The Road Ahead for FinTech in Europe

Will the UK see its throne overturned amid Brexit turbulence?

As the UK’s exit from the European Union draws near, the reality of Brexit for European FinTechs is becoming clearer. We now know, for instance, that FinTechs will be able to use existing passporting rights until the end of 2020 to provide their services across the UK and the European Economic Area (EEA). Other areas, such as the extent of regulatory divergence, are yet to be confirmed; UK representatives are aiming for ‘mutual recognition’ of similar regulations with flexibility to gain an advantage through divergence, while their EU counterparts have made it clear that they are insistent on regulations being recognised as equivalent.

This developing picture raises interesting questions for prospective and current FinTechs regarding the ideal location strategy for their business. London has traditionally been seen as the FinTech capital of Europe, an accolade which has been reflected in FinTechCity’s top 50 European FinTechs to watch in 2018 list, in which more than half are headquartered in London.

Are European FinTechs migrating south to avoid the Brexit chill?

The announcement of Brexit led to a wave of speculation around London’s position as the continent’s FinTech capital. Cities such as Berlin have had no hesitation in promoting the storyline of London’s impending demise, including bold adverts beckoning start-ups to relocate and suggestions from German industry stakeholders that London has “committed suicide as a leading FinTech centre.” Then again, based on Deloitte’s 2017 ranking of the world’s top FinTech cities, in which Frankfurt was the only German city listed, Berlin may not even be the best place in Germany to start a FinTech, let alone in Europe as a whole.

Despite the best efforts of rival cities, London has managed to convincingly arrest concerns over its ongoing FinTech dominance. FinTech venture investment in the UK grew 153% from 2016 to 2017, an increase which saw it overtake China to become the 2nd ranked country globally in terms of total capital raised and deal volume. The UK also hosts 3 of Europe’s 5 FinTech Unicorns, two of which (Revolut and Funding Circle) reached their $1bn+ valuation long after the Brexit vote.

Comparing Current Initiatives

Another area in which the UK is leading is the development of regulatory sandboxes. The Financial Conduct Authority’s (FCA) sandbox is one of the most established globally, with Amsterdam’s InnovationHub the only other European initiative with similar maturity. Lithuania and Denmark have similar, albeit younger initiatives; Denmark’s choice to follow the FCA’s sandbox strategy highlights the UK’s role as a benchmark for others following suit.

There have been some attempts to set up a pan-European sandbox by the European Union, although these have so far been unsuccessful, most notably due to the scepticism of BaFin, the German financial authority, over relaxing standards for FinTechs. This hinderance means separate national approaches must be taken – Lithuania’s sandbox is initially focusing on Blockchain start-ups, for example – which prevents the EU from taking advantage of potential economies of scale.

When it comes to incubators, however, the story is different. The UK is slightly behind the rest of the EU in terms of the biggest and best initiatives. Paris-based Blackfin Capital is a good example: it claims to be the biggest independent FinTech fund in Europe after closing $180M in investment in July. The EU’s strength in this area is set to continue through its VentureEU initiative, which intends to back 6 chosen Venture Capital (VC) funds with €2.1bn in financing, aiming to share this among 1,500 start-ups across FinTech and other sectors.

The Road(map) Ahead

The first quarter of 2018 saw both the EU and the UK launch their respective FinTech roadmaps, presenting a distinct set of strategies. In addition to existing initiatives, such as the requirement for large banks to recommend rejected SMEs to selected alternative providers for financing, the UK has set out several plans moving forward, including:

  • Spreading its FinTech presence beyond London through ‘FinTech envoys’ in Scotland, Wales and Northern Ireland, as demonstrated with their recent rebranding of TechCity to TechNation
  • Investigating ‘shared platforms’ to create economies of scale for FinTechs working in similar areas
  • Creating machine-readable rules in partnership with banks, enabling automated or ‘straight-through’ regulatory reporting to reduce costs and accelerate the implementation of changes
  • Pledging additional resources through the Department for International Trade to help utilise existing FinTech bridges. Click here to have a look at where these have been formed so far in our infographic

While encouraging in some senses, FinTechs may be justifiably concerned by the prospect of UK FinTech’s focus being stretched across the British Isles; London’s FinTech density is often heralded as one of its key strengths.

“[London] has the “Fin” of New York, the “Tech” of the US West Coast and the policymakers of Washington, all within a 15 minute journey on public transport.” – Deloitte report, 2017

The EU, meanwhile, has placed its focus on co-ordinating a network of countries with disparate priorities to unify their efforts, thus mounting a significant challenge to London. This includes:

  • Pledging support for crowdfunding firms wanting to expand within the EU
  • Developing standardised APIs by mid-2019 to enable easier integrations for FinTechs
  • Analysing sandbox best practices across Europe and encouraging authorities to act on these

What does this mean for FinTechs?

Current UK-based FinTechs are likely to have their eye on passporting regulations to access the EU, enabling them to provide services across the region while having presence in only one country. Lithuania has emerged as perhaps a surprise contender for the UK’s gateway to the EU post-Brexit, claiming to offer a combination of value for money, an innovative regulatory body and “the fastest license issuing in the EU”. Revolut and TransferGo have already set up subsidiaries in the country and Invest Lithuania, its foreign investment and business development agency, is beckoning more FinTechs to come and join them.

For new FinTechs looking to put down roots, a lack of strategic agreement across European nations may be a concern. The prospect of eased cross-border growth and increasing support emerging at national level will surely provide some encouragement; for instance, Cyprus and Portugal have both recently announced the establishment of FinTech innovation hubs to help start-ups navigate regulatory requirements.

The UK, meanwhile, continues to offer the strongest proposition and its FinTech funding tally topped the world rankings in the first half of the year. Its abundance of FinTech bridges are eyed as a supplement to EU benefits; the FCA’s recent creation of the Global Financial Innovation Network (GFIN) with 11 other regulators, none of which are EU-based, suggests these connections are being actively strengthened. There may be some remaining concerns around the transition period ahead but, as a world FinTech leader, the UK is not going anywhere.