This article first appeared on the 3 Beards’ blog ahead of Digital Sizzle 8.

Finance and technology have been inextricably linked – and entrepreneurs have been exploiting that link – since the introduction of the telegraph in the 19th century.  Until 1851, news was carried between England and the Continent by ships. That year, however, a telegraph cable was laid across the English channel. A German-born entrepreneur named Paul Reuter (who had previously used homing pigeons to bridge a hundred-mile gap in the telegraph links between Paris and Berlin) opened a “Submarine Telegraph” office in London and negotiated a deal with the London Stock Exchange to provide stock prices from European exchanges, in return for access to the London prices, which he then sold to stockbrokers in Paris. Over the next 150 years, London grew to become one of the world’s top financial centres and the company Reuter founded grew along with it. By the time it was acquired by Canada’s Thomson Group in 2008, the Reuters Group was worth $17.6bn.

For decades, the phrase “financial technology” referred to the institutional finance sector that deals with the capital markets – broker-dealing, sales and trading of shares, bonds and derivatives. Many large, established companies started out as fin.tech startups.

In 1981, Michael Bloomberg (now the mayor of New York) was made redundant from the investment bank Salomon Brothers. He used his severance package to found a company called Innovative Market Systems to provide market information to Treasury bond dealers. In 1986, it was renamed Bloomberg LLP and by 2008 it was worth over $20bn. Also in 1981, a company called Intercom Data Systems was founded in London. It later changed its name to Fidessa and by 2008, 70% of equity trades in London were being processed through trading systems built on Fidessa software. Today, Fidessa is listed on the London Stock Exchange, with a market capitalisation of over £700m.

By the late ’90s, investment banks were embracing Internet technologies and incubating startups. Tradeweb, an online platform for trading government bonds, was founded in 1996 by a group of dealer-brokers, led by Credit Suisse First Boston. It was acquired in 2004 by Thomson Financial (now Thomson Reuters) for $385m in cash, plus an earn-out of up to $150m. Three years later, a group of investment banks reinvested in a deal that valued the company at over $1bn. MarketAxess, a platform for trading corporate bonds, was incubated by JP Morgan and spun out as an independent company in 2000. It went public in 2004 and is worth $1.5bn today.

Both those companies are based in New York but over the past few years, London has emerged as a prime location for a new generation of financial technology startups like OpenGamma and Kurtosys.

“It’s easier to raise money in London for a fin.tech startup than it is for a consumer-focused startup,” says OpenGamma co-founder and chairman Kirk Wylie (himself an American). “We raised raised a multi-million dollar seed round from London on the strength of a three-person team and a slide deck.”

Instead of consumers, OpenGamma and Kurtosys target the CTOs of investment banks, hedge funds and asset managers. London is a great location for doing that. Since the launch of the Euro, London has cemented its position as Europe’s financial capital (and vies with New York for the top spot globally), with companies like BNP Paribas and Deutsche Bank opting to run their capital markets businesses from their London offices instead of their headquarters in Paris and Frankfurt. Hedge funds might be domiciled in tax havens like the Cayman Islands and Luxembourg but a large portion of their assets are managed by traders sitting in Mayfair.

Proximity to potential customers isn’t the only reason to set up shop in London; it’s also a great location to recruit staff. “London is the talent sink for all of Europe,” according to Wylie. “All the top tech talent from places like Poland comes here”. Recruiting that talent has become easier since the financial crisis, as banks have laid off thousands of employees and bankers’ compensation has come under threat from politicians seeking to placate voters who have elevated bankers to the status of “Public Enemy No. 1”.

The public’s dislike for the banks has also helped fuel a new crop of startups that have appropriated the “fin.tech” label to cover companies that compete with high street banks.

The zero-sum nature of the trading game meant that investment banks and hedge funds were quick to innovate and embrace technology that gave them a competitive advantage or reduced costs for the industry as a whole, and that has led to a trickle-down effect for retail investors, who can take take advantage of technologies developed from those used by institutional traders to access the international markets from their smartphones.

