In the first half of 2018 the UK received record levels of investment in the fintech sector – with over $16bn investment, according to KPMG. That’s $2bn more than the amounts raised in the Americas and China, individually, and six more than the rest of Europe. But while the UK has been active in its pursuit of fintechs, uncertainty around Brexit, and the growth of fintech hubs in Europe may cause many in the sector to follow their clients in financial services - many of whom have prepared for the worst case no deal scenario - to at least establish an office on the continent’s mainland – if not leave British shores altogether.
Termed the “Brexit banks” by lender Helaba, Goldman Sachs, Citi, JPMorgan and Barclays have moved operations to Frankfurt from London in the past eighteen months. That takes Germany’s total Brexit bank total to 25, with Paris sitting at eight big movers over the same period, and Luxembourg, Dublin and Amsterdam have attracted 15 collectively.
The Frankfurt flux has incentivised fintech firms to move to the city, says Dr Jochen Biedermann, senior advisor at Frankfurt Main Finance, who stresses the importance of growing cooperation between banks and fintechs.
“Frankfurt is the place to mingle between the fintechs and the banks, and any kind of fintech company from any part of Germany come to Frankfurt whether they’re based in Berlin or Hamburg or Munich, because the banks won’t come to the fintech companies, usually the fintech companies come to the banks.”
“We see a lot of foreign fintechs coming to Frankfurt, looking for clients among the big banks here. Also, there’s a tendency I see with fintechs coming directly from London […] Many of them are coming and targeting the Germany-based banks,” says Biedermann. “On one hand you can offer white label solutions to banks and financial institutions, on the other you can offer customised solutions to corporates to offer better supply chain finance, how they do their treasury in a better way, and so on.”
But EU governments and the private sector have recognised it’s not just the attraction of a close proximity to their client base that’s important for fintech vendors: being close to similar firms in their own ecosystem has become a strong attraction. As such, hubs can be crucial, and those that have dotted up across the globe now hold great pulling power to start ups and established players alike.
According to market participants, the industry has changed over the past few years: previously, start-ups and more established players worked in isolation, competing directly with one another in the race to the biggest and most profitable clients. Now, with banks and financial institutions willing to work with multiple fintech partners and different vendors offering specific products and services across the technological stack, many are buddying up to offer wider product suites. Because of this fraternalism – as well as a more certain ability for firms to offer services across markets – continental Europe may have become a more appealing venue for fintechs and their investors.
“One of the issues I see is the mobility, the passporting, the capability of companies to freely move and export and sell things,” says Fabian Vandenreydt, executive chairman, b-hive. “That’s why a lot of them want to have their HQs or establish a second HQ within Europe, to keep mobility and ensure passporting.”
An island of growth
The UK government puts last year’s success down to a number of factors, including the growth of the challenger banking community, the Open Banking initiative, the Rent Recognition Challenge, and the Financial Conduct Authority (FCA)’s regulatory sandbox – which has widely been deemed a success. Four of Europe’s top deals took place in the UK – with funding rounds by Revolut (£190.3m), eToro (£76m), Flender (£45m), MoneyFarm (£54m) and Monzo raising more than £100m through crowdfunding. While the UK’s place within global financial markets may seem uncertain given the question marks that still remain over the terms of the country’s exit from Europe, the government has recognised the need for fintechs to engage with global markets.
“As fintechs mature – so too will the need to help support their ambitions for growth and expansion internationally,” says Graham Stuart, the UK’s minister for investment. Stuart points to intergovernmental agreements with non-EU countries as drivers that will sustain the UK’s appeal as a major fintech host.
“The key international initiatives sustaining fintech are centred on the Government’s FinTech Bridges policy, where international agreements including a government-to-government, regulator-to-regulator, and business-to-business components, have been signed with five key jurisdictions: China, Hong Kong, Singapore, Australia, and South Korea,” he says.
