According to Goldman Sachs in 2016, FinTechs will displace $4.7 trillion of the current $11 trillion of global financial service revenues (about 14% of global GDP) through the disintermediation of banks, insurance companies, asset managers and brokerage companies. These giant financial firms will find it near impossible to compete with nimble FinTechs because of their multi-legacy systems, bureaucratic management structure and post 2008/9 compliance and capital requirements. FinTechs have reconfigured pathways to connect financial products to consumers. They offer a simpler, cheaper, user-friendly consumer experience on the smart phone now universally available at a fraction of the cost five years ago. Transparency and financial literacy will expose many traditional financial services as opaque and noncompetitive.
London is globally-centric and has long been recognized as the world’s leading international banking center because of its concentration of international banks, regulatory environment, location and time zone. The route to innovation in Canary Wharf and its FinTech surroundings passes by the Greenwich Museum, poignant symbol of its historic trade routes. London jumped ahead of other FinTech centers such as New York, greater San Francisco, Singapore, Hong Kong and Beijing by leveraging off this foundation.
Although New York is also noted for its innovation in capital markets, the domestic market drives its priorities. Furthermore, US FinTech regulations are hampered by its complex system of federal and state financial regulators. San Francisco is well advanced in technology, social media and technology capital but lacks the financial sophistication of London and New York and has the same US regulatory issues as New York. Hong Kong and Singapore have successfully modeled themselves on London in order to facilitate the growth of FinTech. However, Hong Kong is China-centric and Singapore is regionally-centric. China itself is the exception because of its size, government central control, closed internet and unique domestic innovation. Beijing along with Shenzhen and Shanghai are capitalizing on the extraordinary success of Tencent’s WeChat and Alibaba’s Ant Financial which converted their messaging apps into mini financial operating systems and by-passing traditional banking and credit card services. So far China has not been able to leverage its advantages internationally both for regulatory and China-centric reasons.
In August, 2014 the UK Chancellor of the Exchequer announced the UK’s ambition to be the “the global capital of FinTech” and the UK Government adjusted its policies to focus on (1) talent, (2) capital, (3) regulatory and tax policy and (4) demand:
Talent. Today, despite Brexit, the UK has a broad base of technology, financial and entrepreneurial talent with an estimated 30% of FinTech founders in the UK coming from overseas. In addition, academia, traditional financial institutions and technology companies help to expand this domain experience through government and industry-backed incubators and accelerators.
Capital. Professional angel investors, venture capital, private equity, hedge funds, mergers and acquisitions and public offerings provide substantial capital for starting and scaling up FinTechs.
Policy. One of London greatest strengths is its progressive FinTech regulatory and tax environment. The Financial Control Authority (FCA) combines all the UK’s financial regulators into one department. A special group of FCA professionals has been set up to focus on advising and helping FinTechs understand existing and possible future regulations. The FCA established an innovation hub for new ideas and a “regulatory sand box” for FinTechs to try out new ideas under close supervision. New tax incentives are simple and competitive. They include relief with low capital gains tax for entrepreneurs, R & D tax credits, an enterprise investment scheme for early investors and tax relief on new equipment.
Demand. Innovative FinTech services are in high demand with UK consumers, financial institutions and corporations in the world’s sixth largest economy.
The UK is adopting the Global Digital Protection Regulation in May, 2018. Data protection and cybersecurity are top priorities for all UK FinTechs in their new systems development. This is a major advantage for international expansion over US and Chinese FinTechs, which will be constrained by legacy.
Finally, although Brexit has created the uncertainty that traditional financial institutions dislike, UK FinTechs, which have become used to by-passing traditional consumer routes, are well-placed to navigate this uncertainty. London in particular has over a half century of experience in laying the ground work for today’s FinTech ecosystem and centuries of cross border financial and trading experience. For the forseeable future, London will therefore remain the innovation and validation center of choice for FinTechs with global aspirations. To duplicate the unique London ecosystem elsewhere will be a challenge.
Arthur Sculley, CEME Senior Fellow, is a former Managing Director at JP Morgan based in Hong Kong and Singapore, was later co-founder of the early FinTech IntraLinks in New York in 1996 and is now co-founder of the FinTech HyperJar in London.