Can London continue to lead Europe in fintech?

Banking & Finance
| The European | 12 October 2020
Max Bautin, co-founder of IQ Capital

London is the world leader when it comes to creating fintech unicorns, with 18 founded in the UK capital compared to the 16 of Silicon Valley. Within Europe, the UK accounted for half of the top 10 biggest deals in fintech during 2019. Much of this success has been built on London’s historical reputation as a global financial services hub, which attracts talent from across the globe and is fertile ground for innovation to grow. However, there are also other factors that give it the advantage over other financial centres such as New York, Berlin, Paris, Singapore and Hong Kong. London is a hugely complementary tech ecosystem – it includes tech talent, serial entrepreneurs, investors, specialist incubators, favourable tax breaks and other government support among its many attributes. As well as supportive regulators, cultural appeal and of course EU market access.

As the UK moves forward with Brexit against the backdrop of Covid-19, London will need to fight for its title as the leader in fintech in the face of stiff global competition. To do so, it will have to lean on the conditions that allowed it to achieve this poll position in the first place and to refocus its USPs to maximise its long-term advantages – likely reaching to other markets.

How London became the home of fintech

Fintech is not an industry that you can easily break into unless you have the right knowledge and network. Prior experience in the market and the ability to understand the highly complex environment is critical as this is a highly regulated industry that places intricate limitations on what can and cannot be done. Many of the best-known London fintechs have tapped a rich vein of experience and contacts. Anne Bodem previously worked at UBS, Lloyds and Standard Chartered bank before founding Starling Bank. Likewise Nikolas Stronsky of Revolut, Rishi Khosla of OakNorth, Tom Blomfield of Monzo, and Samir Desai of Funding Circle all cut their teeth in traditional finance first. This is where London’s history as the second biggest financial centre plays a role. Hosting global banks as well as its own, there is a glut of talent available, creating communities for the transfer of ideas and increasing the opportunity for innovation. The sheer size of London’s finance industry and the Anglo-American culture of entrepreneurial capitalism has kept it ahead of other European cities such as Frankfurt, Paris, Dublin and Amsterdam that have sought to become the financial centres in Europe. 

However, with banks such as Morgan Stanley choosing to move their HQ to Amsterdam and many other banks relocating teams to Frankfurt and Paris, some of the top talent may follow and the UK will have to lean more heavily on its other advantages to maintain its lead in innovation. 

The tech talent is another factor in London’s rise ™ to fintech’s premier hub. A number of founders of London’s top fintechs – such as Taavet Hinrikus of TransferWise, Guillaume Pousaz of Checkout.com or Paul Taylor of Thought Machine  – set out to disrupt the sector based on their general tech backgrounds and ability to attract top tech talent, as well as vertical industry expertise. London is a global magnet for tech talent and its tech pool is underpinned by a diverse economy and the presence of blue-chip firms from a variety of industries. While top talent is mobile, this appeal is unlikely to be hugely affected by Brexit or Covid-19 – if anything, working-form-home make it easier to grow the teams in a regionally or even globally distributed way.

Regulatory aspects are also key to the city’s fintech success. For those fintechs which require regulatory authorisation to trade, the Financial Conduct Authority (FCA) has proven to be a more innovative partner than most of its European peers and in essence unlocked the disruptive potential of fintech by opening up banking and financial services to competition. This is where London fintechs may be quite exposed post-Brexit – and while most already have to apply to local licenses in other jurisdictions, and some focus on indirect business models, the likely loss of the EU passporting arrangements will be a big hit as the UK market alone is not big enough to grow many fintech unicorns. Indeed, N26 shutting down its London office is an example of how regulation can become a strong barrier to growth. London-based fintechs will need to shift focus and succeed further afield – Asia, Latin America and Africa all offer huge untapped potential, with limited competition and relatively open regulators.

Another factor that attracts talent to London is the availability of funding from venture capital over the last decade. The UK as a whole ranks third in the world for the amount of investment, only behind the US and China, with 40% of this capital deployed into the UK’s fintechs. This makes it much easier for entrepreneurs to find backing for their ideas. There is also an incredible concentration of accelerators dedicated to fintech within London, for example the Barclays/Techstars Fintech Accelerator, Seedcamp, Startupbootcamp, Accenture’s FinTech Innovation Lab as well as dozens of more generic ones which have produced many excellent fintechs. All of these help fintechs test their ideas in the market, and receive interest from some of the world’s largest financial institutions at a much earlier stage than in other cities in the world. This makes London a very attractive place for potential founders to begin their journey before expanding into other countries. 

Retaining the crown

Despite the adversity, the first half of 2020 has seen an increase of funding for fintechs. We have seen successful rounds into market leaders such as £100m Series B financing in Thought Machine, which helps develop core banking systems for leading banks. In line with the UK Government’s support of the fintech sector, the Future Fund has given investors increased confidence to continue backing earlier stage startups throughout the lockdown. As support schemes come to an end it will be crucial that private investors continue to deploy investment into both early stage and later stage businesses. Many great businesses are founded during recessions and these will need seed stage backing to avoid an innovation gap in the future. 

London has thrived over the last decade, taking full advantage of its infrastructure and global prominence to attract some of the best talent into the city. And, by combining its world-class tech ecosystem and venture funding network, the stage was set for it to continue to be the world’s leading fintech centre. While there is increasing competition from Europe and beyond, a great opportunity remains for London if it can capitalise on the UK’s rich history as a leader in finance and technology to spearhead the fintech evolution globally.

Further information  

iqcapital.vc 

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