Slideshow Data: The threat to London's status as a fintech hotbed

Published
  • January 24 2018, 11:10am EST

A fintech investment surge is underway across Europe, with PSD2 regulations going into effect this month and the U.K.’s Open Banking initiative rolling out. Developments in blockchain, mobile and online payments are drawing venture capital funding in most European countries, with the U.K. firmly in the lead.

What’s unknown is how the looming Brexit situation may affect the U.K.’s strong fintech momentum, and where exactly funds would flow if talent and startups flee Britain. Recent data tallying last year's funding activity suggests the U.K. is still on track to lead Europe in fintech investments in 2018, with London at the center of attention.

The U.K. was Europe’s leading country for global technology investment in 2017, and fintech was the single largest category for venture capital investment, according to London & Partners, which commissioned data from PitchBook.

Looking across other European countries’ fintech totals for 2017, Germany was a distant second with $800 million, followed by Sweden with $543 million, Switzerland with $528 million and France coming in at $412 million.

While fintech is the leading category for venture capital in the U.K., Germany and Sweden, the fintech sector ranks third in the overall tech investment landscape in both Switzerland and France, coming in behind medical/health care concepts and data hosting/analytics tools in each country.

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As one of the world’s leading banking centers with a strong history of technology development, London was ideally situated to become a fintech hub when digital financial technology began to drive specific venture capital investments several years ago.

Britain’s technology firms raised a record £2.45 billion (US$3.5 billion) last year, and 46% of that was centered on fintech firms, according to London & Partners. Top fintech deals in 2017 included TransferWise (US$295 million), Funding Circle ($115 million) and Monzo ($100 million).

London and the city’s surrounding region accounted for 80% to 90% of all fintech firms receiving funds, underscoring the city’s concentration of major banks, startups and digital laboratories that have helped create a hotbed of ideas and innovation around financial technology. Its role as a major academic center and an international travel hub make London tough to beat among firms seeking talent.

“The U.K. remains one of the world’s leading hubs for technology investors and it’s no surprise to see that U.K. tech companies attracted double the amount of venture capital than any other European country last year,” said Eileen Burbridge, a partner at London-based Passion Capital, in a London & Partners statement.

Funds poured into the U.K.’s fintech sector in 2017, returning to 2015 levels after a dip in 2016, according to data compiled by Choice Loans, an investment financial firm based in the London area.

Since the U.K. voted to exit the European Union in 2016, the government has been negotiating to determine the scope and specifics of Brexit, creating uncertainty for U.K. fintech firms and investors.

“A big factor that could delay investment is whether the E.U. and the U.K. can agree upon the movement of people [across borders],” said Sean O’Farrell, a principal with Choice Loans. “If the talent pool within the U.K. is drastically reduced, many companies and investors may relocate their operations.”

Another factor creating uncertainty for investors is whether U.K. organizations and firms will have direct access to the wider European market or whether authorization may be required from each E.U. member state, which could be costly.

Choice Loans predicts that although U.K. fintech investments were booming through the second half of last year, the growth rate is bound to soften in 2018, resulting in a 10% increase for the year.

The Brexit vote in 2016 gave other European cities the opportunity to thrown their hats in the ring as emerging fintech hubs, in case London's momentum in financial technology innovation crashes because of market and border restrictions.

Paris, Berlin, Stockholm and Amsterdam are among the major European cities generating buzz as possible new fintech centers because of their size, talent pools and locations. Authorities in these locales also are sweetening incentives for companies looking to relocate.

Spreading fintech development to more European cities could be a broad benefit if it nets more overall investments in the region, offsetting heavy tech-funding flows to the U.S. and Asia, observers note.

The European Commission is currently preparing legislation to break down barriers for fintech startups, including incentives for companies seeking office space, network access and collaboration opportunities, with the goal of creating a single digital market across Europe, according to recent reports.

Another wild card is the fact that London’s existing financial industry players will face new pressure this year from the Open Banking initiative, which requires banks to interact with third parties—including startups. “This will make it easier for people to switch banks and, with the additional competition presented by fintechs, it could squeeze profit margins,” said Choice Loans' Sean O’Farrell.

“It’s hard to predict just how much investment will be made in 2018, so we’ve taken the middle ground in our prediction but remain optimistic in the future of U.K. fintech,” O’Farrell said.