The UK could lose its status as Europe's leading fintech hub if it doesn't support startups facing new competition and regulatory uncertainty caused by Brexit, according to a new government report.

Among the recommendations made by the review, which was led by Ron Kalifa, the former head of payments company Worldpay, is a £1 billion (about $1.4 billion) fintech growth fund. The report says the fund would help fill a startup funding gap at the Series B+ stage that is worth £2 billion.

"Britain has a proud record of starting-up and scaling-up some of the best-known fintech products, but we cannot rest on our laurels," Kalifa said in a statement. "The next powerhouses will not be created by accident."

Some think the need for capital is greater at earlier stages. Stephen Page, CEO of seed investor SFC Capital, said that during the pandemic many private investors doubled down to protect existing investments, meaning more investment is needed at the earliest stage to preserve the innovation.

"We need long-term thinking, not short-term support for perceived quick wins," said "I hope to see [the fund] proposed in the Kalifa report supporting the truly early-stage startups. We don't need another Future Fund for companies that have already secured venture capital funding, which excluded the 99 percent of "true" startups that are still pre-VC."

The report said that the UK fintech sector is worth more than £11 billion to the country's economy and represents 10% of the global market share. The UK also consistently accounts for more than half of VC fintech investment in Europe, according to PitchBook data, and is home to some of the world's largest fintech unicorns. These include online payments startup Checkout.com, which was valued at $15 billion following its Tiger Global-led Series C in January, as well as challenger banks Revolut and Monzo.
 
 

But other European countries are catching up. Germany saw VC capital invested in fintech startups cross the €1 billion threshold in annual capital raised for the first time in 2020, thanks to mega-rounds from the likes of Monzo competitor N26, while France recorded a record €460.1 million. Furthermore, while the pandemic accelerates fintech adoption, Brexit has brought regulatory uncertainty for the UK fintech startups. For example, UK and EU regulators are still deciding how they will cooperate on financial services.

Other recommendations in the report include a private sector-led Centre for Finance, Innovation and Technology to oversee growth, a new fast-tracked visa process to attract international talent and a relaxing of rules around listings to encourage late-stage fintech startups to go public. The review was endorsed by several UK tech leaders, including nonprofit Innovate Finance CEO Charlotte Crosswell and Monzo CEO TS Anil.

"The Kalifa Review has the potential to be a seminal moment for the fintech sector in the UK," said Christian Faes, co-founder of LendInvest. "It is time to re-invigorate the sector, and I know that fellow founders want to play their part in driving growth, innovation, and in the process, an economic recovery for the whole country."

Many of the proposals in the report are already in motion. The UK government announced last year that it is reviewing the rules around IPOs with possible changes such as allowing dual-class share structures and lowering the free-float threshold. Reports also emerged earlier this week that UK finance minister Rishi Sunak is preparing to unveil a new visa scheme to attract tech talent.

"Above all, [the review] is about building markets for [fintech] innovation to grow into. A great product will not succeed without a strong customer base, adequate regulation, access to data, skills and capital," Kalifa said. "And it must be done now. Others are waiting for our crown to slip."

Featured image by Peter Dazeley/Getty Images

Related content