Danish Fintech is an international position of strength. Still, while the industry is showing significant momentum with record high investments and job creation, regulations could force the largest Danish fintech companies to move abroad.

So far, the story about Danish fintech has been nothing short of a fairy tale. When Copenhagen Fintech opened in 2016, few would expect Danish fintech to represent a serious actor for established financial institutions. But the job creation and the rise in the number of entrepreneurial fintech startups tell a different story. Today, the industry has more employers than the entire pension industry.

“The recent report and figures clearly show that the industry is right on track to create growth, jobs and international investments. The estimates show that the industry will employ 5,000 by the end of 2023, an increase of roughly 800 per cent over eight years. Copenhagen Fintech has played a massive role in maturing the industry and making Denmark an international powerhouse in fintech,” says Kent Petersen, president of Finansforbundet, a trade union for all employees in the Danish financial sector.
Finansforbundet is one of the founding partners of the industry association Copenhagen Fintech. The ambition was to establish an environment where entrepreneurs could build businesses from a disruptive business model and create jobs for the future financial industry.

“We want to do our best to maintain the workplaces in Denmark. That’s why Danish long-term investments are needed”

Kent Petersen, president of Finansforbundet

Despite the momentum and inarguable success of Copenhagen Fintech, Kent Petersen see challenges luring on the horizon. If those challenges are not appropriately addressed, Denmark risks losing successful companies to countries where taxations and investment opportunities are more favourable to the fintechs.

“We are looking into a not-to-distinct future where digitalization will dictate how fintechs drive business. It will mean even further decentralizing job creation and collaboration with stakeholders. We need to be ready for that movement and be well equipped to handle the international talent competition also when it comes to regulations,” he says.

A barrier to growth

In 2020, the Danish Board of Business Development pointed out fintech as a Danish economic stronghold and cluster of the future. With the acknowledgement comes the privilege of being an industry with the best possible conditions for growth.
According to Kent Petersen, this is in stark contrast to the reality of the regulations in the financial industry today.

“If we want to drive growth, innovation and create jobs of the future, we must address the inappropriate balance in some tax areas which will affect employment. In the financial sector, the payroll tax is a clear example. The current regulations tax means that Danish companies in the sector must pay a tax to the state corresponding to 15.3 per cent of the total payroll costs,” says Kent Petersen.

The payroll tax for companies within the financial sector was introduced in 1990. Thus in a different time, before labour and production became digital to the degree, we see today, where financial services are exposed to international competition. The consequences today will significantly impact the Danish fintech ecosystem going forward.

“The payroll tax will inevitably force some companies to move jobs out of Denmark. The fundament of future companies is based on technology and are less dependent geographical location. And while the lack of talent is one of the most present barriers to growth in fintech, we see Danish fintech are hiring like never before, and those jobs should be kept in Denmark. So there should be broad political agreement on this.”

Losing out on billions

When the tax is placed on labour, companies can achieve significant savings by moving jobs abroad or creating digital solutions for advisory positions. An estimate made by Copenhagen Economics in 2017 showed that the tax alone could cost up to 10.000 Danish jobs. This would amount to a loss of around 1 billion euros.

“When we have an inappropriate way of taxing Danish companies, it will impact the creation of jobs in Denmark. If they choose to relocate, they can avoid taxes aimed at salary expenses. Apart from losing existing jobs, we are also looking into a future where companies will be forced to place new jobs and key hires in foreign countries with lower taxes. There are no winners in this scenario,” says Kent Petersen.

The direct tax on salary expenses in the financial sector gives Danish companies an unnecessary distortion of competition compared to foreign companies. The tax will also severely impact international financial companies when having to choose where to locate.”
“This must be addressed. We have established one of the world’s biggest strongholds in fintech, and despite an uncertain future, we do not see a hiring stop among Danish fintechs. We can’t afford to halt the momentum,” says Kent Petersen.

Long-term investments needed

This momentum is, in many ways, caused by an ecosystem that has matured over the last five years. For example, last year, Finansforbundet reached an agreement with the new Employers’ Association for Danish fintech that defines the framework for the companies’ pay and working conditions.

“From early on, we wanted to define fintech as an independent industry. The agreement with the Employers Association is an important step in going from a startup environment to an established industry. Apart from securing a fair industry, it gives fintech founders access to advice and guidance on responsible business conduct. Just because you get good ideas does not mean you know how to build a company with everything from salary agreements to recruiting employees,” says Kent Petersen.

Earlier this year, Finansforbundet invested 10 million euros into the fintech fund Upfin, which invests in early-stage Nordic fintech companies. As a natural consequence of the association’s involvement in developing the Danish fintech environment.

“Capital injections are often coming from foreign investors. When foreign investors look at the pricing of doing business in Denmark, they will, in most cases, push to relocate from Denmark. We want to do our best to maintain the workplaces in Denmark. That’s why Danish long-term investments are needed. We are not interested in making a quick return. We rather enter sustainable investments that maintain jobs in Denmark,” says Kent Petersen and concludes:

“We are determined to make the investments necessary to create the best conditions for Danish fintechs to develop into established financial companies.”