operate by relying on their passporting rights.
For example, without a succession plan for passporting, FinTechs operating as payment service providers (PSPs) will be forced home and will have to return to the drawing board before agreeing access to the European market via relationships with PSPs located there. This is an onerous task, and without functional equivalence status, the UK will fall outside of the Single Euro Payments Area, meaning PSPs will have to submit direct applications to re-join.
Brussels and Paris threaten London’s dominance
If the potential impact of Brexit isn’t unsettling enough, a campaign of flattery on the other side of the Channel is mounting. First was Paris – the Bank of France’s Prudential Supervisory and Resolution Authority (ACPR) has been ramping up the pressure on the UK’s FinTech firms. Earlier this year, the ACPR asked 500 British FinTechs with French customers, and reliant on passporting rights, about their contingency plans after March 2019. Although the ACPR secretary general was quick to follow up with the FT, clarifying that it was part of its own contingency planning for a potential ‘hard’ Brexit, it was widely misinterpreted as being the latest move to lure City business to Paris. Now Brussels is on the offensive, having announced itself as a “vibrant financial and fintech ecosystem”. The threat is real, with both having the advantage of close proximity and excellent transport links with Britain and the rest of the Continent.
Whether or not this was a shot across the bows, FinTechs are already starting to pay attention, with a number that includes TransferWise and Revolut considering other European cities. Paris’ increasing variety of benefits for new businesses and France’s promise to pump €2 billion into the market are likely to prove an attractive bait.
Alternative solutions, such as the EU and UK rules being deemed as ‘equivalent’ to each other and thereby offering limited mutual access in return, are being disparaged, with rumours (allegedly from France) that any future passporting rights will offer far less access than before.
The absence of a solution to the passporting problem will certainly affect FinTechs’ decision to set up shop in London, and to look elsewhere in the EU. This may also trickle down to established FinTechs that are considering returning home before Brexit.
As Britain creeps ever closer to the precipice of crashing out of the EU without a deal, London will need to think seriously of ways to retain its FinTechs, which are fearful of being marooned here. Such an eventuality would disrupt the FinTechs’ technology supply chains, open up customers to VAT, and negatively impact their workforce (54 percent of the workforce in the City’s FinTech industry are from abroad).
For now, London shows no sign of losing its FinTech crown but that it is certainly sitting precariously at the time of writing. Given the strength of the entrepreneurial sector as a whole and its value to the UK economy, let us hope that the UK government gives it the priority it deserves.
Continuing to devise innovative benefits and schemes that encourage ventures to start in London is essential to the security of London’s FinTech success and for it to continue.