“[T]he work of HM Treasury and the Department for International Trade (DIT), through our FinTech Bridges policy, will streamline the ability for fintechs to export their services in key markets abroad, reducing market entry barriers and further build on the UK’s comparative advantage in the sector.
“Last year, DIT launched its FinTech Steering Board which brings together academics, industry experts, government and regulators to drive investment into the sector,” adds Stuart. “It is chaired by the City of London’s Lord Mayor and firms including Zopa, Neyber, EY, Innovate Finance and Santander will sit alongside government, regulators and academics from MIT and Oxford University.”
“DIT aims to give effect to these agreements by launching a FinTech Bridge Pilot Programme later this year – showcasing the support available for fintechs interested initially in expanding into Hong Kong and Australia.”
Across the UK, several cities – including Manchester, Belfast, Liverpool, Bristol, Edinburgh and Leeds – “host vibrant fintech ecosystems”, says Stuart. Central to the UK’s endeavours, however, of course sits the capital, where policies such as the City of London Corporation’s Local Plan, sets out ambitions to “future proof” the city as a key economic growth area until 2036.
“We will remain a world leading financial centre long after Brexit thanks to our ability to innovate and tap into new opportunities, such as fintech and green finance,” says Catherine McGuinness, Policy Chair at the City of London Corporation.
But McGuinness points to some immediate concerns around Brexit that will have an impact on fintechs and the markets they serve. And while some of these issues are being dealt with head-on by UK regulators, movement must be made by EU counterparts, she says. “There are also some cross-cutting, cliff edge issues that need to be addressed urgently, including contract continuity and movement of data. Firms alone cannot provide a solution to these challenges in the time remaining so it is vital EU regulators reciprocate steps taken by the Bank of England and the FCA.”
“We are now urging EU regulators to take urgent action to address cliff-edge issues that could cause disruption to the financial sector as well as households and businesses on both sides of the Channel.”
Unlike the UK’s investment minister, McGuinness underlines the importance of financial services having a clear line of sight between the country and the EU.
“We will also continue to push for an ambitious Brexit future relationship agreement which covers financial and professional services between the UK and EU27 once the current deadlock is broken,” she says.
Germany’s hub hopes
The growth of fintech hubs across mainland Europe has done much to appeal to firms looking to set up there. Advantages cited by firms currently based in hubs or considering moving into one include infrastructure, costs, and the ability to create symbiotic relationships with other fintechs when going to market with products or services in the same tech stack.
“It’s really important to make very fast connections to other companies,” says Frank Jorga, CEO, WebID, the Berlin-based secure online identity verification firm. “It’s the same in Zurich, where the fintech area is growing and it’s really easy to connect. Creating those connections is obviously really important.”
With Germany appealing to the Brexit banks, Jorga suggests more are looking to make the move thanks to country’s hub growth.
“A lot of companies are coming from the UK and have been looking for a new place,” he says, pointing to Berlin, Frankfurt and Hamburg as the three major cities appealing to UK fintechs. He also suggests start-ups are choosing Germany over the UK thanks to the cost of set-up and ongoing business expenses, as well as other market-led initiatives.
“For those companies considering one of those three cities, none of them are as expensive as London. For a typical fintech start up London is just too expensive,” he says. “So the state authorities gave them the possibility to stay in coworking spaces – of which there are a lot in Berlin, Hamburg and Frankfurt – to make it more attractive for fintech companies. On the other hand there are a lot of events that started last year that concentrate on fintech markets, and probably 50% of them are no longer in German – they’re in English.”
Fintechs considering mainland Europe’s different hubs have plenty of choice as each has a key strength, says b-hive’s Vandenreydt, and relationships across the ecosystem exist to provide firms with the ability to work across the continent’s markets.
“What is great is that each hub is specialising in either a business or technological domain,” he says. “It’s difficult to say one is better than the other. The role they play in attracting companies to their country or to their city is important to some hubs.”
“There’s a big difference in some instances – some hubs are far more advanced than others. You also see more hubs that are initiatives from the financial services sector, with the fintechs themselves, in the country or in the city, like you see in Brussels, in Dublin, in Luxembourg. The maturity is moving, but it’s still collaboration and there’s still a lot of competition between cities.”
