Who will win the battle to become Europe’s FinTech capital?

Germany (Berlin), Netherlands (Amsterdam), France (Paris) or will the U.K. and London retain its crown?

Following the U.K. electorate’s decision to leave the E.U., a lot has been written on the potential impact this could have on various industries in the U.K. as well as on the relationships the U.K. has with Europe – on a holistic and individual country level.

One industry which is likely to feel the impact of the U.K.’s decision very soon is the rising FinTech sector. The U.K. has been recognised as Europe’s FinTech capital for some time, with London as its epicentre. However, many commentators, including some FinTechs themselves, fear that the U.K. and London could lose its crown as some FinTechs decide to leave the U.K. or not consider the U.K. as a potential base from which to start up operations.

A key argument for why some would consider leaving the U.K. is that Brexit will mean that FinTechs will (in theory) no longer have access to the European market as well as access to the same levels of funding (foreign direct investment) and talent. The access to the European market issue crystallises around the so-called passporting rights. This allows a European FinTech with a licence in any European country to sell its services and products into all other European countries (without the need to be licenced in each country or partner with other companies in each country to piggyback on their respective licences). As soon as the U.K. is no longer part of the European Union, this might no longer be possible for U.K.-based FinTechs and an additional licence in each E.U. country might become necessary.

By taking a closer look at the attractiveness of the U.K. as well as recent post-Brexit announcements, it seems however unlikely that London and the U.K. will actually lose their standings as Europe’s FinTech capital.

 

Many European countries and cities are courting to become the new FinTech capital

With the uncertainty surrounding the outcome of the U.K.’s Brexit vote, other countries and cities are actively trying to challenge and take the U.K.’s and London’s crown.

 

postBrexit image_ Berlin

 

For example, a Berlin based business development group is especially eager to capitalise on the uncertainty around the impact of the vote on regulations in the U.K. as well as the access to the single market. The group claimed in a press statement that it has received a number of enquiries from London-based start-ups requesting information about the terms of relocating to Berlin. It’s also not only private groups or entities that are actively coming to London to promote Germany as a hub among U.K. FinTechs, political parties from Germany are also doing the same.

While cities like Berlin promote access to the single European market together with a pool of innovative young talent and favourably low living costs, countries are also getting involved in the game and marketing themselves as an attractive alternative to the U.K.

Ireland is promoting its progressive tax regime as well as the benefits of the shared English language that many start-ups with international employees highlight as being a key factor in their location decision-making process.

Other countries (e.g. France and Luxembourg) and cities (e.g. Amsterdam) are also all courting for FinTechs by focusing on the size and attractiveness of their financial service sectors; an advantage over Berlin’s proposition.

Even though all of these countries and cities do have some valid arguments to become a FinTech hub in Europe, none of them seem to combine the same factors as London did or might still do. They are either lacking a sizable or as attractive financial services sector (e.g. Berlin) or lacking the international talent pool due to language barriers (e.g. France and Luxembourg). All of this is offered and is likely to be continued to be offered by the U.K., and especially London.

 

Is the battle over before it started?

So how does the U.K. and London react to the increased competition for its FinTech crown? Is the U.K. too focused on other issues and decisions? Or can it still be an attractive home for FinTechs? With the English language and the many young and talented people from all over the world (not just from E.U. member states) willing to live in the buzzing capital [London], we think the U.K. has some good arguments as to why it could stay an attractive home for FinTechs post-Brexit.

Brexit could well mean that the U.K. leaves the European regulatory framework. This presents an opportunity for the U.K. to reshape its own regulatory environment, helping her to continue to be and also become a more appealing base for FinTechs. It is likely that this could be favourable for start-ups and FinTechs, especially as the U.K. has no interest to loose innovative U.K.-based companies.

We are also seeing that the claims around investment drying up following the Brexit vote may not be as strong as many previously believed.

U.K. banks continue to invest in FinTechs and Start-ups. These investments are not necessarily restricted to direct lending and monetary support. Investment also includes providing mentoring services (e.g. Lloyds) and in funding events especially hosted for FinTechs to provide platforms to exchange and explore new and emerging digital banking technologies (e.g. Barclays).

Despite some experts having stated that Brexit could potentially cut access to E.U. funds and investment, there are now signs that the recent vote has stimulated global investment into the U.K. For example Santander InnoVentures, a Santander fund to invest into FinTech companies globally, just announced it was investing £75M in U.K. FinTech businesses.

With funds likely to continue to be available for U.K.-based FinTechs, the access to other markets is one of the remaining prominent concerns. However, Brexit does not necessarily need to mean the isolation of the U.K. – yes the U.K. is an island but so are many other successful countries! Brexit also opens opportunities to trade and build relationships with markets outside the E.U. The recently introduced FinTech Bridge with South Korea is one example of this. These bridges allow FinTechs from both sides to more easily access the respective markets, as well as helping attract investors to the respective countries. The U.K. has built a number of bridges recently, including those with Australia, Hong Kong and Singapore.

Reduced access to talent is another point many commentators have mentioned. The U.K. is the U.K. and London is London. Both have strong pulls and will likely continue to attract talent. In our article posted in advance of the Brexit vote [ ‘Potential Impact of Brexit on the British FinTech Space’ ], we discussed that a Brexit vote could end the freedom of movement of people that helps the best and brightest to work and locate in the U.K. and that the cost of recruiting overseas talent could rise due to the increased complexities involved in the recruitment process. We also discussed that a positive of Brexit could be that wages may increase, ultimately helping attract more talent to the British FinTech space. Likewise, the U.K. could well consider developing a points-based visa system that is focused on specific skills sets – similar to the Australian model. This could actually make it easier for FinTechs to hire talent!

 

So what does it all mean?

The true impact of Brexit is still unknown – it is really too early to make a call either way. However, all the efforts we are currently seeing are likely to help the U.K. to continue to attract and retain innovative and disruptive FinTech companies, strengthening the U.K.’s and London’s position in the fight to stay the European capital for FinTechs.

 

 

Featured Images:
View of City of London from Bow, East London by Gary Ullah licensed under CC BY 2.0
Berlin by Jörg Schubert licensed under CC BY 2.0

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