In the second of a three-part series, Moriah Costa examines the impact of Brexit on alternative finance and how the UK became the fintech capital.
As the date for the government triggering Article 50 looms closer, fintech firms are waiting to see if the vibrancy of the financial world in London will continue or if they will need to look elsewhere for growth.
The government has done a lot in the last few decade to create a vibrant fintech sector, which is worth an estimated £20bn in annual revenue. But with a new Prime Minister and Chancellor, it’s uncertain if the UK’s commitment to fintech will continue as strongly as it did before.
“What we did in the UK was create a level of momentum very early on, which has been very good and actually a lot of other administrations overseas have looked on and thought, it's quite interesting what's happening in the UK, wouldn't it be lovely to recreate that here,” he said.
While London has a long history of being a financial centre, it started to set the foundation for fintech before the financial crisis. In the 1990s, the UK launched a series of tax relief programs to encourage investments in smaller high-risk trading companies. Some of the first alternative financing and fintech companies were also started in the UK.
But it wasn’t until after the crisis that the government began to ramp up its fintech-friendly regulation, from licensing digital only banks to data sharing initiatives. In 2011, the government established the GoCardless system, which gives all firms access to the recurring payments system at banks, allowing start-ups to improve their cashflow.
In 2014 the UK’s financial services regulator, the Financial Conduct Authority, established interim licenses for P2P lenders. In 2016 the government further expanded the potential market for investments through P2P lenders by allowing – in theory - the platforms to offer the Innovative Finance Individual Savings Account (IFISA).
Robo advisors, or wealth management firms that use automated algorithms and technology in lieu of face-to-face investors, can apply for regulatory help through the FCA’s advice unit, which was launched in June.
The FCA also established the first regulatory “sandbox” in the world, where firms can test innovative products without all of the normal regulatory requirements for engaging in financial services. And it has an innovation hub aimed at helping companies come with new financial service products.
The regulatory environment has allowed many fintech companies to grow. Now the question is how to continue that momentum, Battersby said.
Not everyone thinks that London is the fintech capital. Mike Baliman, who runs the London Fintech Podcast, is skeptical that the UK is the leader of fintech. Peer-to-peer lending and Bitcoin usage is far higher in China than it is in the UK, he said.
"However it is true to say that the UK is a must-know about for fintechers worldwide," he said.
London has a unique ecosystem that has helped fintech companies flourish, said Gianvito Lanzolla, a business professor at City University of London. It has capital, talent, and numerous opportunities. But after Brexit, nothing is happening, he said.
“They sit on the fence and wait,” he said. Many of the financial companies he has talked to do have a plan B, however, which is to move to another city. But exactly which city is yet to be determined.
Recreating the London ecosystem is not a trivial manner, Lanzolla said. It means not only relocating infrastructure, but finding jobs for spouses, schools for children, and having a city that provides capital and talent.
Already some European and Asian cities are hoping to lure away fintech from the UK. About five UK-based fintech start-ups have relocated to Berlin since the referendum and Singapore is also hoping to attract financial entrepreneurs.
Marco Aboav, head of asset allocation at digital wealth management firm MoneyFarm, does not think Brexit will change much about the financial technology sector in London.
“I still do believe that London is the place to be to work in fintech,” he said. “There are no other cities in Europe that can be comparable.”
While funding is an issue for firms, there is still a lot of talent in the city, as well as tax incentives for small and medium sized businesses, he said. It’s too soon to tell however what will happen in the long term, he added.
While no one knows what is going to happen after Brexit, many fintech firms such as robo advisors, are likely to stay, said Adam French, cofounder and CEO of wealth management start-up Scalable.
“People who live in the UK will still require investment management solutions so the business model I think still exists and it will become the main channel for which people actually do their investing,” he said.
Click here to read the first part of this three-part series: The Brexit risk to the UK’s status as ‘fintech capital of the world’