While London used to be the architype in terms of creating the perfect roadmap for creating a healthy environment for a fintech community, that’s no longer the case, says Vandenreydt.
“Ten years ago everyone looked at London as the template but there are many hubs now in continental Europe that are well managed.”
Frankfurt Main Finance’s Biedermann acknowledges that the race to attract fintech firms and the development of different technologies requires government support. While cyber security, artificial intelligence (AI) and blockchain are considered strengths in Frankfurt, more government assistance is required to help start-ups working in those areas. In China’s Hangzhou – where payments and ecommerce giant Alibaba is headquartered – last year the city government backed a $1.6bn fund to invest in blockchain start-ups, dubbed the Xiong’An Global Blockchain Innovation Fund. As much as $400m is being funded by the city’s government according to Sohu.
“This is probably more than the overall German government investment,” says Biedermann. “Too little government funding for new technologies means start-ups can’t scale as quickly as they’d like.”
However, he anticipates that the government will do more this year, and points out that the regulatory environment benefits firms based in Germany who are considering expanding into different jurisdictions. Bafin – the German financial regulator – has traditionally been considered a strict enforcer of rules. As well as the regulator’s decision to recruit internal teams of fintech experts its reputation for firmness benefits fintechs.
“More developed fintechs when they go abroad, when they have the approval from Bafin, it’s very helpful in the EU and abroad because Bafin has a reputation for being quite tough with start-ups.”
On the UK government’s policy to establish agreements with third non-EU states, Biedermann points to Frankfurt Main Finance’s “bridges” with other hubs – including those based in South Korea, Hong Kong, Israel, Kazakhstan, and several other EU-based hubs, that promote cooperation and discussion between entities.
Across Europe and further afield, governments have reacted differently to Brexit and how best to attract fintech talents. In Lithuania, for instance, the government responded to Revolut and Google entering the local market by bringing together the ministry of finance, the Bank of Lithuania and Invest Lithuania to make the regulatory environment as appealing as possible. There’s now a specialised license for challenger banks, and it takes just three months to attain a payments or e-money license – which is three times faster than many other jurisdictions. Thanks to those policies – and the new market participants, with whom smaller fintechs will want to coordinate with – interest from UK firms rose “sharply” in the final quarter of 2018, according to a spokesperson at Invest Lithuania, who expects that trend to continue beyond 2019 and the period within which the UK leaves the EU.
Governments in Paris, Frankfurt and other EU states have been proactive in boasting the qualities of their local fintech hubs and initiatives.
“The role of the government is also to help the private sector position a number of business domains so the hub can shine within a specific niche,” says Vandenreydt. “Then of course you have the role of government to make the lives of people who come there great, like in tax regimes, in housing, education, in infrastructure.”
Elsewhere, however, governments have plans to mainly promote their economic, legal, and market conditions, rather than attempting to build specific fintech ventures. The Swiss government, for example, isn’t being “opportunistic,” says John Hucker, president, Swiss Finance + Technology Association.
“Here the government takes a hands-off approach - or rather they focus on creating the right conditions for innovation and competition, investment, and then they allow the private market to work within those rules,” he says. “What they don’t really do is create trade promotion groups and get actively involved in promoting certain sectors of the economy which for certain things like the fintech community can sometimes feel like a short-term solution, but if we step back and consider why Switzerland is such a strong proposition – especially for fintechs – is because of that approach by the government.”
Fundamentally, whether the UK – or any other government creates trade ties with different states if a firm wants to enter a new market it will be down to the economic and business opportunities it sees in that jurisdiction, says Biedermann.
“What I have learned from many bilateral matchmaking events is that the fintech start-ups have their own agenda. If they want to expand to a certain country, they will do – with or without support. And if they don’t want, it is very difficult to convince them to, even if you have the closest partnership among fintech hubs or financial centres in general.”