Facing twin Covid-19 and Brexit headwinds London has shown great resilience and fortitude, helping it win the lion’s share of Europe’s venture capital (VC) investment to remain Europe’s undisputed fintech capital. By embracing fintech and creating an environment that nurtures it London has both proved naysayers wrong and offered a seemingly Brexit-proof way forward for the continued innovation of its coveted financial services sector.
Following a lockdown lull caused by the pandemic, VCs are back with a vengeance – eager to invest at every stage in fintechs who offer innovative solutions in a world embracing contactless payments, e-commerce and digital transformation. Between January and June 2021 global fintech VC investment totalled $54.1bn and according to the latest figures from Innovate Finance [the UK’s fintech industry body] UK fintechs raised US$5.7bn during this period – a significant increase on the $4.3bn invested during the whole of 2020 and higher than any full year figure, behind only the US in funds raised globally.
“London is one of the world’s pre-eminent capital markets and a magnet for global investors,” states Revolut, CFO, Mikko Salovaara. “In the first half of 2021 European fintech firms raised $13.9bn, 51% more than they did in the whole of 2020 and London based businesses accounted for more than a third of that investment.”
In July Revolut raised $800m in a fundraising deal with Softbank and Tiger Global that has seen the London-based neobank valued at $33bn – six times its last private valuation in 2020. This came days after a direct listing on the London Stock Exchange, rather than a traditional IPO, by fellow London-based fintech Wise (formerly Transferwise) who secured an $11bn valuation whilst elevating London’s reputation as a tech listing destination.
Mikko Salovaara, Revolut: London is one of the world’s pre-eminent capital markets and a magnet for global investors
Being home to so many successful fintech companies is, according to Janine Hirt, CEO, Innovate Finance testament to London’s reputation as a place where entrepreneurs can build and scale their operations. “The capital has a historical pedigree in financial services, and has built an ecosystem with a diverse talent pool, access to leading academic institutions, as well as strong support from regulators and government – all of it together creating an environment that allows fintechs to thrive.”
The UK boasts 17 fintech unicorns (with $1bn+ valuations), including neobank, Starling who achieved unicorn status after its latest funding round took its value over £1bn and chief corporate affairs officer, Alexandra Frean believes the latest figures from Innovate Finance show there’s an appetite among international investors to fund high-growth, innovative firms who have flocked to the capital.
“Silicon Valley is all about technology. New York is all about finance. London, uniquely, has both. In addition, we have a regulatory environment in the UK that is very forward thinking,” Frean says. “In the UK our regulatory sandboxes have played an important role. For example, the Financial Conduct Authority’s regulatory sandbox allows businesses to test innovative propositions in the market, with real consumers.”
“London’s success,” concurs Salovaara, ” is based on a regulatory framework designed to foster innovation and the fact that tech pioneers from around the globe know they can find and attract the best talent here.”
Alexandra Frean, Starling: Silicon Valley is all about technology. New York is all about finance. London, uniquely, has both
Although London is developing a critical mass of talent and fintech-focused investors, Kebbie Sebastian, managing director of financial technology consultancy, Penser is less bouyant about Brexit. ”Dublin, Amsterdam and Berlin are all increasingly good alternatives to London with the benefit of access to European markets, which was not the case before Brexit.”
Failure to strike an equivalence deal and the loss of passporting rights brings challenges to the City of London’s post-Brexit future. Fintechs wishing to serve European customers now need to establish an EU presence, including Revolut, who opened an office in Vilnius, Lithuania to continue providing retail services to its European customers.
“Brexit did bring uncertainty, but in its wake there has been a commitment to accelerate tech visas to maintain the flow of talent into London,” remarks Salovaara, who believes Covid has been a greater hurdle in disrupting people’s willingness to make the decision to relocate globally. “Many companies (Revolut included) quickly and successfully transitioned to the large majority of their workforce working flexibly from remote locations with no loss of efficiency – and with upsides in colleagues’ work-life balance. In one way that is a huge opportunity for London in being able to recruit even non-mobile talent from anywhere in the world while still being a sufficiently attractive world capital that people want to come here.”
