by Anam Alpenia
Financial technology – or FinTech, to lend it the inevitable portmanteau – has become one of industry’s hottest topics over the past few years. Companies which allow financial institutions the chance to reduce fraud, hike value and ease payments, have begun to penetrate a market traditionally dominated by huge incumbents. The game is on.
And nowhere is it more on than Europe. Accenture recently reported that global investment in FinTech firms tripled from 2013 to 2014, from £2.72 billion ($4.02 billion) to £8.18 billion ($12.09 billion). The U.S. still tops the amount of investment, but with just under £1 billion ($1.47 billion), Europe is the sector’s fastest-growing region. The U.K. and Ireland accounts for 42% of that total, followed by the Nordic countries, the Netherlands and Germany. Over 44,000 people are employed by FinTech firms in the U.K. – more than New York or Silicon Valley.
So why are the British Isles – particularly London – shooting ahead of the crowd? Some of it is down to pure geography. “London is the banking capital of Europe: people are willing to pay for FinTech companies,” says Robin Slakhorst, founder of Symbid, a Dutch online funding platform. “The U.K. is a perfect launching pad for initial stages in the U.S. It’s an ideal place to mitigate distance between the European and U.S. markets. Ireland, too, has many head offices: Google, Amazon and others.”
This geographical fortune, which includes a time zone one hour closer to the U.S. – plus London’s financial stature – has drawn innovative companies from all over mainland Europe which are looking to expand west. A recent Crowdfund Insider survey revealed that the European alternative finance market grew 144% in 2014, to just under €3 billion ($3.22 billion). It could top €7 billion ($7.51 billion) this year. Over a third of that came from the U.K., followed by France, Germany, Sweden, the Netherlands and Spain.
“It’s mostly a strength of the U.K. and London than a weakness of other countries,” says Thilo Schneider, a corporate lawyer at Pinsent Masons, a London consultant. “Berlin is thriving and other countries are trying hard to create an environment that’s open to tech entrepreneurs. But the U.K. is particularly strong.
Britain’s Financial Standards Authority (FSA) has been praised in many quarters for its studied attempts to decouple FinTech firms from its financial services regulations. Restrictions on retail investors were lifted for equity crowdfunding in April 2014, and peer-to-peer lending, a term that has recently fallen under the FinTech banner, has “always been open to the crowd,” says Dom Wolf, co-founder of London crowdfund platform InvestUP.
The country’s Payments Systems Regulator (PSR) also launches today (April 1). The group, headed up by former Ofgen chief Hannah Nixon, has injected yet more optimism that watchdogs in the U.K. can further dampen major banks’ influence over the country’s £75 trillion ($110 trillion) payments industry. “Our approach will bring change to the industry, injecting competition and innovation where it is needed most, and will put the interests of the people and businesses that use payment systems front and centre,” Nixon said.
Other nations haven’t fared quite so well. Italy has kept its legislation strict. And Germany, despite being Europe’s economic powerhouse, has fallen foul of its far-flung business centers. “In the E.U. many countries do not have one central tech and financial hub,” Wolf adds. “Even Germany has its financial centre in Frankfurt and tech centered on Berlin. When you add the impact of a very pro-FinTech government, this geographic focus naturally creates perfect climate for FinTech to grow in London.”
Especially strict regulation in Germany is limiting the potential of local FinTech startups, argues Lennart Boerner, senior vice president of strategy and special operations at Hamburg’s Kreditech. “The local state of FinTech is also somewhat influenced by the conservative approach towards financial service and strong influence of savings banks and credit unions,” he says.
France has also shown an unprogressive hand, adds Börner, in its treatment of Uber, while Italy and Spain’s precarious fiscal futures “make it harder to succeed with new business models or raise funding.”
“What we’ve seen in the U.S. 20 years ago is that traditional bank financing was taken over by alternate ways of getting capital,” adds Slakhorst. “If you look at mainland Europe, it’s only now taking place. In Netherlands 80% entrepreneurs are still funded by the big three banks. As of 2016/17 the alternative ways for financing will be bigger that the traditional ways. A lot of FinTech is there to facilitate those new ways. They need to be as efficient as possible: they need technology.”
Regional segmentation may seem like an open invite for companies from the U.S. and Asia to swoop in and take large pieces of the pie. Not so, suggests Wolf. Despite the E.U. still providing fewer chances for startups to win big funding, “segmentation actually aids European companies because it makes it difficult for well-funded U.S. companies to move in and compete,” he says. “This also limits the disadvantages that come from being a smaller market as it allows homegrown champions the time to develop and grow.”
Banking is one of the world’s oldest continuous industries, and Europe’s market, especially, is dominated by a host of monolithic players, some of whom have been around for centuries. It doesn’t seem the most inviting entry into the tech world. That age, says Schneider, is one of the keys to FinTech’s recent surge: “Because the tech banking systems use has been built over years and years, these enormous systems are creaking at the seams, and require new technology to take off some of the weight.”
In Britain the PSR could to do more to weaken the banks’ stronghold by creating a universally-accessible payments infrastructure, or “grid”, claims Wolf. “Aside from damaging the Bank’s branch network, this will also truly spell the end to the banks monopoly on so many areas of finance.”
Right now, though, the race is on for regulators across the continent to keep old financial models in place, while allowing enough space for new models, like crowdfunding, not to be strangled before they’ve started. Changing policies are creating a paradigm shift, “aiming to limit the influence of big banks on economies and spread responsibility over a higher number of specialized market participants,” adds Boerner.
The riches are there for all to see. According to Pinsent Masons, 83% of respondents in a recent European survey believe technology M&A volume will increase, with 64% anticipating that technology valuations will increase over the next 12 to 24 months. The U.K. and Germany are still the most active tech targets in Europe, ahead of Benelux and the Nordics. When asked which tech sectors would experience the most M&A activity, Pinsent Masons found that cloud, mobile and IT services were the front runners.
High costs of living in some quarters could, down the line, hinder that progress. Seven of the world’s most expensive cities are in Europe (if you include Telaviv), including economic powerhouses such as Zurich, Geneva, London and Moscow. Office space and staff costs in the British capital, especially, are prohibitive for young firms, says Schneider, “and that’s one thing London will find it difficult to keep down.”
But overall, Europe is over performing in one of tech’s newest and biggest realms. The real challenge will be whether its governments and regulators can move with the times, and allow startups and disruptors the chance to capitalize on the pain points being left open by finance’s big incumbents.
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