Will Europe's Emerging Fintech Cities Rival London in 2019?
Joe Wallen
The UK is a major European fintech hub, with $16.1 billion invested during the first half of 2018 alone
“Entrepreneurs, business leaders and investors cite London’s talent, creativity, innovation and dynamism as key to its long-term success. The message is loud and clear: London is open to business and investment from around the world."
So, said Sadiq Khan, the Mayor of London, as part of his LondonIsOpen campaign, which was launched in response to the United Kingdom voting, on June 2016, to leave the European Union. Khan led the initiative to try to lessen fears among the capital’s European residents that they would no longer remain welcome in London after the Brexit vote.
Khan’s positive words were not just targeted, however, at allaying the citizenship concerns of the 3.34 million foreign residents in London – of whom approximately a third were born in EU countries – but also the fears of big business in the capital.
While there has not been quite the mass exodus of people and capital flight out of London, following the Brexit vote, as some politicians and academics initially suggested, it is still predicted that Brexit will have a significant negative impact on a number of the capital’s major industries particularly if a no-deal is reached between the UK and EU.
Roughly £25.5 billion of increased tariffs are expected to fall on five sectors of the UK economy alone – financial services, automotive, agriculture and food and drink, consumer goods, and chemicals and plastics.
The UK’s financial services sector is dominated by London, where 50% of the country’s total $152.36 billion output from the industry is generated. Concerns over increased operational costs for businesses remaining in the UK and a desire to maintain passporting rights across the EU has led to fears over the future of London as a global financial hub. Catherine McGuinness, the City of London financial district’s leader, has predicted that up to 12,000 jobs could be lost in the short term following the UK’s exit in March of next year, with many more in the longer-term.
One area of financial services that has so far appeared unaffected by the uncertainty surrounding the post-Brexit future of the UK, is that of fintech.
In the first quarter of 2017, for example, London saw $421 million invested in its fintech industry while Berlin, in second place, was a long way behind on $140 million and Stockholm in third on $96 million. In the third quarter of the same year, seven of the largest fintech deals across Europe occurred in the city of London including student online lender Prodigy Finance who raised $240 million and financial wellbeing provider Neyber who received $149.1 million of funding. An array of globally renowned fintech firms such as Mondo, Nutmeg and TransferWise have also chosen the city as their home.
A major plus point for fintechs locating in London is that the city’s financial sector is physically situated alongside its technology sector, allowing for an overlap of both resources and a tech and financially-savvy workforce. The British government has also introduced an assortment of investment incentives such as the Seed Enterprise Investment Scheme, delivering initial income tax relief of 50% on start-up investments of up to $128,000.
However, the strength of the city’s fintech sector is not only dependent on the continued success of its wider financial services but also its diverse population, with entrepreneurs having traveled to the city from all over Europe throughout the past decade, sharing their ideas and expertise.
None more so than Estonians Taavet Hinrikus and Kristo Käärmann, who co-founded TransferWise in 2011. TransferWise - which is one of London’s few ‘unicorns’ - is now worth $1.6bn, yet the company will relocate their European headquarters back to the continent’s mainland ahead of Brexit going through next year.
“Uncertainty means that maybe if you’re building the next fintech business you shouldn’t build it in London today until everything clears up again and we understand what’s going to happen with access to talent and so on,” said Hinrikus.
TransferWise is not alone, with over one-hundred fintech companies reportedly in talks to relocate to the German capital Berlin. In addition, a French minister announced plans in October to lure thousands of fintech professionals currently residing in London to Paris after Brexit.
So, as Europe grapples, during these unsettled times, to purloin a proportion of the lucrative London fintech pie – which of the continent’s hidden gems could prove most tempting for a flighty fintech company?
The picturesque city of Tallinn may possess a population of just 426,538 but it punches well above its weight when it comes to fintech. With over 400 start-ups originating in the city, including the aforementioned TransferWise and communications giant Skype, Tallinn has been described as “a sort of Silicon Valley on the Baltic Sea”. Incidentally, due to Tallinn’s 30.6 start-ups per 100,000 inhabitants, Estonia has the third highest concentration of start-ups in the whole of Europe.
