LONDON: THE HEART OF EUROPEAN FINTECH

by 28 May, 2021FX

London has long been known as the financial capital of the world, despite the presence of other major hubs across the globe, such as New York, Hong Kong and Frankfurt. Here, we look at why London remains at the heart of European fintech in particular and whether this is a trend that looks set to continue.

If I had a crystal ball and could see into the future, chances are I would not be sitting here writing this blog about why London remains at the heart of European fintech. Instead, I would most likely be sitting on a pile of blue chip stock, an array of investments and next week’s lottery numbers. Unfortunately, I do not have a crystal ball and – like everyone else – have no real way of knowing exactly what the future brings.

However, one thing we can do to predict the future is look to the past. Of course, what has historically been the case is not forced to always be the case (how else would change ever occur?), but by looking at what led to London establishing its reputation as one of the major financial centres in the world, we are better able to understand its ability to deal with the challenges it faces both now and in the future.

LONDON’S FINANCIAL HISTORY

It is said that towards the end of the 19th century, more than half of the world’s trade was financed with British pounds, which certainly helped establish the UK – and London in particular – as one of the most eminent financial powerhouses in the world. A century later, one in six members of London’s workforce was employed in financial or business sectors, with the ‘Square Mile’ having the largest concentration of financial employment in the world.

Then, throughout the 1990s, London became Europe’s main centre for large volume trading in securities (although Amsterdam has recently moved into first place as Europe’s top share trading hub). It also became home to the international banking market, with banks from countries around the world setting up shop in England’s capital to trade on the markets, including relatively new ones, such as swaps and currency options.

This international outlook and willingness to allow global banks and financial institutions to establish a base is something that helped build, then cement London’s reputation as an attractive place to conduct financial activity.

THE BREXIT EFFECT

To some extent, the UK’s vote to withdraw from the European Union has undermined London’s reputation as a willing home to international businesses. However, while there is evidence to suggest some industries in the UK are going to be adversely affected by Brexit (such as the automotive industry, pharmaceutical industry, airline sector and fishing industry), London looks likely to remain a financial powerhouse for some time yet.

Of course, that is not to suggest that Brexit has not brought about significant challenges to the financial services industry. Many banks and financial institutions have had to relocate significant operations and personnel from London to various countries across the EU in order to acquire the local registration and licensing required to continue conducting business in similar ways prior to Brexit. In fact, figures have shown that around £1.2 trillion of financial sector assets moved out of London between the 2016 Brexit result and the end of 2020, with some 7,500 jobs within the financial sector being relocated in the same period.

Clearly, such figures are concerning and much of the future of post-Brexit banking depends on something known as equivalence. Put simply, in this context, it alludes to whether the European Commission decides whether the UK’s rules are equivalent to those of the EU. Without equivalence, it could prove extremely difficult for Britain to maintain the same access to financial markets as before.

But it is worth considering the bigger picture in context: The Bank of England has estimated that equivalence only covers approximately £10 billion of the £300 billion of financial services revenue generated in the UK. Then there is the fact that the most important decision for financial stability has already been made, which allows European companies to continue using London’s dominant clearing houses (to be reviewed in June 2022).

THE IMPORTANCE OF SEPA

Many fintechs, particularly those who provide payments services, rely on access to payment networks that facilitate the sending and receiving of cross-border payments. It is therefore worth highlighting that the UK’s withdrawal from the EU has done nothing to change its status as a member of the Single Euro Payments Area (SEPA). There have been some teething problems since Brexit, but these issues are almost certainly temporary and will be resolved before long.

Membership of SEPA essentially means that payments can be made into the EU from fintechs and their clients located outside of the EU. While we are still only a few months into the period since the UK’s departure from the EU, regulatory frameworks between the UK and EU remain aligned and there is no reason why this should not continue to be the case for the foreseeable future.

SEPA membership effectively enables fintechs to empower their clients by facilitating speedy and seamless cross-border payments. Therefore, those based in London should not face any significant challenges in this regard.

LONDON IS STILL ON TOP

There are many encouraging signs regarding London’s current position in the ‘league table’ of financial and professional services and, while nobody can predict the future with any certainty, we should take heart from a recent report from the City of London Corporation. The report, published on 22 January 2021, showed that “London continues to hold the top spot for financial and professional services, when compared to other global destinations, including New York, Singapore, Hong Kong and Frankfurt.”

