Has UK’s Cautious Approach to New Technologies Paid Off?

New York and London — two of the world’s leading business-destination cities and top global financial centers — have a “strong two-way flow in terms of FinTech innovation,” say Innovate Finance CEO Janine Hirt and Stephen Feline, North America director at London & Partners.

“When you look at our two ecosystems, we are world leaders in innovation. Just looking at levels of global FinTech investment, the U.S. stands at No. 1, while the U.K. has repeatedly and consecutively stood in second position,” Hirt told PYMNTS in an interview.

It’s the reason why she says there’s a huge opportunity to strengthen the relationship between the two ecosystems, whether it’s sharing knowledge or driving partnerships among FinTechs and between FinTechs and incumbent financial services players.

“Being able to provide a pathway for U.K. FinTechs to scale into the U.S. and also to encourage U.S. FinTechs to come into the U.K. is what we associate success with for this program,” Hirt added, referring to Innovate Finance and London & Partners working together to advance the global FinTech community in the U.K.

Apart from the similarities between the two ecosystems, one area where London stands out is in the open banking space, Feline noted, pointing to the multiple U.K.-based unicorn firms such as Revolut, Monzo and Wise that have capitalized on the European Union’s Second Payment Services Directive (PSD2) regulation to scale.

It’s a unique advantage that U.S. firms are hoping to learn from, according to Feline, by looking to the U.K. for best practices on developing the U.S. open banking system and driving the growth of new challenger banks.

Overall, Feline said, interest in London, particularly for FinTech companies, has remained very strong despite Brexit, with companies like U.S. FinTech and identity decisioning platform Alloy launching in the U.K. earlier this year.

“All the reasons why people were looking at London before Brexit are still valid — it’s access to buyers, access to capital and access to talent,” Feline argued, “and it just remains the best place in Europe to grow and scale a FinTech business.”

Hirt also echoed recent remarks by the U.K. Department for Business & Trade on the post-Brexit freedoms the U.K. has embraced to remove unnecessary EU red tape and regulatory burdens that previously held British businesses back from competition and innovation.

“And we are also seeing from so many of our [Innovate Finance] members that coming into the U.K. still provides them with that core launchpad not just into Europe but also the Middle East, Africa and parts of Asia as well,” Hirt added.

Cautiously Pro-Business

The rise of artificial intelligence (AI) has led lawmakers around the world, including in the U.K., to want to regulate the fast-growing technology and the potential it has to transform the way businesses operate and compete.

But depending on how the U.K.’s AI regulation pans out, Mattias Ljungman, founder at U.K.-based early-stage investment firm Moonfire Ventures, recently cautioned against taking a hard-line regulatory approach that could stifle innovation and competition, and slow firms’ progress in the fast-growing space.

Hirt concurred, but she, however, pointed to the value of the collaborative engagement between the U.K. government, FinTech regulators and industry in addressing new technologies and understanding how best to regulate technology innovation to the benefit of both consumers and businesses alike.

An example is the FTX collapse, which Feline said had minimal impact in the U.K. compared to other countries because of the pro-business, albeit cautious, approach the government has taken to regulating new technologies. “You look at what’s happened with FTX, a lot of [companies] lost money from that, but the U.K. didn’t allow it in quite the same way.”

Pinning Hopes on VC Dry Powder

Feline said the fundraising drought remains a challenge for U.K. scale-ups in London, especially as traditional venture capital (VC) funding continues to dry up on both sides of the Atlantic.

Another area where U.K.-based firms will need support is around scaling internationally and creating a global U.K. brand. It’s part of the reason, Hirt said, Innovate Finance, in partnership with London & Partners, has put in place a U.S. program to assist FinTech firms around the world coming into the U.K. to grow and scale.

“It is about providing them with the support along with PR and marketing, connections to investors, potential partners and institutional incumbent financial services players, to help them grow,” Hirt said.

And asked about trends for the coming year, Feline predicted that interest rates will start to come down towards the end of this calendar year to hit historically normal levels around midway through 2024, creating “more confidence in the VC community to release their dry powder.”

Hirt also predicted FinTech firms will play a greater role in driving financial inclusion and ensuring better access to financial services for consumers and small businesses, helping them better manage their budgets and cash flow amid a biting cost-of-living crisis in the U.K.

“I also believe that hopefully, by the end of the year, we’ll see some more money flowing through from the VC end,” Hirt said.