Uncertainty about the rights of UK-based companies to operate in the EU after Brexit may have drawn a question mark over the country's financial services sector, but its fintech companies appear to be unaffected.
“Less than 40% of fintechs actually require regulatory approval or a licence to operate, so in theory [they] wouldn’t be affected by passporting rules or specific financial services regulations in the EU,” says Eileen Burbidge, whose dual roles as the UK Treasury’s special envoy for fintech, and a partner at London-based early-stage venture capital (VC) firm Passion Capital, give her unique insights into the UK fintech sector.
The UK was the leading European country for VC investment into fintech in 2019 (as of mid-August), with $2.29bn invested across 142 deals, according to a London & Partners report. This is more than twice as much as other European fintech leaders such as Germany and Sweden.
Furthermore, London has carved a niche as a leading fintech hub, attracting the highest number of VC investment deals in the sector of any city worldwide in 2019 (as of mid-August). With regards to total VC investment in the fintech sector, London brought in $2.11bn, or 92%, of the $2.29bn invested in the UK.
Ms Burbidge attributes London’s fintech strength to its strategic timezone (which enables financial settlement across the globe on the same calendar day); burgeoning technology sector; financial services heritage; and the presence of regulators such as the Financial Conduct Authority. “There really is no place like London; it’s as if you physically overlaid Silicon Valley, Wall Street and Washington, DC,” she says.
Notable fintechs in Passion Capital’s portfolio include: Monzo, a challenger bank valued at £2bn ($2.57bn) following its latest funding round in June 2019; GoCardless, a global business payments platform; and Tide, a digital bank offering current accounts to SMEs. All are headquartered in London.
Since it was founded in 2011, Passion Capital has made 138 investments into early-stage companies, and has been the third most active investor in European unicorns (start-up tech companies valued above $1bn), according to PitchBook, a private capital research group.
Despite these strengths, concerns have emerged due to uncertainty around whether UK financial services firms will still be able to operate across the EU after Brexit. Ms Burbidge claims that support in the UK government for regulatory equivalence between the UK and the EU after Brexit should mean there is as little disruption as possible.
Nonetheless, greenfield investment into the UK financial services sector has faltered, dropping to its lowest level since 2013, according to greenfield investment monitor fDi Markets. Just 47 greenfield FDI projects for the sector were announced in the UK between January and September 2019, a sharp fall of 42% compared with the corresponding period in 2018.
London has also begun to attract an even larger share of the greenfield investment projects announced in the UK financial services sector since the Brexit referendum in June 2016, with almost three-quarters of projects announced in the capital (compared with a share of just over 60% since 2003), according to fDi Markets.
Despite London’s dominance, Ms Burbidge says the UK has other strong fintech hubs, such as Edinburgh, Leeds and Cardiff, where many fintechs and digital banks have either technical or customer support teams. However, in a post-Brexit world the standing of cities outside of London is uncertain.
“Although it’s difficult to predict and while I’d like to think that all regions will be affected proportionately after Brexit, it could be the case that cities outside of London will be more affected,” she adds. Despite this, she believes the UK is still a “very appealing and addressable market” across sectors, especially for fintech.
Location, location, location
Fintechs wanting a global presence must carefully decide upon which international market to expand into first, and which investors to partner with to ensure success. Referring to the boom in fintech VC investment Ms Burbidge says: “We’re in the longest bull run in history, where cash is not a precious commodity, but actually quite commoditised. Company founders should always be mindful of the source of funds, and which investors to partner with to ensure there is strategic alignment.”
Some investors favour the US due to the size of the market; others believe Europe is preferable as its smaller markets make it easier for firms to be more localised and tailored to demographics. Meanwhile, Ms Burbidge says: “South-east Asia is very interesting and countries are very receptive. It’s a very obvious export market for UK businesses in every sector.”