U.S. Financial Institutions Face Global Fintech Competition

Fintech has emerged over the last few years as the most striking growth opportunity in the global financial services industry. A KPMG report released in March found investment in the sector more than doubled to $13.8 billion in 2015, meaning it has multiplied almost seven-fold over the past five years. Today the U.S. dominates the list of the world's most competitive financial centers, boasting five of the 11 top-ranked cities, according to a recent report by Z/Yen. To maintain this strength, it is imperative that U.S. financial institutions actively lead the charge in fintech innovation – or else risk losing ground not only to their European peers, but budding financial centers from the emerging world.

It's clear, however, that this will not be straightforward. The stakes are high and global competition is fierce. Last year, the U.S. was once again the world's biggest investor in fintech: A surge in mega-rounds (deals worth more than $50 million) propelled its funding to $7.4 billion, up 72% over 2014. The most eye-catching mover, though, was China – a relatively minor player on the scene just 12 months before – whose investment more than quadrupled to $2.7 billion, a fifth of the global market.

While Europe was more subdued on the whole, the U.K. was a notable exception. With London being the top rated city in the latest Global Financial Centres Index – edging New York City into second place – it appears U.K. regulators are laying the foundations for the U.K. to fully capitalize on the next stage of the fintech revolution. By contrast, largely due to inconsistent regulation between states and uncertainty over legal jurisdictions, the U.S. could risk missing out.

Indeed, a recent survey of financial technology founders and investors conducted by Silicon Valley Bank found regulation was perceived as the biggest impediment to fintech's growth in the U.S. It is not clear which of the myriad of overlapping regulatory agencies – both national and state – govern them, nor which rules and policies (many of which were in place before the internet era) they are subject to. This complexity drives up compliance costs, a major burden for young firms that might only have a handful of employees.

By contrast, Europe – and especially the U.K. – has actively maintained light-touch regulatory regimes. A recent report by EY comparing seven leading financial centers ranked the U.K. as having the strongest fintech ecosystem because of its “world-leading fintech policy environment”: Supportive regulatory initiatives, tax incentives and government programs designed to promote competition and innovation. British regulators have allocated £42 million over five years toward research into developing the industry. In April, the U.K. Treasury laid out a strategy to establish a fintech panel to monitor public initiatives, a professional services information hub for start-ups, and bridges with priority global markets to help fintech players expand internationally.

One example of the differences across the Atlantic is how blockchain has entered the mainstream of public policy in the U.K., which is still a peripheral subject among U.S. policymakers. One of the only states to have so far issued a position paper on the emerging technology is Vermont, which does not even have a financial services industry. Vermont perceptively noted that providing legal recognition of blockchain technology may create a first-mover advantage with the potential to draw in economic activity. On the other hand, if the U.S. fails to move quickly, its institutions could lose a valuable competitive edge.

Falling behind in the fintech race hurts more than just emerging start-ups; it is a risk to the entire financial sector. Fintech is here to stay; established financial institutions must invariably adjust their traditional business models to remain relevant. Increasingly, both they and their younger competitors are recognizing the benefits of cooperation and forming partnerships to get the best of both of their worlds – nimble, innovative technologies combined with financial institutions’ brand recognition, personalized service and wealth of resources.

The good news for the U.S. is that in areas other than public policy, its fintech sector has an excellent platform to build upon. Both California and New York were ranked very highly by EY in terms of their talent availability and pipeline. Together, the two hubs employ around 130,000 people in the sector – compared to around 100,000 in the U.K., Germany, Australia, Hong Kong and Singapore combined. The U.S. centers also perform very well when it comes to capital: Seed, growth and listed. For example, growth investment in fintech is more than six times that in the U.K., buoyed by a culture that emphasises re-investment. The U.S. has the world's strongest established network of angel investors and is dominating the global IPO market.

Efforts are beginning to be stepped up, too, to strengthen the regulatory environment. In March, leading U.S. fintech companies teamed up with Innovative Finance, the trade association for the U.K.'s global fintech community, to set up a new Transatlantic Policy Working Group.

The key is to foster a regulatory environment that is both consistent and clear to all market participants. There are challenges, such as how to reconcile the national nature of the fintech market with different, state by state regulations. Whether that means the creation of a federal framework or some kind of system in which companies can export regulations from their home state on a national level, it also has to be simple, given fintech players typically lack the resources to meet overly onerous compliance costs.

The prize is a market that is expected to grow at an annual rate of more than 50% over the next five years. But that is also why, amid voracious competition from Europe's financial powerhouses and Asia's burgeoning centers, there is no room for complacency.

Michael Carter is CEO of BizEquity. He can be reached at 0044 (0) 203-195-3240 or bizequity@morganrossiter.com.