Canadian fintechs not intimidated by Brexit
‘We’ve got all the ingredients to be successful’
• Wealthsimple Inc.’ s offices in London matches its moniker: two small, white- walled rooms with rented desks, j ust enough to serve the needs of the Canadian fintech’s sevenperson, trans-Atlantic beachhead. Its ambitions are another thing altogether.
After building a North American robo- advisory business that has more than 40,000 clients and US$1 billion in assets under administration in just three years, Wealthsimple has been beta testing its service in the U.K. ahead of a planned September launch.
Here, Wealthsimple is a smaller fish in a much bigger, crowded pond that includes the likes of local robo-adviser Nutmeg Saving and Investment Ltd. and giant HSBC Holdings PLC’s automated investing platform. Still, the U.K.'s fintech scene has much room to grow, and the opportunity is “gigantic,” said Toby Triebel, Wealthsimple’s chief executive of Europe.
“The market share of those players is so tiny still, and we think we’ve got a lot going for us,” he said in a recent interview. We’ve got all the ingredients to be successful in the U.K., which is a much bigger market than Canada.”
Though the looming Brexit has put a damper on all things to do with the U. K., Toronto-based Wealthsimple is one of at least five Canadian fintechs making moves across the pond in recent months in response to the U.K.'s increased efforts to attract fintech investment and a collaboration between the Ontario Securities Commission and its local counterpart to facilitate fintech expansion.
Triebel is optimistic that the U. K.'s so- called “advice gap” — in which investors cannot or will not pay fees associated with financial advice — presents an opportunity for Wealthsimple’s lower-cost robo-advisor service.
In 2013, the U.K. financial advice compensation structure was overhauled by the regulator, shifting from a commission- based system to explicit, upfront fees. That left some smaller investors unable or unwilling to pay the fees, and encouraged some advisers to turn down clients that are too small to be material.
According to a survey released in 2016 by the Association of Professional Financial Advisers, 69 per cent of advisers said they had turned away potential clients within the previous year, with 43 per cent citing affordability.
“We’re j ust being very open, transparent, and have a simple pricing structure in place,” Triebel said. “And that should ultimately play in our favour.”
Other Canadian fintechs that have made the move, or plan to, include Torontobased Q4 Inc., an investor relations and capital markets software and analytics firm that in January launched a London office. It plans to have more than 20 local employees by the end of the year.
As well, banking software enterprise platform company Zafin said in December that it planned to expand its U. K. presence from 15 to 50 people, and grow to 100 within a year.
Sensibill, which offers digital receipt technology for banking, launched its product in November for an unnamed U. K. bank’s business customers. It’s preparing for a wider launch across the bank’s customer base in the next few months, said Corey Gross, the startup’s co-founder and chief executive.
He would not name the bank ahead of the launch, but said it was one of three it has been in touch with: Royal Bank of Scotland, Barclays PLC and Lloyds Bank PLC.
Meanwhile Kooltra, a cloud-based foreign exchange software company plans to establish a London office within the next two months, said Henry Long, investment officer with the U.K. Department for International Trade (DIT) based in Toronto.
These four firms were among the 11 fintechs that went on a trade mission to London with the DIT in December 2016 — a participation requirement of which was a commitment and willingness to establish a presence in the U. K. within two years.
Long said the department is anticipating that three of those companies, including Kooltra, will officially launch in the U.K. within the next 12 to 18 months.
Despite the uncertainty after the Brexit vote and the U. K.'s negotiations to leave the European Union, there has been an uptick of interest from Canadian fintechs looking to make the move, Long said.
The interest also comes after the Ontario Securities Commission in February signed a co-operation agreement with its counterpart in the U. K. to help support emerging fintech startups from both countries to expand their businesses in the other market. ( Though the OSC said the agreement is still in the early days).
One more driver is the receptive climate for fintechs in the U.K., Long said.
“The British banks move a lot quicker than Canadian banks,” he said. “A lot of it has to do with culture, as well as various legislation. The market is a little more mature. There is definitely a strong openness for collaboration. They see fintechs as complements rather than competitors.”
That willingness is what Sensibill has found since it first visited London in 2015, Gross said. Sensibill could have already started in the U.K. and been further ahead from a business perspective, he added.
“What the banks in the U.K. are doing is really build- ing partnerships and launching services to customers, and throwing the weight of their marketing to popularize their relationships as well,” he said.
Fintech adoption in the U.K. is far ahead of many parts of the world, including Canada. Its fintech adoption rate was 42 per cent, third highest among 20 markets assessed by Ernst and Young in its latest Fintech Adoption Index.
China leads the way at 69 per cent and India is second at 52 per cent. Canada ranked 18th, with just an 18 per cent adoption rate.
Investment in the U. K. fintech space hasn’t slowed down either, as evidenced by the bump in activity in the second quarter to roughly US$ 1.4 billion, according to KPMG’s recent Pulse of Fintech report, compared to less than US$ 250 million of venture capital, private equity and merger and acquisition activity a year earlier, the report said.
“London- based fintechs still command plenty of capital, despite ongoing political uncertainty,” KPMG said in its report released in August. “There have been large investment rounds at both ends of the scale — from late-stage deals into more traditional subsectors such as lending, to activity in emerging areas such as insurtech and regtech.”
However, as the possibility of a hard Brexit becomes more real — with Londonbased financial services firms potentially losing the ability to hire EU nationals or conduct business with the rest of the continent — many fintechs have started looking for potential alternative loca- tions for their operations, Anna Scally, KPMG partner and fintech leader in Ireland, said in the report.
“While regulators are pushing major banks and insurers to come up with a ‘Plan B,’ fintechs haven’t had to be as quick to make decisions," she said. "But expect to see fintechs increasingly focused on examining their options over the next six months.”
One prominent Londonbased fintech unicorn (a company valuation of more than $1 billion) has expressed second thoughts about setting up in the U. K. after the Brexit vote in June 2016.
In April, Taavet Hinrikus, chief executive of money transfer firm TransferWise, told an international fintech conference held by the U. K. Treasury in London that he might have chosen another city if he knew what was to come.
“If I was setting up TransferWise today, I probably would not choose London,” he said.
Wealthsimple also decided to push into the U. K. before the Brexit vote, but the outcome had no impact on the decision, Triebel said.
The company is also confident that Brexit won’t impede the company’s eventual expansion into the continent.
“If and when we do decide to go to the rest of Europe, we have a contingency plan in place that will not be dependent on the passporting,” Triebel said.
THE BRITISH BANKS MOVE A LOT QUICKER THAN CANADIAN BANKS.