The UK’s Financial Technology (FinTech) sector is ranked 1st in the world by EY in a report commissioned by HM Treasury. Interestingly the report highlights a supportive regulatory regime and the Financial Conduct Authority as key elements that has helped make UK FinTech a success story.
In the release from HM Treasury there is a canned quote from Chancellor George Osborne saying: “In 2014 I said I wanted Britain to be the global capital of FinTech. This report says that we have delivered exactly that: we have the most supportive tax and regulatory regimes in the world for FinTech, and we have the world’s leading FinTech ecosystem.
“But we’re not going to rest on our laurels. I know that we need to do more if we want to maintain this position, and so I welcome the report’s recommendations. We are defining the future of global banking right here in the UK. This is all part of our long term plan to cement Britain’s position as the centre of global finance.”
As important as these things are it is the UK talent pool and the availability of capital for start-ups and high-demand from clients in the London financial services sector that are equally if not more important than the regulatory regime. Taken together it backs the recent decision by Isomer Capital to start a new fund based in London and focused on start-ups. Isomer Capital believes that investors are ready to start taking a slice of the €137bn generated in exit capital from European start-ups in 2015.
What does EY have to say?
There are two versions of the report. The full report (130 pages) which can be found here and the executive summary (16 pages) which is located here.
Both versions of the report go through the benchmarking process that EY undertook and while the UK scored first in just policy it was second in talent and third in both capital and demand.
What will be interesting is whether the UK FinTech scene can continue to grow with the twin uncertainties of Brexit and the proposed London Stock Exchange merger with Germany’s Deutsche Bourse. German FinTech companies are in a much worse position than the UK with poor talent, a tougher regulatory regime, little demand and less access to capital. Should the merger go through it would be interesting to see what impact it would have in terms of tighter regulation.
EY do not address this as a future risk and that is disappointing. It will be interesting if we see an update or separate press release from EY in the next few weeks to address this.
Other key numbers from the report for the UK show:
- 61,000 FinTech staff second only to California
- A market size of £6.6bn more than £1bn ahead of the second largest market New York
- Investment of £524m well behind California (£3.5bn) and New York (1.4bn).
What the numbers do show is that London is clearly punching above its weight and return on investment in the sector is considerable. It will be interesting to see if Isomer Capital or some of the other emerging tech investment funds in the UK set up a separate division to look at FinTech.
Risks to UK FinTech are mounting
While EY seems to have ignored the merger talks between London and Germany and makes little mention of the risks from Brexit it does highlight the risk of a loss of policy momentum. This would be caused by the UK not responding to the way other FinTech regions are developing leading to a loss of momentum in the market.
There are other risks such as large scale investment from other governments around the world and the move towards increasingly specialisation by some countries. EY calls out the Benelux focus on payments, Malta and the Isle of Man’s focus on cryptocurrencies and Estonia’s focus on financial identity as example of specialisation.
However it reserves its biggest warning for the Chinese FinTech sector which has outgrown almost every other region with over £8.6bn in investment during 2015 up from just £1bn in 2012. It also points out that 7 of the top 31 FinTech unicorns are based in China who are benefiting from a very relaxed regulatory approach.
9 recommendations to keep the UK on top
There are 9 key recommendations from EY to HM Treasury if it wants to keep the UK FinTech market on top of the pile:
- Create a FinTech “delivery body” to drive high impact policy initiatives to implementation as quickly as possible
- Build on the FCA’s position as the most progressive regulatory body globally
- Deliver practical business support to FinTechs
- Build FinTech “bridges” to support UK FinTechs expand internationally
- Strengthen the UK’s talent pipeline, particularly for tech talent
- Establish regional Centres of Excellence in the UK
- Initiate investor-focused programmes to improve access to growth capital
- Broaden tax initiatives to drive greater investment in UK FinTech
- Promote government, consumer and FI adoption of FinTech services
Some of these will make uncomfortable reading given recent policy decisions by the UK Government. For example in point 5 it talks about broadening the Tier 2 Visa. The problem here is the earnings limit that the UK Government has decided to set will immediate count against start-ups who generally put earnings back into the business early rather than focus on large salaries.
Conclusion
The full report which runs to 130 pages is something that requires a lot of time to read. It looks in detail at critical areas such as the Talent Pipeline, something that the UK needs to work on to catch up to California and stay on top of the pile. The problem is that it is not just the Talent Pipeline that is needed to keep the sector on top. As we’ve seen many times over the last few years it is easy for British talent to be seduced by the monies on offer in the US. It is also easier for overseas talent to gain access to the US than the UK especially as visa conditions continue to tighten.
On the upside the return on investment in the UK is far higher than anywhere else and it will be interesting to see if this is enough to attract investors. If the investment picks up then there will be a reason for Talent to stay in the UK and providing the UK Government continues to offer a positive regulatory regime things will continue to look rosy.
What will weigh on everyone’s mind in this sector is the risk to UK FinTech’s from Brexit and the potential regulatory problems that could occur if a merger with Deutsche Bank goes ahead. While few of the start-ups are listed they are selling into listed companies and that means much more complex products increasing the lead time for product generation, increasing costs and reducing the return for investors.
