London is the undisputed heavyweight champion of fintech, but it has found itself with a PR problem: Brexit. Will the UK suffer from massive brain-drain as foreigners find their workpapers revoked? Will trade disputes disrupt banking-as-usual? Will Frankfurt, Dublin or Zurich emerge as the new center of finance?
No doubt there is a lot at stake. More than one million foreign nationals work in London, and 37% of the London population is foreign-born. While at least one source claims there are as many as 1600 fintechs in London, Crunchbase reliably identifies 761 fintechs with HQs in London.
The successful establishment of a points-based immigration system is one important victory for workers and recent graduates employed in fintech and other technical fields. The UK’s points-based system is a meritocracy of immigration that benefits highly skilled workers, English speakers, entrepreneurs, investors and — importantly — recent university grads. Still, several post-Brexit questions remain, including trade, tariffs and data regulation. Depending on how these issues are resolved, London will either continue unabated as the fintech champion of the world, or be open to a challenger.
So far, so good. From my conversations with the people on the ground, the concerns among UK-based fintech entrepreneurs resonate loudly about a tight labor market — which has been a constant refrain for years — and decidedly not about fundraising, brain drain, or macro-economic fissures of any kind.
Have I mentioned I love the FCA?
Robin Finer has a difficult job. He is Head of Competition for the Financial Conduct Authority — the all-in-one bank and securities regulator of the UK — which has over 60,000 companies under its purview. His department’s role is to promote competition to encourage innovation in financial services while emphasizing consumer protection and market integrity. One question is, among those thousands of entities, how will the government treat the largest of all, those like Facebook and Google, whose digital populations dwarf all others?
Now that the UK is undoubtedly leaving the EU, it can choose to engage with companies, markets and sovereign nations with liberty. The Furman Report in March 2019 first urged the government to establish a Digital Markets Unit to regulate Big Tech, in part due to the fact that the use of traditional antitrust regulation is ineffective. The UK government has committed to implementing the DMU, which will pursue personal data mobility and open standards to deliver greater innovation while promoting a digital code of conduct for platforms deemed to have “strategic market status.”
How does the FCA stay relevant in the face of such industrious innovation? First, in contrast to what we have in the United States, the FCA is a single entity that governs the entire financial sector without interference by competing agencies or states. Second, the members and officers with whom I have interacted fit a refreshing description: they are energetic, curious and committed to long-term success through innovation.
The Help Desk as an effective Horizon Scanning Tool
The FCA launched FCA Innovation in 2014 with the singular aim of supporting innovation in financial services; since that time, 680 requests for support have been fielded, 100 of which have gone through five sandbox cohorts, and more than 40 of which have been authorized to proceed in the open market after graduating from the sandbox. See “The Impact and Effectiveness of Innovate” for more details on this excellent program.
The FCA utilize FCA Innovation as a horizon scanning tool, employing machine learning to identify trends in fintech, regtech and supporting technologies like edge computing, quantum computing and cryptography. One easy-to-see trend is this: approximately ⅓ of all requests for assistance fielded by FCA Innovation were distributed ledger technologies. Apparently, we see a fair bit of blockchain on the horizon.
Also a fair bit of Big Data. Nick Cook, the inaugural Director of Innovation for the FCA, has said that the FCA will become less a regulator of money and more a regulator of data. It’s now less about opening banking to competition, and more about opening all financial services. So let’s let Open Banking continue to play out while we begin moving toward Open Finance.
The difference between tech & fin (reprise)
Along with the continued ambition of fintech entrepreneurs and regulators, we also sampled the enthusiasm of certain debt and equity investors on our tour of London last week. It seems investors are particularly keen; innovation continues apace while the macro economy is reasonably strong and stable, pandemic scares notwithstanding.
Valuations have simmered down to a more attractive level, perhaps finally reflecting the difference between consumer tech and fintech. Fact: digital consumer technology can grow massively without massive incremental costs; whereas fintechs, particularly originators, must understand that their COGS is the cost of capital. The closer one’s business model is to lending, the more important is the cost of this input. Thus, fast-growing lending companies don’t experience margin expansion the same way that fast-growing digital tech companies do. Knowing this, banks with 0% cost of funds become formidable competitors. Therefore, the only place to invest is where zero-COGS competitors can’t compete due to structural or regulatory restrictions. And then only under the tight constraints that modest margins afford.
Innovation’s edge is sharper in London
In the past week we saw strong evidence for continued growth and innovation in digital banking, alternative credit, regtech, compliance, insurance and countless enabling technologies. As the FCA’s Robin Finer said, “innovation is the sharp edge of competition.” Here in London it is sharper than anywhere else in the world.