The Germany’s burgeoning fintech industry is quickly emerging as a regional leader with a number of startup gaining international recognition and Berlin becoming a “strong contender for London’s fintech crown,” according to a new report by UK payments startup GoCardless Ltd.

“It’s no secret that Germany took its time to enter the scene, especially with investors erring on the side of caution due to the complex nature of German financial regulations, the report says.

“But now the gap is finally closing on the UK. As Brexit places London’s ‘EU passport’ in jeopardy – the UK may soon find itself overtaken by Germany in the near future.”

With now 250 companies employing approximately 13,000 people, Germany’s fintech industry is growing rapidly.

A report by EY released in March, suggests that the German fintech market is fragmented but has developed three main hubs: Berlin, Rhein-Main-Neckar region and Munich, each standing for a distinct characteristic.

In terms of investment, Germany is lagging behind the UK, with €524 million invested in domestic fintech startups in 2015 compared to €707 million for UK startups.

Ventures focusing on banking and lending alone have attracted a big chunk of Germany’s overall fintech investment, raising €402 million in 2015.

The report notes the involvement of Peter Thiel, the co-founder of PayPal and a prominent figure in the tech industry, in a number of deals. These include participation in funding rounds of Zinspilot, a platform for comparing interest rates, and Hamburg-based consumer loan platform Kreditech.

Traditional banks and financial institutions have too been involved, with a number of them either acquiring or partnering with startups to add innovative products and services to their portfolios. These include Sparkesse which acquired the majority of shares in payments startup Payone in 2015, as well as Deutsche Bank which has been collaborating with domestic startups such Gini and Fincite.

Gini is a B2B focused financial data analytics startup delivering an API that uses artificial intelligence to enable businesses to automate paperwork, while Fincite is a German robo-advisor provider.

Deutsche Bank has further announced plans to invest €1 billion in digital banking in the next five years as part of its “Strategy 2020” to boost efficiency, cut down on risky businesses and boost its capital base, as reported by Handelsblatt in March.

One of the UK’s competitive advantages over Germany is the supportiveness and openness of the Financial Conduct Authority (FCA) related to the UK’s ambition to become the fintech capital of the world. “A major component of that policy includes tax incentives to encourage seed investments, along with government programs to support innovation,” the report says.

This has helped foster a flourishing fintech startup community with widely renowned ventures such as TransferWise, Funding Circle and Monese.

Germany’s Federal Financial Supervisory Authority (BaFin), on the other hand, is deemed “more complex and more conservative towards the development of fintech.”

“The BaFin is still far behind on implementing policies similar to the FCA’s,” it says.

“For many German FinTech startups, acquiring a banking license from the BaFin is considered a path to profitability as it enables establishment of faster processes. But it also requires startups to implement strict controls and supervision for fraudulent activity. The application process can be long, complex and costly for recently founded startups, which discourages venture capitalists from making major investments in the industry.”

In light of the regulatory hurdles, banks have been trying to bridge the gap through investment funds, while players such as “fintech company builder” FinLeap have introduced products and services to help startups with financial regulations.

For instance, FinLeap’s SolarisBank is a fully licensed digital bank focusing on powering e-commerce businesses and fintech startups with modular, API-accessible financial services.

While some local fintech startups have to rely on partnerships with existing financial institutions to help them grow, others such as N26, formerly known as Number26, have been awarded a full German banking license.

Berlin-based N26 is a digital challenger bank that allows users to open an online banking account from their smartphone “in under 8 minutes.” N28 provides customers with a free MasterCard payment card, as well as the ability to send money abroad in 19 different currencies.

N26 is currently available to customers residing in Germany, Austria, Ireland, France, Spain, Italy, Greece and Slovakia.

Another challenger bank that holds a German banking license is Fidor Bank (Fidor Group), which was acquired by France’s Groupe BPCE in July 2016.

“There’s already lots of activity in the German FinTech scene and some of the established players mentioned earlier have already laid the groundwork,” the report says.

It concludes:

“There is massive potential for Germany to rival, and perhaps even take over from, the UK when it comes to fintech. The UK leaving the EU may also pave the way for Germany to take that lead sooner than expected, with the UK’s so called ‘EU-passport’ in jeopardy.”