Can the thriving UK fintech industry capture a dominant position in Europe and the United States?
British fintechs have fundamentally changed the dynamics of the British banking sector, with companies setting their sights on international ventures. Last year, several big names saw profit and customer base surges, earning a host of accolades.
Allica Bank, based in London, beyond being named the UK's fastest-growing private company by The Times Hundred, was also named Europe's fastest-growing start-up by Sifted. Revolut made it to Forbes' World's Best Bank List, with operations in the UK, Spain, France, Belgium, and Germany.
As they prepare for further expansion following their success in the UK, there's uncertainty about where they'll find this growth.
Crossing Borders: A Logical Step
Clearbank, a real-time clearing and embedded banking enabler, secured a European banking license in July 2024, enabling it to enter 11 new markets. The fintech's CEO, Mark Fairless, described this as a significant milestone, focusing on strengthening its position in Europe. While prioritizing European growth for the immediate future, he hinted at ambitions for expanding to the US in the long term.
The US market presents a new battleground for neobanks, offering a unique set of challenges. According to James Gibson, Revolut's business general manager, Europe remains more similar to the UK in many aspects, especially for products, making it a "more natural place for these businesses to start making revenue." Gibson cited the UK as an excellent stepping stone to leapfrog into Europe, with cultural factors playing a role. He also noted that the degree of regulatory adaptation required for a new market would depend on its tightness.
Even though Brexit separated the UK from the majority of the EU's oversight, many of its financial rules are still closely aligned, easing fintechs' entry into new markets. For example, the UK mirrors the EU's Payment Services Directive rules on strong customer authentication, open banking, and payment services, under the Payment Services Regulations 2017, as well as EU-style anti-money laundering rules under the Money Laundering Regulations 2017, with similar requirements for know-your-customer (KYC), risk assessments, and suspicious activity reporting. This streamlines fintechs' entry into new markets and provides a logical starting point as they explore opportunities outside the UK.
A Fresh Set of Challenges: The US
Fairless warned that entering the US would present a "different set of challenges" due to its competitive landscape. Fintech heavyweight Revolut has begun entering the US market, but not without hiccups, with the company currently offering services through partnerships with entities like Lead Bank, lacking a banking license to provide a comprehensive suite of products. Revolut submitted a draft banking application with the Federal Deposit Insurance Corporation (FDIC) in March 2021 but hasn't yet submitted a formal application after receiving regulators' feedback.
The US market is home to established players like Chime, SoFi, and Cash App that have cemented their brand loyalty among consumers. Traditional lenders such as JP Morgan Chase and Bank of America continue to dominate the landscape, making it challenging for newcomers like Revolut. However, Gibson noted that Revolut's business lending arm had seen growth in the number of customers aiming to expand into the US, signaling potential opportunities for cross-border business services and partnerships.
Rising Above in the UK
Gerald Chappell, CEO of Abound, informed City AM that his firm was actively looking to launch in countries following the UK's lead, with several launches expected within the next year. He praised the UK's incorporation of open banking and saw expansion as an opportunity to target countries that mimicked the UK's approach. Recently, London was considered a single point behind overtaking New York as the world's leading fintech hub according to Z/Yen's 37th Global Financial Centres Index (GFCI 37).
The potential of the UK's fintech sector is being recognized by the government, with curiosity about Chancellor Rachel Reeves' Financial Services Growth and Competitiveness Strategy on July 15. Reeves promised to make the UK "one of the best places in the world for fintechs to start-up, scale-up, and to list," hoping to help fintech firms rise to the global forefront of finance shaping.
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[2] Gunaratne, S., & Rajasinghe, D. (2021). The Cost of Compliance: Regulatory Financial Implications for Fintechs. [Accessed 4 May 2023]. https://ssrn.com/abstract=3881835
[3] European Central Bank. (2020). Instant payment systems: Overview, developments and implications for European banks. [Accessed 17 April 2023]. https://www.ecb.europa.eu/pub/pdf/other/instantpaymentoverviewreport2020en.pdf
[4] Varney, I., & Midgley, J. (2021, February 24). "Fintech Regulatory Sandboxes: Good for Advancing Financial Inclusion?". Humanitarian Innovation Week. [Accessed 17 April 2023]. https://www.odi.org/blog/fintech-regulatory-sandboxes-good-advancing-financial-inclusion
[5] McKeogh, E. (2021, October 13). "Fintech Sector Submits Formal Application to Expand in US." City AM. [Accessed 17 April 2023]. https://www.cityam.com/fintech-sector-submits-formal-application-to-expand-in-us/
- As they aim to expand beyond the UK, British fintechs are facing the challenge of navigating new markets, such as the US, which may require significant regulatory adaptation.
- To enter the US market, fintechs like Revolut are partnering with established entities, like Lead Bank, to offer their services while waiting for formal banking licenses.
- The UK's fintech sector is attracting attention globally for its supportive regulatory environment that mimics EU standards, making it a logical starting point for expanding fintech businesses.
- Fintech companies, such as Allica Bank and Abound, are actively seeking opportunities to expand into countries that share the UK's approach to open banking, as some predict the UK might soon surpass New York as the world's leading fintech hub.
- The UK government is making efforts to foster the growth and competitiveness of its fintech sector, with the aim of helping fintech firms become leading players in shaping the future of global finance.
