7 ways emerging fintech hubs are taking on the giants

Silicon Valley, New York, London and several of China’s largest cities are the world’s leading fintech hubs, but many other locales are gunning for their crown.

The emerging fintech hubs are tiny in comparison to the giants, but they’re rolling out the welcome mat to startups with innovative regulatory policies and incentives.

One reason fintechs might look to base their operations in emerging hubs is the high cost of doing business in tech centers like San Francisco and New York, along with the threat Brexit poses for London’s future. Here are some examples of fresh activity in new fintech zones, and a look at the fintech power the U.K. still controls.

Lithuania is making a major play to become a fintech hub. Regulators created a faster, less expensive path for payment operators to acquire an Electronic Money Institution (EMI) license. The Bank of Lithuania supports a bank license for startup financial institutions, which is about five times smaller than standard bank capital requirements.

Last year Lithuania established a sandbox for fintechs to develop and test products under the central bank’s supervision. Now 97 companies are listed on the Bank of Lithuania’s site as having licenses to operate, up from 81 in October 2018.
The number of EMI licenses granted in various European countries is escalating with rising regional fintech activity. In Europe, an EMI license enables digital banks and non-bank financial institutions to support operations with electronic money.

U.K.-based Bilderlings recently examined the number of EMIs issued in Europe, noting that the U.K. and Lithuania lead all other countries. Currently many U.K. payments operators are seeking licenses to continue doing business in Europe after the country exits the E.U. Through the end of March 2019, the U.K. has issued a total of 139 EMIs, followed by Lithuania with 45, Malta with 15 and Cyprus, with 13.

Lithuania has seen a surge of EMI licenses issued in the last six months, with 39 companies opening their doors with an EMI license between November 2018 and March 2019, according to Bilderlings.
Bahrain is attempting to diversify its economy beyond oil, and wants to create a favorable climate for fintechs.

The island, situated between Saudi Arabia and Qatar, last year retooled its legal structure to support open banking, with refreshed international laws making it easier for companies to launch operations in the kingdom. Bahrain also supports a sandbox and local accelerators that have drawn 35 companies to the country within the last year.

The FinTech Consortium—based in London with links to U.S. fintech hubs—has established Bahrain Bay, a startup incubator with co-working space that’s supporting more than 45 companies. Bahrain’s governors theorize that the tiny country presents a test market that's easy to manage, and is also located at the gateway to several Gulf countries whose banks are exploring financial services technology.
Perhaps no commodity is more important to any fintech' success is a ready source of talent. Bahrain, with a population of 1.5 million, is working to train more citizens to work in financial services, but its distance from the technology talent pools will be a serious challenge, observers say.

“Access to talent and a culture that’s supportive of enterprise are critical for fintechs to succeed,” said Eric Grover, a principal with Intrepid Ventures LLC.

The U.K. continues to dominate as a fintech hub in part because it's awash in talent, with a strong university system nurturing its role as a fintech hub, but Brexit is creating pressure. The E.U. separation will likely make it more difficult for workers to freely transfer back and forth to the U.K., and regulatory barriers could restrict U.K. fintech companies’ range of capabilities.

But the U.K. is still well ahead of other European countries in total venture capital investments through 2018, which bodes well for its future. Germany is the U.K.’s nearest rival, followed by France, and after that the VC numbers sharply taper off.
London is the epicenter of the U.K.’s fintech operations, hosting a high concentration of companies specializing in artificial intelligence, machine learning, blockchain and cryptocurrencies.

Globally, London ranks fourth behind Beijing, San Francisco and New York, according to the Global Fintech Hub Report, which analyzes the pros and cons of dozens of large and emerging fintech centers.

To offset the effects of Brexit and other factors, London & Partners—an economic development agency run by the Mayor of London—opened an office in Munich, Germany, to promote trade and investment across both regions.

“Companies from both London and Munich are leading in the development of cutting-edge technologies, especially in areas such as AI, advanced manufacturing and the IoT. We see lots of opportunities for collaborations between our two great cities and our new office in Munich will open more doors for businesses from both regions,” said Matthias Frank, Munich office lead for London & Partners, in a recent press release.
In North America, several U.S. cities and Toronto are noteworthy for their growing fintech momentum. Though the total number of deals and fintech funding activity pales in comparison to the global fintech powers, certain regions including the Southeast, Midwest and Texas stand out.

The Northeast—particularly Boston—is seeing a strong surge of fintech activity this year. Through the first quarter of 2019, Massachusetts was the No. 3 U.S. fintech region, pulling in about $400 million in fintech funding through 14 deals, according to the PwC|CB Insights MoneyTree Report. Boston-based Toast, a POS and restaurant management platform, reaped $250 million alone from investors.

Overall, total U.S. fintech funding stayed about flat at $3.3 billion in the first quarter of the year, according to PwC|CB Insights. Other areas that drew noteworthy fintech investments during the first quarter of the year included New Jersey, Texas, and the Midwest, according to the report.
Toronto is another significant fintech force in North America, and the leading fintech zone in Canada, because of the high concentration of financial organizations and technology development in Ontario. Last year Toronto accounted for CA$221 million (US$165 million) in total fintech investments across 25 deals, according to a recent report from Toronto Financial International (TFI).

Toronto ranks ninth out of the top 15 global fintech hubs, according to TFI. Currently the region has more than 190 fintech companies and 20 incubator/accelerators in operation. Payments represent the single leading category of fintech investment in the Toronto area, and combined with lending and digital currencies/FX firms it accounts for half of all local fintech activity, according to TFI.