By some accounts, The United States with its technology hubs in California and The West Coast seems to dominate innovation across our everyday lives on a global scale. Quietly, though, European financial capitals are innovating traditional banking systems by working with their corresponding governments and internal infrastructure to create efficiency and cut costs. Neither is necessarily wrong, but both have monumental differences in their approach and goals. Each will shape their outcome drastically different in the decades ahead.
One of the most glaring differences between Fintech development in The United States and Europe happens to relate to geography. Not the distance between the two continents though. In Europe, the cities that are the heart of finance are also the cities at the heart of technological innovation. In Germany, for example, think Frankfurt, Berlin, and Hamburg. The country is large but nowhere near the distance between technologically important cities in The United States. The same can be said for Switzerland or France. Financial capitals like London are surrounded by the best in technology in their respective locales.
In the United States, the stalwarts of finance have long held onto the East Coast. Think New York City or Philadelphia. Technology is mostly relegated to cities on the West Coast like San Francisco and Eugene. Amazon, Paypal, eBay, Facebook, Apple, Microsoft, and much more are all firmly founded on the Western Seaboard. Oddly, both have drastically different lifestyles related to their businesses and have a difficult time working in concert. Keep an eye on several East Coast tech hubs like North Carolina as The Triangle tries to put its southern spin on the east and west dichotomy. Here’s to you Bank of America.
The demographics in fintech are also drastically different between the United States and Europe. Typically, American startups are working to completely disrupt the current norm in fintech. Rather than working with the existing framework, these twenty-somethings are looking to be the next Mark Zuckerberg or Elon Musk. It’s a billionaire or bust attitude.
While in Europe the vast majority of those employed in the fintech workforce are mid to advanced level career professionals, working within the existing framework and financial capitals of Europe to advance finance. Rather than make current technologies obsolete they are diligently working to cut costs for their companies and streamline results. Thus European fintech is more likely to be amalgamated quicker into people’s everyday lives even if it is not “disruptive” it can still be life changing.
According to Business Insider, French Banks were least likely in the European Union to consider acquiring a fintech, but rather to invest within. Spanish based Santander is looking like the lone exception, quietly acquiring fintechs rather than creating them.
Funding also represents an incredibly different world. In The United States angel investors and education hubs exist to throw millions of dollars into up and coming fintech startups. Many public universities become excellent sponsors for this activity like Stanford and MIT. With their change the world or bust mentality, investors seek huge returns by gambling on companies they hope will completely disrupt the landscape. This process has been fairly regular since the market recovery after the Dot Com Bubble. Still, investors demand traction and outreach among the population over financially sound business models.
In Europe, that investment is a bit more lackluster. The number of firms who are investing in fintech startups is diminutive in comparison. Typically, the fintech work and innovation is coming from within existing companies and therefore only represents a fraction of their funding. So too, funding has to be proven with profitability, not customer acquisition or penetration as it’s known in The United States. There are always exceptions, like Osper, which offers prepaid debit cards for children to learn how to budget. The British fintech has a slew of investors including Horizon Ventures. Other powerful European fintech startups to receive funding include: Lendico, Kreditech, and Monese.
Government intervention and strictly speaking involvement in fintech is one of the most glaring differences between Europe and The United States. In Europe, fintech startups can exist and grow in their integration thanks to governments who are willing to invest by introducing more friendly regulatory measures. The difficulty in setting up business and beginning to work with Europe’s financial powerhouses is streamlined and inviting for startups. Especially in the case of The United Kingdom, their government recognizes the importance finance holds on the economy and has strictly moved in a direct to integration of fintech into the existing framework for the world’s financial capital. One example is the push to adopt Banking API which would allow for a more streamlined use of banking data to improve customer satisfaction and efficiency of financial institutions.
In The United States, fintech has a sour relationship with the Federal and State Governments. Regulatory measures put in place to prevent money laundering and fraud put an incredible delay on the ability of fintech companies to introduce their products and services to traditional financial institutions. Know Your Customer (KYC) exists almost every country in the developed world, including Europe. The measure is far more strict in The United States though. This might be one more reason that fintech startups in The United States favor rewriting the landscape rather than working within it.
Equity payoff is a real concern for both The United States and Europe in fintech company success. In order for investors to be interested in funding a startup and to realize a real profit, an initial public offering is an ultimate goal. In The United States, IPOs are far more frequent, especially in the fintech sector. Many such companies receive seemingly absurd valuations for their startups that reward their initial investors and financiers. Not only is the IPO market hot (though not in the last three years) acquisition has never been hotter. With more targets and more potential suitors – not to mention traditional financial powerhouse like Berkshire Hathaway who are holding onto tons of cash - in The United States, the vast majority of fintech startups are bought up by the traditional financial institutions before they even get to consider an IPO.
Equity in European fintech is not necessarily measured by IPO, but for the inherent value it brings to the company. This is true for internal fintech investments as well as the hiring of an independent fintech startup. Certainly, European fintechs are capable of being listed on the NYSE or NASDAQ. Making it easy for American money might be the difficulty. Though smaller, European exchanges offer a satisfactory alternative.
An obvious but nearly forgotten difference between The United States and European fintech revolves around the use of language. The United States clearly has the advantage being able to market a product or service with ease-of-use across the country and often into Canada or The United Kingdom with no problem. The UK can maintain that advantage if they press into the American market, but has better luck going to Australia or New Zealand. Zopa, the oldest peer-to-peer lending program founded in 2005 in the United Kingdom has done just that with connections to credit unions in The United States.
Europe, in contrast, has dominance in German and French language markets, which can be expanded on a global level to a degree, but will have difficulty marketing outside of its respective borders. That said, localization can be highly beneficial for fintech startups in Europe. Catering to an individual need on a nation-state can have a promising long-term financial impact, instead of going the American route and trying to change the world or fail trying.
In The United States, some are calling for the beginning of a bubble, not unlike the Dot Com Bubble. The IPO market has been abysmally slow for the last two years. Further, financial tourists (hedge funds and institutional investors) who have been pumping money into fintechs have no course for creating a traditional hub of activity. They may have the money but no idea how to encourage innovation, growth, and implementation of the fintech with the greater ecosystem. Those financial tourists are starting to move out, looking for other avenues for investment. There has begun a realization that these unicorns (billion dollar plus private companies) are not worth the investment for their “potential” if they continue to lose money or cannot prove a money making formula fast.
In Europe the path looks slower, less showy, and ever so more promising. Trends suggest that London will be the largest growth city for fintech investment and incubation over the next five years, outpacing any American region or city. Furthermore, Paris is poised to be the most invested hub for fintech innovation this coming year. Again, more than any American region or city. The difference is largely in the slow methodical path that fintech has taken in Europe. Perhaps more careful and more willing to work with improving an existing framework, Europe is building a stable industry in fintech. Jobs are maintained and office space is expanding.
Regardless of differences on both sides of the world, Europe and The United States are clearly moving in different trajectories in regards to fintech innovation. Fintech might not even be America’s strong suit over the next decade. Perhaps Silicon Valley should continue to focus on augmented reality and wearables technology that continues to reshape the world. London, Paris, and Berlin will continue to be the epicenters of finance. Perhaps technology will follow.