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Raja Palaniappan worked at Credit Suisse in London as a bond trader for a number of years before deciding to go out on his own and launch an online marketplace called Origin Markets, which seeks to revolutionize private placement bond issuance by eliminating intermediaries like Goldman Sachs Group. Although American by nationality, Palaniappan decided to open his platform in London because he felt the city offered greater opportunity than New York or Silicon Valley for a new financial technology, or fintech, company (see “ Former Trader Raja Palaniappan Sees Fintech Opportunity in Bonds”).

“London does have a competitive advantage in fintech because you’ve got technology in Old Street and finance on Liverpool Street and they’re about three quarters of a mile apart,” Palaniappan says, referring to two areas of the City of London financial district. “In the U.S. technology lives on the Left Coast and finance on the Right Coast, and there’s little consolidation between the two.”

A wave of investment is following entrepreneurs like Palaniappan to the British capital. According to consulting firm Accenture, Europe is the world’s fastest-growing area for fintech funding, with spending rising 215 percent last year, to $1.48 billion. London had the largest share of that investment, some £342 million ($530 million), according to London & Partners, a government-funded agency supporting the London economy. Although the U.S. continues to lead overall fintech funding, with $2 billion in 2014, much of that was Silicon Valley–based investment in business-­to-consumer start-ups like Lending­Tree, an online exchange that connects consumers with lenders; in London much of the activity is targeted at institutional financial services such as banking, insurance, trading and asset management.

“Since the Industrial Revolution, London has been the center for international commerce, and the melting pot that you have in terms of people and talent is pretty unique in the world,” says Sean Park, a Canadian who runs Anthemis Group, a firm that advises and invests in fintech start-ups from offices near Oxford Circus in Soho.

London’s growth as a fintech hub is not exactly surprising. The city is the world’s leading center for international wholesale financial services. It boasts more banks than Hong Kong or New York, leads the world in foreign exchange trading, has vibrant asset management and insurance sectors, and is home to the Eurobond market. In addition, fintech enjoys strong support from the British government, which sees the financial services sector as essential to the health of U.K. Plc and technology as critical to maintaining London’s competitive edge. Financial services employ some 2 million people, or about 7 percent of the country’s workforce, and generate 10 percent of the U.K.’s gross domestic product.

The government funds a variety of organizations that support what is known locally as Silicon Roundabout, offers tax incentives to investors and has streamlined regulations for start-ups — a crucial advantage in heavily regulated financial services. Officials have even promised to fast-track visas for companies seeking to import talent, though some start-ups complain about difficulties in getting software engineers into the country from Eastern Europe. In a telling indication of this political support, when a group of fintech companies recently traveled to Singapore to demonstrate their wares, the delegation was led by London’s popular mayor, Boris Johnson.

The government “wants the U.K. to lead the world in developing fintech,” Chancellor of the Exchequer George Osborne said last year in a speech to launch Innovate Finance, a government-­funded agency for fintech investments. Osborne also announced that a government bank was doubling its investment in the sector, to $250 million. “You need the best environment, the right tax system, the appropriate regulatory rules, the best infrastructure and a government that gets out there in the world and sells your products and services,” he said.

The London fintech ecosystem currently has 70 shared office spaces with names like Huckletree, WeWork and TechHub, which rent desks and provide such amenities as gourmet coffee, video game rooms and showers to itinerant entrepreneurs. The city also boasts 36 business accelerators, which provide mentoring as well as office space. The accelerators are sponsored by companies ranging from Techstars, a Boulder, Colorado–­based outfit, to Barclays Bank. Virtually every night there is a conference or gathering devoted to fintech development, attracting visitors from Silicon Valley, New York and continental Europe.

London’s greatest advantage may be its people. According to London & Partners, fintech already has 44,000 workers in the capital, more than in New York or Silicon Valley. And unlike in the U.S., where many tech start-ups are founded by 20-somethings hoping to overthrow an entire industry, in London a considerable number of fintech companies are being founded by midcareer financial professionals with a working knowledge of financial services firms and markets. They are often seeking to create technology solutions that can be used by big institutions, not compete with them.

“The entrepreneurs here are a little more experienced, and a lot of people have left established organizations,” says Eric Van der Kleij, CEO of Level39, a fintech accelerator financed by Canary Wharf Group, the property company that operates the financial district in the Docklands area of East London. “They’ve seen why ‘know your customer’ is difficult, they see why compliance is difficult, and so they come here to build a better mousetrap with all the knowledge and insight of what’s relevant for their industry.”

Although London has many advantages over other jurisdictions, the fintech sector there also has two notable disadvantages. The U.K. lacks the depth and scale of venture capital funding available in the U.S. And for companies contemplating an initial public offering, the London Stock Exchange’s AIM marketplace lags far behind the Nasdaq Stock Market and the New York Stock Exchange for helping start-ups emerge as publicly listed entities.

“It’s certainly easier to raise funds in the U.S.,” says Paolo Malaguti, an Italian who is launching a start-up called Aston Corp. Analytics to provide credit data on leveraged loans to institutional investors. “The approach here is much more conservative. I want to go to the U.S., but I’m not ready yet.”

A former banker in leveraged finance for Japan’s Mizuho Bank in London, Malaguti hopes his start-up’s online platform will replace data rooms as a required component of due diligence in the leveraged-­finance business.

Yet there are signs that established institutions are helping the fintech sector address these issues. Eleven big international banks are based within walking distance of Level39’s offices, on the 39th floor of One Canada Square, the central tower in Canary Wharf. These banks have gotten the message that if they don’t participate in fintech, they might lose business to more-agile competitors. Spain’s Banco Santander has set up a $100 million InnoVentures fund in London, and HSBC Holdings has created a tech fund to invest in start-ups. UBS has established a London lab to study blockchain, the technology behind Bitcoin that many technologists believe will transform a wide range of payment services, making them more secure. Even China’s Alibaba Group Holding is getting into the act: The e-commerce giant has set up a tech laboratory in London for Alipay, its online payment service, to develop online payment tools for merchants as well as applications for airline ticketing, utility payments and virtual gaming.

Santander InnoVentures “emphasizes big data applied to specific problems and digital delivery of financial services — things that change the way our clients consume financial services,” explains Mariano Belinky, the outfit’s managing partner. One of the venture’s early investments was a company called MyCheck, which processes payments for the hospitality industry. “We focus on fairly early-­stage investments, such as A or B rounds, that we can take to our clients or use ourselves,” he says.

James Stickland, who heads HSBC’s fintech efforts in London, says the ferment of activity is fostering a new atmosphere of cooperation between tech start-ups and big financial firms. “Two years ago every fintech company wanted to take down a bank,” he says. “Eighteen months later the institutions are now saying there is a degree of opportunity to partner here: You guys are supersmart and can create something new — why don’t we work together to offer a better, more cost-effective experience for our clients?” Stickland declined to confirm reports that HSBC has invested $100 million in fintech.

Barclays has taken a different approach. Instead of investing directly in start-ups, the bank last year set up an accelerator in cooperation with Techstars in a renovated warehouse in Mile End, a once-shabby area of East London that’s on the rise. The accelerator provides mentoring and a chance to have a big bank as a customer; Barclays does not invest in the start-ups, but Techstars takes a small stake. Barclays plans to open similar accelerators later this year in New York and Hong Kong. Derek White, the American who heads Barclays’ digital initiatives in London, says he believes that start-ups need clients more than they need investment help and that Barclays can be a great potential client for many of them.

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