The World Economic Forum recently reported that the fintech industry can close a $2 trillion funding gap for small businesses globally. If given the right conditions, the industry can therefore power entrepreneurship the world over. Yet the United States, home to some of the most generous and talented VCs in the world, is killing this industry. Fintech, which is doing great things to the economies of other countries, such as the UK and Germany, is undermined at every turn in the US.
One-offs happen, like SoFi, which received $1 billion in investment recently. But the US is not playing to any of its strengths and is failing to build a healthy ecosystem for fintech companies more broadly. Here are five key lessons the US can learn from the UK on this front:
1. Good regulation vs. bad regulation
‘Regulation kills innovation!’ The progressive’s war cry might be memorable, but it is deeply misguided. Regulation can kill innovation, but if implemented properly, it can support growth. International law firm Taylor Wessing explains that not only is UK regulation and authorization clear and efficient, it is even open to collaborative reform.
Compare that with the US. There is a highly fragmented regulatory sector, particularly in regards to payment. Not only do regulatory laws differ between states and at the federal level, definitions do. This causes confusion, particularly in the payments sector, with precise licensing information lacking. Licenses vary depending on business type, US state, and which geographical area they serve. And that confusion is compounded by the fact that certain businesses that should qualify for money transmitter licenses actually don’t, such as gambling sites. This confusion will likely lead to large penalties for fintechs later down the line.
For argument’s sake, let’s say the US and EU are similar entities – both federations made up of smaller constituent states. Now, in the US, the license you obtain in one state to become a money-serving business applies only to that state. To comply with laws of all states and be able to provide your services in the entire country, you will likely need to apply for 47 additional licenses and authorizations. This is clearly an inefficient and fragmented licensing procedure that limits an organization from the outset.
Meanwhile, in Europe a constituent member of the European Union may ‘passport’ the licensing rights obtained in one country to another, meaning they can set up their business in London and work in Berlin, Madrid, Paris and Rome without the need for further licenses. This means a payment-oriented fintech can grow in Europe much quicker than in the US.
3. Government support
The UK government helped form Innovate Finance, a not-for-profit platform for fintechs that acts as an all-purpose lobby for the industry. Prime Minister David Cameron has welcomed the lobby’s manifesto entitled UK Fintech 2020, which aims to make the UK a fintech world leader in the next five years. He even appointed a special envoy — American VC Eileen Burbidge — to the sector to ensure that its phenomenal growth in the country continues. The UK even encourages fintechs to comply with regulation early so they can influence regulation in the future and simplify the sector. The government knows fintechs will boost the economy, and fintechs value government support as it helps create consumer trust.
The US, by contrast, makes things much more complicated. Its political system is more decentralized, and it struggles to support new industries as the number of conflicting parties and lobbies is enormous. There is also general distrust about government involvement in tech affairs due to the recent putsch between Silicon Valley and the NSA. Tech companies snubbed President Obama’s invitation to a cyber-security conference earlier this year, demonstrating that there is much work needed to repair this relationship.
The very geography of the country is against US startups. In the UK, despite London being relatively expensive, the media industry, politics, finance and law all jostle together in the same few miles. Networking and expertise are ready-at-hand, and there is no shortage of opportunity to build alliances and partnerships and to access the expertise you need. The financial area of Canary Wharf is particularly attractive for fintech incubator Number 39, as it provides access to the world’s best financial talent immediately.
Now think of the US: Finance in New York, media in Los Angeles, regulators in Chicago, politics in Washington D.C. While this creates massive advantages for individual cities in certain sectors, it can also lead to decline if the industry changes – like Detroit, for example. While Silicon Valley provides tech and startup expertise, that’s not solely what fintech is about; it requires a more diverse talent ecosystem to survive. London has a similar advantage over other European nations such as Germany, with its tech center in Berlin and its financial center in Frankfurt.
5. Low startup costs
It’s been estimated that fintechs need $2 million and two years to start up in the US – given the number of licenses, audits, and waiting times required to comply with existing legislation. In the UK and the rest of Europe, you need much less money and time. Tech City UK estimates that London-based fintech startups benefit from tax breaks and schemes designed to foster growth, such as the R&D tax scheme, which assists companies that employ fewer than 500 people.
What’s more, in London, a company requires much less time to process licenses, given that the rules are much clearer in the first place. This means you can reasonably expect to go from idea to operation within the space of six months. Now, I know that the US is normally considered the best home for business, but in the UK, you can set up a fintech in a quarter of the time.
What to do?
Everyone knows the US is the friendliest country in the world for budding entrepreneurs. Yet, here it is doing everything it can to ensure an entire industry has the most difficult route to success. Lagging behind European nations in creating hospitable conditions for fintech might not mean much right now, but investment — no matter how stupendous — will not last forever, and the US should be more fleet-footed in supporting the industry. After all, fintech helps small businesses prosper, and these are the lifeblood of any economy.
Toby Triebel is CEO and cofounder of Spotcap, an online lender for small and medium sized businesses. He has 10 years of experience in the finance industry, starting his career at Goldman Sachs, and more recently investing in corporate and bank credit at a leading emerging markets hedge fund. You can follow him on Twitter: @tjtriebel.
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