Recently, London celebrated its FinTech week – a week entirely dedicated to start-ups and businesses working on technological solutions for diverse financial issues. While FinTech firms are not entirely new, they have only recently gained wider public attention. Many businesses and private costumers are increasingly adopting FinTech services as a viable option, if not even as a better alternative, to the services offered by conventional banks. Whereas a few years ago traditional financial players had taken note of the emergence of FinTech, it now appears to be a gaining traction regarding viable competition.
For many, FinTech companies are the white knight of the financial industry with disruptive and innovative new approaches to traditional issues in finance – be it in payments, financing, insurance or data analytics. Real innovation stems from real competition, something the financial industry has been lacking for the last five decades. With lower costs, more convenience and higher transparency, FinTech companies are providing such competition, which benefits especially individuals and SMEs that have largely been ignored by the larger financial institutions.
As such, it is great news that London has been named the world’s leading city for the FinTech sector, according to a report commissioned by the Treasury. It has outperformed other European countries, Australia and most importantly the US – both in New York and California, providing the best overall conditions for a thriving FinTech sector.
With the City of London, it is not surprising that the UK has an invaluable pool of talent flocking from other financial institutions to the promising new technology start-ups. With relatively high numbers of consumers, SMEs and particularly other financial institutions adopting these technologies, the UK also has one of the most in demand structures.
Most notably, however, is the UK’s performance on its policy environment, where it is well ahead of its international competitors. It seems almost shocking how much worse other FinTech hubs in the US and Germany have performed in this area, where policy and regulation are highly complex, fragmented and opaque. While the inherent nature of the financial market in London is not necessary much less complex, help from the Financial Conduct Authority (FCA) or other advisers lowers start-ups’ struggle with regulatory issues. The FCA’s Project Innovate, for example, allows new tech firms to get first-hand support from experts while these same experts can learn from start-ups to improve policy and processes. This initiative is supposed to catch up with technological innovation and eliminate or, at least, limit barriers to entry for FinTech companies.
There is additional support from the UK’s taxation policies, such as the EIS (Enterprise Investment Scheme) and the SEIS (Seed Enterprise Investment Scheme), providing tax reliefs for small and medium-sized high-risk start-ups. Such schemes have proven to be much more supportive than their international counterparts. This has allowed UK FinTech companies to witness growth to £6.6bn in revenue, with 61,000 employees working in the sector in 2015.
Although London is the global FinTech city this year, serious competition from Asian cities is threatening its position. Hong Kong and Singapore are seeing considerable demand for FinTech services. Both regulatory regimes and government initiatives are also very favourable for FinTech developments in these cities.
One major point of improvement for the UK would be to extend the eligibility for tax reliefs through the EIS and SEIS. Many FinTech start-ups are still excluded from the scheme as they fall under excluded activities of “banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities”. As research shows, high rents for offices are already making it difficult for new startups to handle their costs. High initial taxation will only exacerbate this problem and increases barriers to entry. If the start-up is successful later on, its social contribution through lower prices and more transparency for consumers will many times outweigh the foregone revenue through tax contribution.
To remain as the “King of FinTech”, the UK should have both an adequate and dynamic regulatory environment via the FCA. So far, the implementation of such regulation has been too slow, as Daniel Lowther explains in his article on BankNXT. London is, therefore, risking being too late in reacting to developments in FinTech, which inhibits the dynamism and innovativeness these firms bring along.
The UK has proven to be a leading country for disruptive companies in the financial sector. Talent, capital, demand and particularly policy have transformed it into a global hub of FinTech. Still, some further policy efforts in taxation and implementation are needed to remain in this position.