Fintech: will the UK lose its crown?

TMT Finance reporter Flavia Milhorance talks to investors and entrepreneurs about what Britain's departure from the European Union could mean for the country’s development of its leading position in the financial technology market. 

For the last couple of years, the British government has bolstered its backing of the Fintech industry that is transforming the way people manage, transfer and invest money through projects like digital wallets, crowdfunding, big data analytics, blockchain and others. Today, the UK is the global fintech hub, accumulating £6.6bn in revenues and 61,000 jobs in the past year, claims an independent EY report commissioned by the Treasury. 

In another couple of years, however, executives worry that the region may have lost its leading position because of Brexit. Seventy-six per cent of executives in the sector agree the uncertainty around the referendum will slow the development of the UK fintech market, according to a survey released late November by Mayer Brown, an international law firm. 

“Certainly the fintech community was surprised with Brexit. More than 30 per cent of our founders and leaders are non-British,” said Lawrence Wintermeyer, chief executive of Innovate Finance, the UK-based fintech trade association created in 2014 with the purpose of boosting the sector. 

Government actions, especially towards immigration and business rules, and the control of market sentiment may now be decisive to keep the UK's crown in an increasingly competitive environment. 

Since the referendum, Innovate Finance has been trying to pull these strings. "We are lobbying hard to make sure we keep ourselves as the global hub", Wintermeyer said. 

The trade group presented the government with a list of recommendations to keep the UK's attractiveness. The document also warned of a 33 per cent decline in venture capital (VC) funding for UK fintech companies in the half-year triggered by pre-Brexit caution. This was contrary to the global trend that saw a 148 per cent increase in investment.  

To Wintermeyer, one of the battles was won. The government heard its lobbying and it was "very supportive" in the Autumn Statement in late November. Chancellor Philip Hammond pledged £500,000 a year to "fintech specialists" in his inaugural statement. A further £400m injection from VC funds into the British Business Bank was also announced. 

Other executives heard on this article said the amount is dwarfed  by investments that financial services firms are already making in the sector. And people in the industry still worry. Among the 120 senior executives from the financial and fintech sectors interviewed in the Mayer Brown's survey, 82 per cent are concerned that access to European markets will be restricted, as passporting rules to do business without further authorization from countries will no longer apply. Besides, 40 per cent believe it has seen "significantly more difficult" to attract and retain talented employees since the referendum.

The UK has the best fintech ecosystem. But until when?

Nigel Verdon is an experienced entrepreneur who since the 1990s has been focusing on financial technology to build up his start-ups in the UK. At a Fintech event two weeks ago, Verdon was presenting his latest project, Railsbank, to be launched in January 2017 to ease fintech companies' access to global banking.

If Verdon is about to launch a new fintech venture to support other fintech companies, is that a sign that Brexit is not a concern? He laughs at the suggestion. “We don't know what is going to happen, so until we get clarity, business is usual and we plan for the worst,” he adds.

Verdon expects some inconvenience ahead, such as problems bringing skilled tech people to the UK. Besides, it has already crossed his mind to move to a country where the government would also give the company “an amazing tax break.” 

That London is a global financial centre is particularly interesting for the fintech business. Government policies across regulation, tax regime and growth initiatives put in place in the last couple of years have added points to make the UK the best environment for this rapid growth industry, the EY report shows.

One example is the Financial Service Authority’s Project Innovate program, currently spending around £1m per year, which was designed to encourage innovative firms to be set up and to remove barriers that might cut off their growth. This policy has been widely copied by other regulators across the globe, but so far, the UK still beats strong hubs like Germany, California and New York. 

“I’m American, but it’s actually much easier to set up a fintech company in the UK,” said Clare Flynn Levy, the founder and chief executive of Essentia Analytics, a UK-based start-up that helps professional investors to make investment decisions using behavioural data analytics. 

Flynn Levy has run her idea past countless would-be customers and investors to see how they reacted. London was a welcoming environment for her innovative project. “The diversity of talent is here, the R&D tax credits that reward UK companies for investing in innovation are very helpful, and the fintech ecosystem is very supportive,” she said.

