The UK currently employs as many people in financial technology (fintech) as Australia, Singapore and Hong Kong combined, but will Europe’s leading fintech hotspot soon lose some of its shine?

The Shard, London

As we near the point when the UK finally leaves the EU, a number of European financial centres are making their play to capitalise on what in some quarters has been called ‘a suicidal decision’ for the fintech centre. Fintech start-ups have been urged to ‘keep calm and move to Berlin’, while President Macron is trying to entice firms away from London with promises of €50bn in state investment. But do we really need to be concerned or are they just pretenders to the UK’s established fintech crown?

Why does the UK’s Fintech sector dominate?

London currently boasts more fintech firms than the rest of Europe combined, but that success has also spun off into other cities, with more than 60,000 people employed by the sector across the UK. That dominance has been built on strengths across a number of areas which are not going to disappear overnight.

Firstly, there’s strong venture capital investment available for fintech firms here in the UK. Despite the concerns about Brexit, an Innovate Finance study shows that investment in the domestic fintech sector more than doubled the year after the EU referendum, while it fell by 18 percent outside of the UK. There’s also a deep pool of tech-skilled talent, with technically minded people and a number of world-leading research universities that have turned their sights towards fintech innovation. Add to the mix a pragmatic and forward-thinking regulator, the Financial Conduct Authority (FCA), and it’s perhaps no surprise that the UK finds itself in such a dominant position.

What are the challenges facing the fintech sector?

There are a number of challenges currently facing the UK’s fintech sector apart from the imminent departure from the EU. Over the last few years, there has been a heavy focus on incubation and early stage investment in fintech firms. However, at the growth stage, there hasn’t been quite the same level of success.

In fact, making the move from start-up to scaleup has been problematic for many firms, with traditional finance providers such as the banks unwilling to provide the support they need. This is backed by a PwC study, which found that the UK ranked lower than France, Germany and Belgium for the percentage of fintech firms engaged in active partnerships with financial institutions.

Another potentially troubling sign is the fact that a significant proportion of investment in the UK’s fintech sector last year came from a single deal, namely the £9.8bn buyout of the UK’s Worldpay by the US payment processor Vantiv. That deal alone accounted for 80 percent of UK fintech investment in the first half of 2018.

Human resources post-Brexit

The threat caused by leaving the EU

It goes without saying that the UK’s decision to leave the single market will have serious repercussions for the fintech sector. London has been the destination of choice for many firms due to the wider entry it has given them into Europe. However, the likely decline of the validity of UK businesses in the EU, particularly if the UK leaves without a succession plan for passporting in place, could be catastrophic. Instead, UK fintech firms face the prospect of having to seek authorisation to operate in each EU member state individually, which will be a costly and time-consuming process. The simple solution for many fintech firms would be simply to move their primary base outside of the UK.

Mike Smith, the director of the fintech platform Business Expert, summed up the current situation: “As we move ever closer to crashing out of the EU without a deal in place, London will need to seriously think about what it can do to retain its fintech businesses. At the moment, the UK shows no sign of losing its position of dominance, but given the benefits being offered by other prominent European cities and the many complications leaving the EU could bring, without intervention, that’s soon likely to change.”