Matthew Jones, managing director of VC firm Anthemis also cites talent as a key Brexit challenge for fintechs. “London does a lot of the hard work in attracting talent to the UK. It is a magnificent, diverse and global city that people of many ages and backgrounds want to both visit and live in. We need to make sure that our post-Brexit immigration system reflects the kind of talent that London (and the UK more broadly) wants, or – put another way – does not deter people who have so much to contribute to our tech ecosystem.”
Whilst welcoming the Government’s implementation of the scale-up visa scheme, Hirt highlights the need to retrain and upskill homegrown talent. As part of a UK initiative to train up 100,000 software engineers by the end of the decade 01 Founders recently launched a free two-year coding school in London that offers students a guaranteed job at a top tech firm.
The Kalifa Review of UK Fintech, led by former Worldpay CEO Ron Kalifa, was published in February at the behest of the Chancellor of the Exchequer, Rishi Sunak to provide a roadmap for the future of UK fintech.
“The Kalifa Review set out a vision and strategy of how the private and public sector can collaborate to ensure the UK retains its position as a global leader in fintech,” explains Hirt. “Changing the way we regulate the sector will be key to our future success, and we must ensure fintech companies can scale effectively and responsibly in the UK. For example, it is important that the Government implement the capital and investment recommendations as outlined in the review to attract more fintechs to go public in the UK rather than abroad.”
Alongside regulation, Hirt says the UK needs to build on and strengthen its international links – sharing expertise on the creation of international standards and protocols, as well as providing UK based fintechs with the support they need to expand into new markets and grow their companies abroad.
Fintech bridge agreements between the UK and Australia, Hong Kong, Singapore, China, and South Korea promise cross-collaboration on a global stage, which will cement London’s position as a fintech capital and give the UK a say on fintech regulations. “Brexit has given the UK the opportunity to influence global regulation and to strengthen London’s position as a global fintech centre. It’s up to the UK to capitalise on this,” insists Frean.
Building For The Future
Whilst noting the hurdles Brexit has presented fintechs Hirt also sees opportunities to stand out from the crowd and create a global identity post Brexit. “We now have the autonomy to implement our own regulatory framework, enabling us to protect the consumer while allowing innovation to continue to thrive. This means we’re able to ensure we create the right conditions for fintechs to innovate and grow, especially in emerging technologies such as decentralised finance, and it also enables us to build on our strengths and stay ahead of the curve, particularly in areas like open banking and open finance.”
Janine Hirt, Innovate Finance: We’re able to ensure we create the right conditions for fintechs to innovate and grow
London is home to 3,018 fintech companies – more than any other city in the world. As coronavirus has driven the accelerated adoption of fintech products and services Sebastian says London is well placed to take advantage of growth areas, such as, buy now pay later, payments integrated into software services and the digitization of insurance services.
“Insurtech has blossomed in recent years, building on London’s existing role as a key global hub for insurance that itself developed over the last few hundred years,” adds Jones. “The number of venture investors actively looking at and investing in insurance has increased significantly over the last few years. At the same time, insurance companies have taken great strides in their adoption of new technology and have made considerable progress in attracting new talent to their organisations who can, in turn, drive change.”
With a thriving community of early stage investors in the UK Jones says there are opportunities to improve the availability of later stage funding and support. “This is part of the rationale for our new venture growth fund, Anthemis Insurance Venture Growth Fund I (AIVG). We’re excited about the opportunities available at later stages and look forward to helping these companies thrive in the UK.”
Matthew Jones, Anthemis: There are definitely opportunities to improve the availability of later stage funding and support
“Fintech’s recent success in attracting funding at all stages,” concludes Salovaara, “demonstrates that London is attracting investors who are willing and enthusiastic in their support for market leading innovation in financial technology.”
So long as London continues to nurture it’s fintechs, investors will continue to fund them – allowing fintech to lead the way for the entire UK financial services sector.