Brexit
triggers race to dethrone London
British
capital won’t easily give up its top place in the FinTech world.
By
Silvia Sciorilli
Borrelli
9/13/16, 5:36 PM CET
This is part of a
POLITICO special report on FinTech: The future of new finance.
A perfect
combination of business opportunities and friendly regulation in
recent years has made London the European, if not the world, capital
of financial technology companies, or FinTechs.
Now Brexit could
take the title away and in its wake, complicate the rise of the
nascent industry in Europe.
Other aspiring
European FinTech hubs like Berlin, Stockholm and Zurich are hoping
that London’s loss will mean a potential gain for them. This, in
turn, is forcing U.K. financial regulators to go on the defensive as
they continue their work of balancing the interests of financial
startups and their customers. How these competing interests play out
is likely to determine the future of new finance in Europe (and
probably beyond).
After the 2008
financial crisis, financial startups flocked to London to fill the
vacuum left by failed banks and insurers. They were also attracted by
the fact that access to funds and financial talent in the British
capital was still plentiful to fuel their tech-savvy and simpler,
more transparent business models. Rarely in the modern history of
finance have newborn companies had the opportunity to challenge the
City of London giants’ way of doing business.
In addition to its
world-class financial standing, London was the obvious place in
Europe for the FinTech revolution to kick off because it also offers
the European Union’s so-called “passporting rights,” which
allow companies to operate across the bloc’s single markets from
their U.K. headquarters. According to a July survey by the industry’s
trade body Innovate Finance, these rights are of vital importance for
the U.K.’s FinTech ecosystem.
Murkier future
As they await the
British government’s exit negotiations with Brussels, however,
U.K.-based FinTech firms now fear the loss of the passporting
privilege and, as a result, face a murkier future for their
continent-sized ambitions.
Just two weeks after
the Brexit vote, Cornelia Yzer, Berlin’s economics minister,
declared the German capital’s intention to exploit the opportunity
created by the U.K.’s decision to leave the EU. Her main selling
points, in addition to the city’s already strong reputation as a
tech hub, are access to the EU’s single market and the country’s
economic strength. According to Yzer, her office has received
numerous emails in the immediate aftermath of the Brexit vote from
U.K.-based FinTech companies that were considering relocation.
All indications,
are that retaining the same passporting rights Britain has enjoyed as
an EU member will be nearly impossible outside the bloc.
Venture capital
investments in Berlin surpassed €2 billion in 2015, according to
Ernst & Young, making it Europe’s No. 1 hub for startups.
London came second, followed by Stockholm and Paris. Zurich was
further down on the list, but the Swiss hub has recently been
stepping up its efforts with big banks eager to contribute cash. At
the end of August, Credit Suisse and UBS were among a group of
investors that launched a business “accelerator” called,
Kickstart, to help develop 30 international startups, including
FinTechs.
The U.K. isn’t
prepared to take this challenge to its FinTech supremacy lying down.
The two-pronged counter strategy of Innovate Finance (which is backed
financially by the City of London Corporation) consists of going all
out to retain the passporting rights for FinTech firms while making
sure they continue to find London the best place to set up shop.
Lawrence
Wintermeyer, the head of Innovate Finance, said he is ready to work
with the government and push access to the EU’s single market to
the top of the U.K.’s agenda during its exit negotiations.
All indications,
however, are that Brussels is going to be tough on the U.K. in
negotiating its exit, and retaining the same passporting rights
Britain has enjoyed as an EU member will be nearly impossible outside
the bloc. Since the June 23 vote, EU politicians and officials alike
have reiterated that there will be no access to the single market,
including passporting, without free movement of labor — something
many Leave voters intensely dislike.
This is why the
British government will be redoubling its efforts at home. At a
midsummer post-Brexit gathering, Chris Woolard, head of strategy and
competition at the Financial Conduct Authority, the U.K.’s top
financial regulator, reiterated his agency’s support for existing
FinTech startups and its determination to attract many new ones to
the country.
Since the launch of
Project Innovate 2014, the FCA has been an avid supporter of
financial services disrupters and has helped startups navigate the
ocean of regulations. Its driving philosophy is to make finance more
accessible for ordinary customers, from pensioners to young people.
The success of
many FinTech firms at the business level is linked to
“disintermediation,” or getting rid of the middleman.
