Today, most people agree that Europe is lagging behind in the global digital economy, with the US and China racing ahead. But there’s one industry in which European entrepreneurs are actually pulling it off, and it’s financial services.
Indeed, fintech startups are the ones attracting the most venture capital money in Europe. The continent’s most promising unicorns are clustered in that space, with the likes of Monzo, Revolut, TransferWise and many others. Finally, and this should count as the surest sign that something really is happening, customers are contributing to the shift, embracing fintech startups and their products rather than the offers of exhausted incumbents.
But why is fintech such a success while other European sectors lag behind? And what lessons can we draw when it comes to growing startups in other industries?
Like in any industry eaten by software, there are two conditions governing how startups can succeed in the current paradigm shift. You need to be able to scale your business up beyond that magical threshold that gives increasing returns to scale. But you also need a supportive ecosystem that provides you with everything you need to start your journey and overcome the many obstacles along the way.
Let’s start with the ecosystem question. Pan-European fintech actually has a centre, London, which is explained by the following reasons.
First, there’s the proximity to incumbents. This would normally count as a liability since incumbents have a tendency to strangle fast-growing startups rather than supporting them. But in the case of London, the financial crisis changed the equation. So many young bankers were laid off in 2008 that they suddenly had to consider other options. With their background, ambition and ability to draft a business plan, what better option was there than creating a fintech startup? It is no coincidence that many fintech founders were previously employed in the financial services industry. Things were made even easier by the fact that they could go and pitch their wealthy former colleagues to secure their seed rounds, letting them then take advantage of the widespread availability of tech talent from all across the continent.
Another reason why London has emerged as the base for European fintech startups is that the local regulator has been quite supportive of new entrants. The UK’s Financial Conduct Authority (FCA) has been a pioneer in adapting regulatory regimes so as to foster innovation, going as far as to give new entrants a kind of special treatment, known as a regulatory sandbox. A representative from the FCA once explained their approach by quoting Frank Herbert’s Dune: “There is little that bureaucrats hate more than innovation… improvements always make those at the top of the heap look inept. And who enjoys being inept?” Overcoming their bureaucratic impulse, the FCA has managed to send a clear message to European entrepreneurs: Come to London and we’ll help you take on exhausted incumbents.
But just having London as their base would not be enough for fintech entrepreneurs to succeed. They also need a large market to scale up their business and, on that front, they’ve been able to count on another ally: the European Union. Indeed, financial services is one of the few sectors, like energy and railways, that truly benefits from the advantages of the single market. EU-enforced rules (in this case, the payment services directives) ensure that there’s a level-playing field, making it easier for startups to enter the market. In practical terms, this means that once they’ve taken off on the British market, it’s easier for all those UK-based fintech startups to expand on the continent.
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There are two questions that you may have at this point. The first is: will Brexit put an end to this virtuous circle of London fuelling fintech innovation and UK-based startups then expanding across Europe? The answer is simple: nobody knows. It will all depend on what terms Boris Johnson negotiates with the European Union. Indeed, it would be a shame if those terms end up crippling all the startups that have bet on London as the supportive ecosystem that they need to scale up.
The other question is about the lessons we can draw from financial services when it comes to other industries in which Europe is still lagging behind. Indeed, there’s the beginnings of an industrial policy recipe in the fintech precedent: you need both a supportive local ecosystem (and this calls for competition between the various European cities and countries) and the ability to scale up (which calls for a level-playing field that only the European Union can provide). And so this is how the whole scenario could unfold:
- Local ecosystems need to identify how they can become a competitive advantage for startups in a given industry. As we’ve seen with London-based fintech, it requires everyone pushing in the same direction: entrepreneurs, investors, talent, incumbents, and regulators. Can other ecosystems emulate that playbook and achieve as much as London, but in mobility, healthcare, education, agriculture?
- Then the European Union needs to step up to ensure that promising startups in those industries have a continental platform on which to dance, which poses two challenges: first, not every industry is as easy to address in this way as financial services; second, in the current context, will Europeans tolerate Brussels stepping up and facilitating fast-growing startups’ emergence on traditional markets?
And yes, it is definitely a paradox that the London ecosystem has benefited so much from Brussels imposing a level-playing field while this is precisely the kind of European regulations that prompted part of the British elite to embrace the cause of Brexit. One could even question whether they really understood how these relationships worked at all!