The opposite is true of the retail and commercial banking sector, particularly in the UK where the market has been dominated by an oligopoly. In 2000, the Cruickshank report on ‘Competition in UK Banking’ found that banks were making substantial excess profits from their personal and SME customers. Incredibly, competition has actually declined since the financial crisis – just four companies (Lloyds, RBS, HSBC and Barclays) currently control 75% of the market for current accounts. Metro Bank (which received its banking licence in 2010) was the first new high street bank in the UK for more than 150 years.

The lack of competition bred complacency and resulted in a failure to innovate and invest in technology. The banking platforms these companies operate are often decades old and inefficient, which results in high costs that are passed on to customers and embarrassing outages like the one experienced by RBS customers last July. Legacy banking systems are also ill-suited to supporting the sort of products and services that are made possible by modern consumer technology. It says a lot that mobile-phone based money transfer was available in Kenya five years before Barclays introduced Pingit.

Normally, a crisis creates opportunity to bring about change, but over the past six years, UK banks have been distracted by the credit crunch and its aftermath; the consequences of financial product mis-selling and their failure to implement proper anti-money laundering measures; and changes in the regulatory environment, including the introduction of more stringent capital adequacy requirements, which have led them to tighten lending standards, restricting the availability of credit to individuals and small businesses.

Regulation is a double-edged sword for startups. Regulatory approval represents a hurdle for new entrants and startups need to ensure that they are in compliance – the regulators’ job is to protect consumers, not give new startups a free pass. However, it’s much easier and cheaper to ensure that a new company is in compliance with regulatory requirements than it is to implement the necessary changes in an existing business with thousands of employees into compliance, and regulatory change creates opportunities that small, nimble companies are better positioned to take advantage of than the large incumbents. Regulatory approval can also be an advantage when you’re trying to convince people to trust a brand new company with their money.

It’s also easier for new entrants to build their businesses on new business models than it is for incumbents to pivot. Many startups in this space are doing exactly that. Zopa and Funding Circle have launched peer-to-peer platforms for loans to individuals and businesses. MarketInvoice provides an invoice discounting platform for companies in need of working capital. Transferwise, Currency Cloud and Kantox are offering alternative services for international payments and foreign exchange. Seedrs and Crowdcube are testing the water for equity crowd-funding. Abundance is letting consumers invest in renewable energy projects. This week saw the launch at the Regent Street Apple Store of Droplet, a mobile wallet and payments app that aims to replace cash for everyday transactions like buying a cup of coffee.

However, startups should not underestimate the incumbents. They have far greater resources, far deeper experience of financial services, and, often, a captive market of existing customers. They also have the capability to confound expectations by being far more nimble and innovative than one would expect. The worst-case scenario for a startup is to discover that the incumbents they thought they were going to disrupt have already anticipated changes in the market, and prepared themselves to compete with new entrants as soon as they get large enough to become a threat.

It’s also important to be aware of competition from other new entrants. Consolidation in this sector is inevitable, particularly where there are significant network effects (e.g. peer-to-peer platforms). Founders don’t just need to build a sustainable business – they also need to position that company so that it emerges at the top of the pile because, in many cases, the rewards that accrue to the winners will be far greater than the also-rans.

The competition won’t just come from other UK-based startups. The competitive advantages that London enjoys in wholesale finance and capital markets do not extend to the retail and commercial finance sector, which is far more decentralised. As a result, we see Scandinavian startups like Holvi and iZettle taking full advantage of the single European market for financial services, and US startups like Stripe and Braintree are expanding into Europe.

So, entrepreneurs can’t afford to be complacent. Entrepreneurs need to seize the opportunities they enjoy here in London to build companies that are capable of targeting more than just the UK market and can compete globally. That requires ambition, a sense of urgency and laser-like focus on execution.

For those who are successful, a billion-dollar valuation is not beyond the realms of possibility.