Why is fintech important?

Fintech overview

Financial Technology, or 'fintech' is a market focussing on the development of innovative technology which aims to compete with, enhance, or replace traditional methods of banking or other financial services. Businesses and consumers increasingly expect simplified, more transparent and instant access to financial services through digital technology.

Fintech startups initially expanded through retail banking, earning transaction fees on consumer purchases, before expanding into providing savings and mortgage offerings and branching out into higher-value business loans. Fewer customers are visiting to a physical branch across Europe, and the traditional ‘front office’ is becoming digital.

Rent on commercial high street premises is an overhead for traditional banks, where fintech companies are able to make savings. Over the last 10 years, the number of bank branches in Europe has fallen by 60,000, according to Statista, as the online banking penetration rate has risen to 54% across the European Union. Technology and app interface is how financial services companies are beginning to differentiate themselves to customers.

Fintech companies are generally leaner and benefit from being able to adapt and develop new technology. On the other hand, legacy banks benefit from extensive capital reserves and brand recognition, although the challenge is ensuring their online services adjust more quickly to technological change.

According to PwC, around 30% of existing financial services jobs are at risk of being automated by mid 2030s due to algorithms and faster analysis. As a result, many middle and back office banking roles are changing as workers become upskilled. Fintech employers are now increasingly in search of applicants with programming skills and computer science degrees.

Location of workspace for fintech companies is especially important as early stage companies benefit from proximity to finance clusters, customers and competitors, often in incubator space or flexible offices. On maturity, fintechs generally move to conventional offices nearby in order to retain staff and customer base, as Savills research indicates that fintech companies typically move office an average of 4.5 months after receiving funding.

Savills European Fintech Occupier Index

Which European cities are most attractive to fintech occupiers?

Savills European Fintech Occupier Index ranks the most attractive European cities for fintech occupiers to locate, subject to three main criteria- demographics, talent & innovation and affordability & business environment. The study covers 16 occupier variables across 23 key cities within Savills European occupier network. The study covers the following office markets; London, Berlin, Manchester, Barcelona, Dublin, Madrid, Paris, Stockholm, Warsaw, Amsterdam, Munich, Copenhagen, Milan, Budapest, Prague, Frankfurt, Bucharest, Brussels, Vienna, Lisbon, Lyon, Oslo, Athens.

Demographics

Early stage fintech companies require a sufficient critical mass of professional and tech clusters companies in close proximity in order to expand. London (770,000 jobs), Paris (625,000 jobs) and Madrid (337,000 jobs) employ the most workers and also report the highest economic output levels within this sector across Europe. However, challenger cities Budapest (+23%), Lyon (+19%) and Oslo (+19%) are forecast to see the strongest jobs growth within this sector over the next ten years. London, Paris, Madrid and Berlin also scored highly given their large working age populations.

Innovation and Talent

Universities have a pivotal role in nurturing fintech growth by both courses and providing accelerator environments for early-stage growth companies. According to the Times Higher Education, 35 of the world’s top 100 computer science degrees are based in European universities. The cities of London, Paris and Munich each accounted for three of the top ranked computer science courses, as fintech employers seek workers with advanced programming and coding skills.

Germany remains the innovation capital of Europe with 21,198 patents granted during 2019, according to the European Patent Office (EPO). France (8,800 patents granted) and Netherlands (4,326 patents granted) add positive scores to the cities of Berlin, Munich, Frankfurt, Lyon, Paris and Amsterdam. Sweden ranked in the top five for patents granted, lifting Stockholm in the overall rankings.

Early-stage fintechs require venture capital investment as the next step for expansion. London headquartered fintech companies received €10.8bn of venture capital investment over the past five years, far in excess of any other European city. Berlin (€1.8bn), Stockholm (€1.5bn), Paris (€1.1bn) and Dublin (€804m) completed the top five most heavily invested European markets.

Existing fintech clusters, proximity to likeminded companies and industry networking events are essential in developing fintech growth, which is reflected in the number of fintech companies present in each country, according to data from Crunchbase. Again, the UK leads the way in Europe with 454 fintech companies and appeared second on a global basis behind the US. Spain (100), Germany (90) and France (64) feature as countries with more established fintech companies. Fintech companies benefit from consumer bases with high proportions of online banking, and the Nordics are spearheading the change in this respect. Eurostat data indicates that Norway (93%), Denmark (89%), Netherlands (89%), Finland (89%) and Sweden (89%) have the highest online banking penetration rates across Europe. Consumer confidence in electronic payment systems is increasing as Northern European consumers adopt online banking most readily, whilst Central Eastern European (CEE) and Southern European economies have generally lower banking penetration rates.

