U.K. financial-technology startups are raising fresh
investment cash at a fast clip, a boost for London as it tries to hold on to
its role as a global financial center post-Brexit.
London-based Checkout Ltd., a behind-the-scenes processor of
online payments for businesses, became Europe’s most valuable venture-backed
company last month after raising $450 million from investors including New
York-based Tiger Global Management and Singapore sovereign-wealth fund GIC, in
a round that valued it at $15 billion.
British fintechs, including Revolut Ltd. and Monzo Bank
Ltd., raised a combined $4.3 billion last year, second only to the nearly $22
billion raised in the U.S. That put the U.K. ahead of places like China and
Germany, according to PitchBook data.
London’s leadership as a fintech startup hub, however,
hasn’t fed through to its public stock market. The London Stock Exchange lacks
the giant technology companies that have come to dominate U.S. and Asian
exchanges in recent years.
The benchmark FTSE 100 remains a bastion of old-economy
companies in oil, mining and traditional financial services. As a result,
returns in the U.K. have badly lagged behind those in the U.S., where tech
giants such as Apple Inc. and Amazon.com Inc. —and in the fintech space, PayPal
Holdings Inc. —have driven outsize gains. The FTSE 100 is up just 10% over the
past five years in dollar terms, versus 111% for the S&P 500.
To change that, the U.K. government has launched two reviews
that could result in regulatory changes to help startups. They include
discussions of loosening rules to make London’s stock market more attractive to
tech companies.
Ron Kalifa, the former chief executive of Worldpay, a U.K.
payments business that Fidelity National Information Services Inc. bought for
about $35 billion in 2019, will announce the results of his government-backed
review into fintechs in coming weeks. His recommendations might include
reducing the amount of equity companies have to sell when they list on the
London Stock Exchange and allowing dual-class share structures for companies
trading on the exchange, according to a person familiar with the report.
Another government review, led by Jonathan Hill, a former
U.K. commissioner to the European Union, is also exploring how to persuade more
startups to list in the U.K. Mr. Hill’s review of stock-market rules would try
to ensure they are “adapted to the needs of fast-growing new-economy
companies,” the U.K. Treasury said in a statement last year.
British regulators set the stage for fintechs to flourish
after the last financial crisis more than a decade ago.
“The U.K. banking regulator realized there was too much risk
concentrated in a handful of companies and decided to encourage innovation,”
said Chi-Hua Chien, co-founder of California-based Goodwater Capital and an
early investor in Monzo as well as Facebook Inc. and Twitter Inc.
For instance, the U.K. created regulatory sandboxes—places
where startups could test out their systems without worry that they would cause
wider damage to the financial system. Regulators granted banking licenses to
startups and authorized Checkout as a payments institution.
The U.K.’s departure from the European Union has thrown up
challenges to London’s finance scene. Big banks, exchanges and insurance
companies have moved jobs and capital inside the EU, though so far most
operations have stayed put.
So far this year, Amsterdam, once one of Europe’s leading
financial centers, has overtaken London in terms of the average value of shares
traded per day, according to data from CBOE Markets. The Dutch city traded
shares worth more than €9 billion per day in January, equivalent to $10.9
billion, versus €8.6 billion in London.
The change in stock trading venue doesn’t have a direct
impact on where finance professionals need to be and little effect on tax
revenues in either the U.K. or the Netherlands. In the long term, there are
concerns that investors might find trading more costly if activity is split up
among different cities.
The break, which pulls the U.K. from Europe’s single labor
market, could make it harder for U.K. fintechs to recruit employees.
“Post-Brexit, it will be interesting to see how many visas
we can get to bring talent to London,” said Guillaume Pousaz, Checkout’s
founder and chief executive. Supportive regulation, tech-savvy workers and
plentiful funding were the reasons he founded the company there in the first
place, he said.
When a pizza is ordered from an online ordering platform
that is a Checkout client, the company’s technology ensures the restaurant,
delivery person and the platform get paid correctly. The nine-year-old company
recently disclosed new offices in New York and Denver.
U.K. startups are dealing with Brexit’s obstacles in
different ways. Monzo, a digital bank popular among young consumers, is vying
to expand in the U.S., where it has applied for a banking license. Rival
Starling Bank Ltd. has applied for a license in Ireland, which would give it
access to the rest of the EU.
Write to Simon Clark at simon.clark@wsj.com.
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