Fintech Talk: June 29, 2016
Nearly a week after it was announced that the UK had voted to leave the EU (52% in favour, 48% against), the UK has gone though a great deal of change in just a short space of time – the resignation of David Cameron as Prime Minister, upheaval in the Labour party and the devaluation in the pound.
British politics aside, the country’s technology and financial services industries have also undergone a great deal of uncertainty in the last seven days with fears that Brexit will have a substantial and detrimental impact on both industries and, subsequently, the fintech sector in the immediate and long-term future.
These fears are definitely justified as the fintech sector in the UK generated £6.6bn in revenues and attracted roughly £524m in investment in 2015, according to EY. What’s more, at last count, fintech firms employ about 61,000 people — about 5 percent of the total financial services workforce — making the UK larger than rival tech hubs in New York, Singapore, Hong Kong and Australia combined.
London as the European Capital of Fintech
Its status as the European capital of fintech owes a great deal to the stance of its regulators and policymakers, as well as the access to a common market of 500 million consumers and a globally advantageous time zone. However, with Brexit, all of this could change.
In an article by Financial News this week, Hiroki Takeuchi, the CEO and co-founder of payments startup GoCardless, backed up this claim and said that he was “…worried about the startups that are ahead of us [younger companies] rather than the older companies. If I were starting GoCardless today, would I start it in London?” To that effect, I wouldn’t be surprised if other European jurisdictions and cities, such as Frankfurt and Paris, look to use Brexit to their advantage and fight to attract fintech business away from London.
Companies have also begun looking into the effect that Brexit will have on their ability to easily and cheaply recruit individuals with the necessary technical skill-sets from the EU. While more established companies will most likely overcome this obstacle, entrepreneurs and startups face a more significant challenge as they often lack the operational means to undergo lengthy and expensive visa applications.
Investment and Regulatory Challenges
Brexit also brings with it uncertainty and volatility in the venture capital sector, which will make it harder for fintech companies to fundraise. Eric Benz, the COO and co-founder of blockchain startup, Credits, supports this view and is quoted in the same Financial News article as saying, “What this does more than anything is shake investor confidence. For anyone in general operating a company, it’s not great. Especially with us seeking to raise capital in a time like this, it will be very interesting.” That said, other experts have suggested that a weaker pound might present an opportunity for investors as investments will appear more affordable.
Another area that has been discussed extensively is the possibility that Brexit would automatically lead to a divergence of financial services regulation between Europe and the UK, making it more complex for businesses to work with clients in the EU, where they currently benefit from “passporting” into the single market.
However, this appears unlikely as the UK abides by all European financial services regulations and fintech companies would only decide to leave London for two reasons. The first is if the UK actively diverged from European regulatory structures, which would not be in its best interests, as it would create a two-tier structure that would prohibit some companies from managing common operations across Europe. The second reason is if the EU decides to punish the UK by prohibiting its banks to “passport” across Europe—a possibility suggested last weekend by Francois Villeroy de Galhau, the head of France’s central bank.
If Mr Villeroy gets his way, this would pose a real threat to London, the British economy, the UK’s fintech industry, and by extension all other aspects of financial services in Europe. It would also create a lot of headaches for international banks who have chosen London as their European headquarters.
Not all doom and gloom
Despite the uncertainty, there are fractions of the fintech industry that are rising above the doom and gloom, and are looking at the opportunities that Brexit offers. For example, the government now has an opportunity to pitch itself as a competitive alternative to Europe with an attractive tax regime and light-touch regulations. Edan Yago, founder of Epiphyte, which helps firms make transactions using blockchain, predicts that “If London differentiates itself with streamlined regulation, reduced tax burden for employees and support for innovation, it could become an even more attractive hub for fintech and start-ups.”
In short, the result of the referendum was a shock to the system and runs against the status quo. However, in reality, nothing has changed, and won't until the government invokes article 50, thereby officially declaring its intent to leave the EU and kicking off two years of negotiations. In the meantime, financial services and fintech companies should, as the popular saying goes, ‘keep calm and carry on’ with every day services, while also keeping a close eye on how things develop and preparing for all eventualities.