Despite the strong ecosystem, the UK has been facing increasing competition and its long-term fintech position is not certain. Other hubs are stepping up policy initiatives following the British example. Singapore launched a £100m innovation scheme, and Australia announced a £500m innovation and science agenda. Germany has made efforts to better integrate Berlin, Frankfurt and Munich, and it has invested £388m in fintech in the past year. 

Although China is not currently among the biggest, it is scaling up across the sector. Chinese regulators allow fintech firms to achieve a huge scale. For example, e-commerce Alibaba processes more than 80 million transactions per day and operates a £65bn online money market fund. Besides, Beijing’s VC market has rocketed from £1bn in 2012 to £8.6bn in 2015.

While the US government has a limited role in supporting the industry, the country has competitive demand, both from its position as a global financial centre and in consumers' appetite. New York and California score the highest on the fintech adoption index, which measures digitally active consumers that see themselves also as fintech users.

Essentia Analytics' Flynn Levy is not worried about the short-term Brexit outcomes, as neither her clients nor employees have thought it a problem for the moment. But the referendum did have an impact on her view of London's future as the global fintech capital and as an easy place to do business.

“It is going to be very damaging, and it makes me sad. It has definitely made me more inclined to focus energy, at least on the sales side, on the US,” she said.

Market sentiment: need for control

PensionBee is an online pension manager to search and combine old pensions into a new online plan. Their business is exclusively UK-focused; therefore, Brexit does not pose a direct threat to it. 

Chief executive Romi Savova says the company campaigns for more freedom of choice in the market by pushing against barriers that tend to block customers from leaving. Hence, market sentiment and consumer confidence are important factors to watch. 

“More than anything we're looking forward to achieving some stability,” Savova said, explaining that the performance of pension programs is negatively or positively impacted by the volatility in global markets. 

PensionBee is not the only fintech firm that is watchful of market feelings. Mayer Brown partner Guy Wilkes said the Brexit referendum result “undoubtedly” affected sentiment in the industry. Until the rules are clear, Wilkes said, “many fintech firms remain nervous.” 

The bearish market feeling can spread. His colleague and head at Mayer Brown, Peter Dickinson explains that investors’ appetite for investing in London fintech firms will be driven by general market sentiment; and whether London continues to be a fintech hub. 

VC and private equity investors may seek to mitigate the negative risk of Brexit on the fintech market by investing both in London and outside. If, because of this, less funding is available in London, that will spark more fintech companies looking to establish themselves in other places with better opportunities for funding. 

Following that logic, the market sentiment may even affect the attractiveness of London Stock Exchange's sub-market, the Alternative Investment Market (AIM), one of the world's leading growth markets for small and mid-cap companies. In turn, this attractiveness “will be one factor taken into account at the time a fintech founder decides whether to establish in London or elsewhere,” Dickinson said.

Fighting the bad mood

On the other hand, the sentiment is not all dark. Sixty-four per cent executives interviewed in Mayer Brown's survey are confident of lower tax and lower regulation following the UK's departure from the European Union, and 70 per cent of the executives expect that the UK will wrap up free trade agreements with countries outside the EU.

Besides, 61 per cent feel the vote will not slow company transactions, such as M&A or joint venture activity. Half of financial services and fintech firms expects to engage in joint ventures in the next three years. 

“Brexit does present opportunities, but it will be some time before it’s clear exactly what they are,” Wilkes said, pointing out that one solution to the passporting problem could be an EU acquisition by fintech firms rather than moving all operation to a new office outside of London. And this could drive M&As deals over the next couple of years, he added. 

Lawrence Wintermeyer also tries to sell a positive future perspective pointing out that fintech is borderless. That is why a Innovate Finance arm has also been launched recently in New York. Both big markets aim to strengthen their connections. Yet the US is not the ultimate fintech target. The trade association was also involved in the launch of the Global Fintech Hubs Federation, an independent network of fintech hubs. 

“Digital is global, so our movement is global. Our lobby agenda with the government really focus on global standards,” he said. 

If you are interested in writing a Special Report to be published in TMT Finance, please contact