There were several key areas where London excelled on the global stage:

  • London is the world’s capital for tech and innovation in financial services
  • London is home to most of the Fintech 100 firms
  • London is the only global financial centre that is also a leading centre for sustainable finance
  • London is home to the ‘greenest’ stock exchange and offers the most future-ready talent pool on sustainability issues

The report also found there were some areas for improvement, but while this article is attempting to explain why London remains at the heart of European fintech, it is not attempting to paint a perfect picture. The experience and skill set of fintechs based in London means that the city is in a strong position to overcome the challenges within the financial services sector and put measures in place that facilitate the necessary improvements.

FINTECH STATE OF THE NATION

In addition to the experience and skill set London-based fintechs have in spades, there are also encouraging signs regarding current and future investment in the sector. A recent publication from Innovate Finance, The FinTech State of the Nation, provides a comprehensive summary of the UK’s fintech industry and demonstrates the UK’s continued attractiveness as a fintech destination.

Of course, given the report is centred on positioning the whole of the UK as a fintech hub, much of the content is geared towards those UK regions outside of London, but ‘outside of London’ is a frequent caveat used in the publication. Generally, it looks as if the UK has an exciting future within the global fintech space, but there can be little doubt that it is London leading the way. Perhaps the imbalance that is currently heavily skewed towards the capital will be redressed in the future (in fact, it is entirely reasonable to expect that this will happen), but as it stands, London “…has been vital to establishing the UK’s leadership position in fintech and the strength of the UK fintech brand internationally.”

Indeed, a Beauhurst report stated that fintech is the UK’s strongest startup sector, with a total of 1,373 fintech companies collectively raising £14.9 billion in equity funding. And, of those 1,373 companies that are still operating, 71% are based in London. “Most of these 1,139 fintechs are in the seed (45%) and venture (34%) stages of evolution, indicating that this is a burgeoning sector with plenty of room for growth. An impressive 88% of companies secured investment since 2011 – significantly higher than the sector-agnostic average of 55%.”

THE KALIFA REVIEW AND FCA SUPPORT

On 26 February 2021, the Kalifa Review of UK Fintech was published. The document is an independent review of the UK fintech sector by Ron Kalifa, who is Chairman of Network International, a fast growing payments company. The report was presented to the UK government and was readily welcomed by the Chancellor, Rishi Sunak.

The Kalifa Review is far too comprehensive to discuss in great detail within this article (although we highly recommend those interested in UK fintech give the report a read). The key recommendations and comments from the review include:

  • A call for a new regulatory framework for emerging technologies
  • The need to retrain and upskill adults in the UK by engaging people in short courses
  • Broaden the application of existing UK state-aid tax incentive schemes to encourage early stage investment
  • Active promotion of the fintech industry
  • Invest in infrastructure to build on what the UK already has

It is also worth highlighting the role that the Financial Conduct Authority (FCA) has played in supporting fintechs in London and the rest of the UK. It is clear that the FCA has a progressive and pragmatic vision for fintech in the future, including consumer protection, innovation and support for open banking initiatives that benefit business and members of the public.

FINAL THOUGHTS

As I hope this article has made clear, the current position of London as the heart of European (and global) fintech, is by no means perfect. There are obvious challenges both now and in the future, and it remains to be seen exactly what the ultimate outcome of the UK’s withdrawal from the EU will be. However, the long history and tradition of London as a leading financial capital should offer comfort to employees and companies based there.

As the global pandemic has shown, nobody (or most people) can know exactly what is around the corner. In that regard then, it seems best to focus on how prepared London is to meet the challenges of the future – particularly those that cannot be predicted with any confidence. It should give peace of mind that London’s business infrastructure and operational resilience has been shown time and again to be one of the best in the world.

Then there is the fact that London is home to a diverse, multicultural and highly talented society and workforce. As anybody who works here will tell you, the city is a thriving, bustling hub of connectivity. That UK universities remain globally renowned and are able to attract the world’s best talent stands London in good stead. The government’s commitment to investment in fintech is also encouraging. This is not to say that there will not be tough times ahead, but this is the case for cities around the world – so London needs to lead by example and address pressing challenges, such as those relating to climate change and the post-COVID recovery. The key focus should be on working to maintain London’s position as one of the best bases in the world for fintech and financial services organisations.

The present looks rosy, but the future looks increasingly bright too.