Affordability and Business Environment

A low corporate income tax rate is an influential factor for occupier expansion, and rates vary significantly across Europe. Ireland (12.5%) and Central Eastern European (CEE) countries (Hungary (9%), Romania (16%), Czech Republic (19%) Poland (19%)) offer the most attractive tax environments. Conversely, the World Bank’s ease of doing business index which covers indicators including ease of starting a business, registering a property and getting business credit rank Denmark, the UK, Norway and Sweden as the most business-friendly.

Fintech occupiers are concerned with attracting the best talent at cost effective prices, as employee costs account for approximately 55% of a business’ total costs according to estimates from the BCO. The average total employee cost of a software engineer in Europe varies from €27,700 in Bucharest to €67,200 in Munich, according to data from Glassdoor and Payscale. However, on a global scale, Europe remains cost effective, as the average total cost of employing a software engineer in San Francisco and Seattle exceeds €100,000 per annum.

Alongside ability to secure higher wages, cost of living is a driving factor for fintech workers as real wage growth has slowed across the EU over the last 10 years and incomes become more stretched. According to data from Numbeo, European house price to income ratios are lowest in Brussels (6.3x), Manchester (8.8x), Copenhagen (9.3x), Dublin (9.5x) and Lyon (9.7x) which present workers with attractive locations to live and work, although much of this depends on how footloose and mobile fintech workers choose to be in relocating between cities.

Property costs account for approximately 10–15% of office occupiers’ total business costs according to estimates from the BCO (British Council for Offices). At Q1 2020, London (€1,004 per sq m), Paris CBD (€869 per sq m) and Stockholm (€751 per sq m) represented the most expensive fintech market office rents across Europe. However, several CEE city prime rent costs offer a discount of up to four times, including Bucharest (€222 per sq m), Prague (€285 per sq m) and Warsaw (€288 per sq m), which could create further demand for office space as companies opt to 'east-shore'.

Top European fintech occupier hotspots

The final results show that London, Berlin, Paris, Barcelona, and Manchester top the Savills European Fintech Occupier Index as the most attractive cities for fintech companies to locate in Europe. These cities combine solid demographic fundamentals, strong talent and innovation, relative affordability and attractive business environments.

1. London

London is ranked as the top fintech occupier hotspot across Europe, attracting more fintech venture capital investment than any other European city. London’s tech employment growth prospects and existing clusters provide attractive environments for global and startup fintechs. King’s College, UCL and Imperial College London all rank in the Times University Guide’s global top 100 universities and work closely to develop startups. The UCL School of Management has created a new home on the 38th floor of One Canada Square, Canary Wharf, with state-of-the-art teaching and research facilities, beneath Level 39, the world leading fintech accelerator. London's existing financial services clusters provide growth potential for fintechs.

2. Berlin

Berlin’s fast growing population is attracting students to study at Berlin’s universities and fintech workers from all across Europe, driving innovation within the city. More patents were signed in Germany than any other European country during 2019 and a number of tech giants are increasing their presence in Berlin. For example, Sony Music relocated its offices from Munich to Berlin Schöneberg last year, likewise, Amazon’s employee count in Berlin rose from zero in 2011 to almost 2,000 in 2019 which will create associated fintech requirements for the city. Whilst Berlin’s prime office rents have observed significantly growth in recent years, at €490 per sq m during Q1 2020 Berlin still offers a c 50% discount to London.

3. Paris

Paris is already established as a global banking district, with a number of international banks choosing to expand their operational functions in the French capital since Brexit was announced. Paris benefits from a large critical mass, whic has helped it to attract over €1 billion of fintech venture capital investment over the last five years. Paris has three of the top 100 computer science universities and an increasing online banking penetration rate. Wynd, Invyo and Tinubu Square represent some of France's fast expanding fintechs.