“The British
government has been incredibly supportive of the technology and
digital sector, particularly these last five years,” explains
Eileen Burbidge, the Treasury’s just-reappointed special envoy for
FinTech. “As the new government looks to reaffirm its commitment to
a strong industrial strategy … FinTech will certainly continue to
be held in high regard.”
Regardless of
supportive policy though, the success of many FinTech firms at the
business level is linked to “disintermediation,” or getting rid
of the middleman, which allows cost-cutting and raises transparency.
Examples include peer-to-peer lending, crowdfunding, and
money-transfer platforms.
Working in
traditional finance taught Kathryn Petralia, co-founder of Kabbage,
"how not to run a company," she said. "I now want to
make sure that I don't work in an environment like that."
Safeguards for
customers
But removing
traditional banks’ intermediation also eliminates the protection a
customer would normally receive if something goes wrong. For example,
earlier this year, the founder of San Francisco-based LendingClub
resigned after an internal investigation into the soundness of the
firm’s loans.
So British
regulators and their peers elsewhere want to make sure appropriate
safeguards exist to prevent the system from being abused. The
challenge is how not to kill the baby in the cradle by imposing
excessive burdens on FinTech firms that have much lighter balance
sheets than their peers in traditional banking.
Mark Carney,
governor of the Bank of England, has said FinTechs deserve some
“regulatory allowance” in order to grow. He dismisses the
possibility that startups, such as peer-to-peer lenders, could
constitute a threat to financial stability by ultimately deregulating
the U.K. banking industry.
The FCA’s main
tool for balancing the competing demands of FinTech entrepreneurs and
customers has been a “regulatory sandbox” regime, which lets
innovative startups test out their businesses without having to meet
all the rules required of normal financial firms. The regulator has
worked with around 200 startups since it launched the sandbox in May
2015 and has turned down just about as many for not being innovative
enough.
As Carney put it,
the key is ensuring that these emerging challengers aren’t acting
as typical lenders. However, this isn’t easy, especially when it
comes to FinTech startups offering the more traditional banking
services like student loans, mortgages, and retail investing.
Now, the risk in
light of the Brexit vote is that the U.K. regulators may go gentler
on these developments than they would have otherwise so as to get as
many FinTech firms to stay in London.
Innovate Finance’s
Wintermeyer dismisses such worries, noting that the U.K. has one of
the most active and engaged regulators who are equally committed to
“working on trying to democratize businesses and finding more
solutions for consumers.”
Indeed, the U.K.
Competition and Markets Authority recently called for increased
transparency, data sharing, and better technology to improve consumer
experience and boost competition among banking institutions,
including disrupters.
Sizeable edge
Ultimately, however,
it’s not regulators but market developments that will determine who
wears Europe’s FinTech crown. In that sense, London still retains a
sizeable edge.
“The ingredients
which have made London the FinTech capital of the world today —
deep financial services expertise, skills from both the financial
services industry as well as the technology-digital sector, and
progressive policymakers and regulatory regime — will not go away
because of Brexit,” said Treasury’s Burbidge, who is also a
partner at Passion Capital, a venture capital firm.
As with all
sorts of business, competition to dethrone London can only be a good
thing for the vitality of the FinTech industry.
Many FinTech players
seem to agree. A German FinTech entrepreneur, who didn’t want to be
identified because his company is going through a fundraising round,
said although his main activities and clients are Continental
European, he is thinking about setting up an office in London because
“that’s where the best investors are based and where people know
more about this rising industry.”
And even without
passporting rights and single market access, Wintermeyer notes that
the U.K. has other attractions. “The bigger question is, are we
going to have some tax advantage, will we be able to raise money on
the government’s balance sheet for FinTech or digital tech without
falling afoul of EU competition law, and will we tweak our visa
programs to make sure we are attracting people from all over the
world, including Australia, Canada, and the U.S.?” he said. “There
are so many variables in this.”
Brexit has
definitely triggered a contest to dethrone London as Europe’s
FinTech capital that would have been unthinkable before the June 23
referendum. But the competition is only just heating up.
As with all sorts of
business, that can only be a good thing for the vitality of the
FinTech industry.
Read the Q&A
with Innovate Finance CEO Lawrence Wintermeyer:
http://politi.co/2cGgREI
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