Us versus europe with brexit: is regulation starving the us fintech sector??

 

 

In November 2015, George Osborne outlined his ambitions to make London the "global center for FinTech". This was a powerful statement made at a time of real global economic uncertainty: This uncertainty was based on low oil prices, China's fading growth, stock market volatility, and the emerging instability caused by the then-approaching and now dramatically failed EU referendum. Paul Jozefak, managing director of innovation lab Liquid Labs, explains the importance of the regulatory environment for FinTechs in the U.S. and Europe.

Managing Director Innovation Lab Liquid Labs

A ber all this has not damaged investor confidence in FinTech. In fact, according to a recent PwC report, the global cumulative investment volume in FinTech is estimated to be around $150 billion over the next three to five years. Although the gap between the US and Europe in terms of funding is glaring: In the first quarter of 2016, around $1.8 billion flowed into FinTech companies backed by venture capital in the U.S., while only around $348 million was invested in Europe during the same period.

But with both regions come different issues that complicate the forecast for this exciting, evolving sector. The U.S. is by no means short of investment, but instead exists a stifling regulatory system that threatens to topple the market leader. The European FinTech scene, on the other hand, is growing tremendously toward a point where it could become threatening to the dominance of the U.S. Or could Brexit prevent this from happening, for example?

Ask the regulators!

Regulators can play a key role in defining the success of industries. It's also exactly what is preventing the U.S. from capitalizing on its enormous FinTech potential. Europe is now taking a more progressive approach and has a regulatory environment that is conducive to financial technology and innovation.

Companies like TransferWise and Seedrs are evidence of the continued dominance of the European FinTech scene."

But what is it exactly that allows companies Europe to innovate so freely? In London, for example, The Financial Conduct Authority (FCA) introduced an initiative designed to help companies in the UK innovate and innovate (by testing new products in the marketplace) without complying with the standard regulations that would typically exist. Also known as the "regulatory sandbox," the initiative operates in the form of a safe space to accompany market experiments of a new product. Of course, it is not without risk to test public tolerance levels in case the thing fails and does not deliver accordingly, but with less regulation, companies can fail faster but at the same time succeed faster.

FCA regulation has long been popular with startups across Europe and is now facing the shards of Brexit: already, the first FinTechs and banks from the UK region are looking for a home in Frankfurt or even Berlin."

The U.S. is less liberal with rulemaking, despite its enormous investment pool and financial resources. Startups are already feeling this strain, with around 86 percent of CEOs saying they were concerned about heavy regulation, according to a PwC report. FinTech companies in the U.S. face stricter regulations than any other region in the world. Firms in the sector must comply with strict federal laws affecting consumer lending, debt collection and credit.

Companies involved in online lending took the U.S. financial technology sector by storm in the aftermath of the 2008 financial crisis. This was promptly followed by criticism from the ranks of smaller banks, which insisted on stricter regulatory requirements in this context. The increased pressure on this fast-growing sector was further highlighted recently when the U.S. Department of Justice reprimanded San Francisco-based lending company "Lending Club" for apparent mis-selling of loans.

Clearly, financial technology can only be a success if there is some degree of compromise between markets and regulators."

Are people really taking blockchain technology seriously?

Take blockchain for example, as there is no better example of the difference between FinTech regulation in the U.S. and Europe. Bitcoins, which are based on blockchain technology, were launched about seven years ago and have been predicted to have a major impact on the financial technology sector ever since. But how seriously is the technology of a disruptor being considered?

When it comes to investor confidence, very serious indeed. Venture capital investment volume in bitcoin and blockchain startups totaled about $1.1 billion in the first quarter of 2016, at the same time about 56 percent of survey respondents said they were aware of the importance of the technology, according to a PwC report. Media attention recently intensified again after the true identity of Bitcoin creator Satoshi Nakamoto was allegedly revealed and then discredited again.

Unlike the U.S., however, the emergence of blockchain has resulted in a sympathetic response from European regulators. For example, congressmen recently voted in favor of a hands-off approach to dealing with blockchain. The proposals, which have now been submitted to the European Commission, indicate that a new task force will be established to research the technologies behind virtual currencies as well as build expertise in this area. This would essentially loosen regulation while making it easier to innovate. Europe also recorded another victory when the European Court of Justice recently ruled that bitcoin will be exempt from VAT.

 

 

Paul Jozefak is Managing Director of Liquid Labs GmbH , an innovation lab for new companies and products in the field of financial technology. In his role, he is supported by Michael Backes, also Managing Director. Jozefak looks back on more than 15 years of professional experience. Before joining Liquid Labs, he was Managing Partner at Neuhaus Partners until 2012. Previously, he was Head of SAP Ventures Europe from 2001. He was also with Davis Polk& Wardwell, one of the leading major international law firms and Andersen Consulting active in the software, telecommunications and utilities sectors. Jozefak holds American and Slovakian citizenship and lives in Hamburg, Germany. He studied finance at Rutgers University, New Jersey, U.S.

As the growth of the FinTech sector in Europe continues to increase, it is fair to say that the title given to Silicon Valley as the "crown of FinTech" is in serious jeopardy. But how does the Brexit affect this development?? According to a Financial News poll before the Brexit referendum, more than two-thirds of respondents believed a Brexit would be particularly damaging to the UK FinTech sector. This is difficult to digest given that a single vote, wipes out the UK FinTech sector's longstanding regulatory lead over the US.

For all companies, EU regulators have a stranglehold on European trade. But does the bifurcation of the European FinTech scene (which is already much smaller than the US FinTech scene) actually result in growth? There is, of course, in the context of Brexit, a deterrent effect of London as a location for company headquarters. Brexit could indeed pave the way for other European countries to take the lead.

Berlin will be the surprising winner

According to polls, Berlin is the surprising winner in the race for the new FinTech hub spot in Europe. 25 percent of respondents to the Financial News survey can imagine relocating here, while around 15 percent are considering Frankfurt as a replacement. Even countries like Bulgaria, Estonia, Hungary and Slovenia have promising FinTech sectors that could capitalize on the Brexit.

If one thing is clear, it is that the European FinTech sector has the potential to become a serious rival to the US. But its credibility as a realistic contender has yet to be validated due to Brexit and its impact."