4. Barcelona

Strong tech employment growth prospects and Barcelona’s working age population. Despite a relatively low online banking penetration rate in Spain, 927 patents were granted last year and as a result, 70 of Europe’s fastest growing companies in 2019 are based in Spain. Barcelona has attracted €182m of fintech venture capital funding over the last five years, higher than the €80m in Madrid. The total cost of employing a software engineer in Barcelona is on average over €10,000 per annum cheaper than in London and house price to income ratios are almost half. Occupiers also benefit from most cost effective office rents at €342 per sq m, under a third of London.

5. Manchester

An attractive rental discount and significantly cheaper salary costs to London could see fintech firms looking to reduce costs north-shore to Manchester. Many of the major banks have large technology operations in Manchester, including Barclays, HSBC, Bank of America Merrill Lynch and Co-operative Bank and the city is home to the UK’s largest ICT sector outside London. Relatively lower house price-income ratios will retain many of the University of Manchester’s highly regarded computer science graduates in the city upon graduation. Relatively low corporate taxation also maintains Manchester’s appeal on the European stage.

Future hotspots

Dublin

Dublin’s low corporate tax environment has attracted a number of global tech companies in recent years, and according to Crunchbase, only France, Germany and UK have more existing fintech companies than Ireland across Europe. Relative housing affordability and work-life balance also maintains Dublin’s attractiveness to fintech workers.

Stockholm

Payment fintech, Klarna, one of Europe's largest fintechs is located in the Swedish capital, valued at over $5.5bn, and has since expanded aross Europe. Over €1.5bn of venture capital funding has been attracted into Stockholm over the last five years.

What next for fintechs?

As the financial services sector shifts from physical to digital, new fintech clusters will continue to emerge across Europe with more corporate funding targeting the sector, creating new jobs and generating a more competitive financial services landscape. One of the challenges for the fintech sector will be keeping on top of industry regulatory changes banking regulation will add costs to fintech companies.

Firstly, Europe’s fintech companies have to carry out a comprehensive analysis on how they collect personal data and must describe the reason the data has been collected. Failure to comply can put companies at risks of paying large fees and penalties, due to GDPR regulation introduced in 2018. The increase in European cyberattacks in 2018 has driven the European Commission’s desire for continued work in this field for all financial services companies. However, research points to how GDPR compliance costs increase with size, leaving traditional banks with far higher compliance costs than startups.

Tighter lending restrictions introduced post Global Financial Crisis (GFC) will limit the level of business lending from challenger banks as they build up the level of capital reserves. Increased internal audit and compliance operations will increase business costs, although adoption of regulatory technology (regtech) is showing signs of reducing costs.

Brand development will become even more important in order to compete at the next stage with the traditional banks. European banking customers are increasingly aware of how their personal data is being used and developing brand identity and trust is essential for fintech companies to gain market share. We expect agile fintechs who are able to proactively assess how they can address industry risks and are able to respond to the ever-changing regulatory environment will prove the most resilient.

Covid-19

Many occupiers are beginning to assess what working life may look like when lockdowns are lifted. Early signs indicate that multinationals are continuing with their occupational decision making, whereas there is more caution within small and medium sized businesses who may opt for flexible office space to tie them over in the short term. Businesses are prioritising different teams’ returns to the office, and reviewing occupational density levels across their office portfolios. Likewise, staggered entry and exit times for workers and increased hygiene facilities seem likely to be among the initial changes within the workplace.

Some occupiers are reviewing whether business parks may better suit their needs in the light of Covid-19, given the suburban location and lower occupational density. This could see new demand for flexible office hubs in satellite cities provide short-medium term accommodation for workers. For example, we are seeing a number of major investment banks using their emergency trading floors across metro cities to mitigate the risk of infection. In the longer term, transport connectivity and proximity to key transport nodes will play an increasingly important role across Europe to minimise workers’ commutes as workers are more able to carry out certain tasks at home.

We also expect Covid-19 to speed up the consumer shift to online banking and increase online banking penetration rates across Europe. However, in the short term, private fintech valuations are likely to observe some falls, due to lockdowns negatively impacting retail sales and transaction fees, as venture capital funds become more cautious. Monzo, for example, is raising a new round of cash from investors at a c.40% discount to previous fundraising levels, according to the FT.

As occupier activity returns to normal ways, we expect fintech office demand to be one of the more resilient subsectors, particularly given the structural changes taking place within the banking sector.