Much of this came as a result of the realization, by its post-Soviet government, that while the country had few natural resources, its population could instead be mobilized as its greatest asset. The launch of the Tiger Leap Foundation – a government-backed technology investment body – saw major investments in both computer networking and infrastructure in the late 2000s. In 2000, only 28.6% of its population was connected to the internet but by 2016, this figure had increased to 91.4%. This has resulted in the creation of an extremely tech-savvy workforce, with the numbers of specialist IT professionals available for hire in Estonia expected to increase again by 22.4% by 2022.
Estonia has the third greatest number of start-ups in Europe, per capita of the population
Therefore, for any fintechs looking to re-locate, Tallinn provides a ready-made and highly-skilled, English-speaking workforce. Estonia’s government has also made moving to Tallinn an attractive proposition, easy for foreign entrepreneurs, and with a wealth of benefits. Firstly, the country introduced its e-Residency program in 2014, making it the first state in the world to offer electronic residency to foreign nationals. By December 2017, 24,000 foreign entrepreneurs had taken advantage of this scheme and its provision for individuals to register an EU-based company entirely online with access to the same government support and tax benefits that a company with a physical base in Tallinn would enjoy. For those looking for a physical relocation, the current record of setting up a business in the country, while still adhering to stringent regulation, is a mere stress-free 18 minutes!
Estonia’s government has also encouraged fintech start-ups through its Startup Estonia policy and Enterprise Estonia agency, which provide funding, networking and advice to local entrepreneurs.
No wonder the country has been nicknamed e-Stonia!
When asked to think of Lisbon, the images conjured up by most people are those of delicious Pastels de Nata and picturesque, sleepy streets – not revolutionary tech. Yet, the Mediterranean metropolis is gaining increasing interest from entrepreneurs after the city was found to have the highest rate of female start-up founders in Europe, as well as being the country that has one of the highest percentages of firms with a one-woman co-founder.
For many women, the Portuguese-tech industry provides greater job-security and higher earnings as it possesses the smallest gender pay-gap across the entire sector in the Europe Union. Therefore, more women within Portugal look towards the industry for fairer pay, while those working within tech in cities like London or Berlin understand they would receive better remuneration for their endeavors by moving to Lisbon. The study also found that Portugal, along with the United States and Latvia, was one of the top three countries globally ‘which have the most to offer women looking to progress in the tech industry’, with government policies such as the Fifth National Plan for Equality – Gender, Citizenship and Non-Discrimination directly leading to a greater number of c-level female appointments within the tech sector.
Recent positive comparisons with San Francisco have also helped!
“I think California is sunny and it has a bridge just like ours,” joked the Portuguese Minister of the Economy, Manuel Caldeira Cabral. “The idea that we want to promote is that we also have an economy based on knowledge and an entrepreneurial community that is growing. We’re attracting them [tech start-ups] for a lot of reasons: because we have a financing system, a very competitive fiscal setting for start-ups; but also because of the lifestyle and quality of life that entrepreneurs find here.”
While the city is at present a lower-ranked start-up city in comparison to more established hubs like London or Amsterdam, it is rapidly growing, featured for the first time in the Startup Genome Report last year in recognition of this. Portugal’s rapidly growing tech industry raised $350 million in venture capital in 2017 alone, while private equity investments have more than tripled to $7 billion since 2015, demonstrating to those still anxious about relocating both the presence of innovative tech and hungry investors.
An extremely enticing feature and undoubted draw to setting up a business in Sofia are the very low day-to-day running costs involved. For many start-ups, escalating costs for office space in London means that operating a business there is impossible. In 2018, the cost of renting just one square meter of office space in Mayfair, Oxford Street and Holborn were an eye-watering $182, $132 and $114 respectively, per month. Sofia, on the other hand, offers an average rental per square meter of just $14. A premium monthly co-working space in London can cost roughly $5,000, while in Sofia it is a mere $110.
For many cash-poor start-ups, Sofia can provide a cheap but thriving location within the European Union to get your business started. With the transactional value in the fintech market expected to grow from $1.18 billion in 2017 to $2.245 by 2021, Sofia’s fintech community is certainly on the rise. Its government, under reformative Prime Minister Boyko Borissov, has also promised to improve its bureaucracy, such as shortening the time it takes to set-up a business in Sofia and streamlining its judicial system.