Why the Best Fintech Startups Start Outside the US
Posted on Jul 23, 2015 by Faisal Khan
It’s true! While the United States certainly enjoys an advantage as far as startup culture and venture capital, when it comes to fintech players, more players are starting out from outside the US rather than inside.
The reason? A friendly regulatory environment!
The US is a huge market, there is no denying that. But - market size alone is not a good enough argument to establish base in the US.
In recent years, companies like Payoneer and Skrill started in UK/Israel and then ventured into the US. The same holds true for remittance companies (look at TransferWise, Remitly, Azimo), mobile payments were definitively born outside the US (starting with SMART in Philippines and then M-PESA in Kenya). P2P lending in UK, voice based biometrics by Tagattitude in France, signature based mobile commerce by Sign2Pay in Belgium, NFC based payments in Europe and South East Asia, mobile top-ups in UK, value remittances in South Asia, direct account debit in Europe (SEPA), bank log-in enabled e-commerce payments by Interac in Canada, remote check deposit Germany, tap-and-pay, Korea/Japan, QR codes based payments in China, etc.
Friendly Licensing In Europe
Europe has a very friendly environment when it comes to licensing. Almost every country within the EU offers two types of licenses: Registered and Authorized. A Registered license allows an entity to operate from a specific country within the EU and has a low barrier to entry. An Authorized licensed entity has ‘passporting’ rights, which means they can conduct business not only in their country of origin, but conduct business all across EU without having to establish offices or get licensed in other EU countries.
Here is an example of what it would cost to be licensed in UK (slide courtesy of Neopay):
Compare this to the list of Financial Regulators in the US where a money transmitter license must be obtained (a total of 50), not to mention, the federal regulators as well. To give you some form of semblance, here is a PDF document that entails the requirements for applying for money transmitter licenses in various US States.
In Singapore, the MAS (Monetary Authority of Singapore) has given an exemption to SVF (Stored Value Facility) from the Payment Systems (Oversight) Act when the stored value outstanding are under a certain threshold. Currently that bar is set at $30 Million. MAS approval is required for the operator when the SVF exceeds the $30 Million mark, and hence changing its status from SVF to WA-SVF (Widely Accepted Stored Value Facility).
If you’re under the limit, you are not required to get approval.
With the regulatory hurdles stacked against startups in the US, it makes more sense for these companies to establish their base in places like Europe and work on out from there.
Access to Capital In The US
Europe does have a disadvantage when it comes to access to (venture) capital. However, they make up for this by providing a very nurturing environment for startups to take seed and grow.
Many cities - like London, Berlin, Amsterdam - incentivize and promote their metropolis areas as places to do business. They provide incubation, angel funding, network access to specialized fintech resources, tax subsidies, etc. London Mayor Boris Johnson, for example, misses no opportunity to promote London as the fintech hub, and even organizes road-shows for the City.
In general, the US is more of an introvert. Most fintech startups rely solely on the sheer size of the US market to feed their revenue streams. Within the United States, payment problems and opportunities exists, especially around the ACH payments, mimicking real-time payments, savings & loans and retail payments.
US fintech CEOs are not looking at the outside world, and the very few who are, face another set of hurdles. When polled, most CEOs cite that access to markets and domain knowledge for territories outside the US is pretty hard to find within the US. The low hanging fruits have always been the US, Canada, UK and then extend outwards to continental Europe, also known as the easy path.
European fintechs not only look at the 28 member states within the EU, but also at the world as their market canvas. Arguably, the banking & payments space as seen from Europe is quite vast, when compared to the view from North America.
Most small to medium fintech companies that are transacting globally will find their roots in Europe. The ecosystem in Europe has always encouraged global trade. With trade volume moving towards centers like the BRIC countries, European companies have been the first entrants to these markets.
A Hybrid Approach?
An alternative approach is for companies to incubate in Europe, gain traction beyond just an MVP and then make plans to enter the US market (an approach that was done by the likes of TransferWise, Azimo, etc.)
The US has a lot of regulatory issues when it comes to fintech, but to counter this, they have heaps of VC money which attracts growth. The struggle between London and NY is expected to become more intense with London hell bent on retaining the title for the Fintech Capital of the World. However, don’t expect NYC to give in so easily. It will be an interesting space to watch.