I found a relaxing holiday away from Europe a great opportunity to think about the impact of the UK leaving the EU on the industry I’ve dedicated most of my career to. As a European based in London, the events leading to Brexit have left me amused and irritated in equal measure. As long-term practitioner in FinTech, I am mostly worried about understanding their impact on my industry.
Is Brexit good or bad news for UK FinTech?
Historically the emergence of London as a global financial services (and more recently FinTech) hub as been due to four fundamental factors:
Access: Easy access to a market the size of a continent with a shared set of rules and regulations
Regulation: Engagement with forward-thinking regulators that could cover both the UK and the EU
Talent: The availability of skilled, flexible and motivated people
Capital: The availability of money?—?be it angel, venture, PE or corporate?—?to back new ideas
The two main tenets of the Brexit “movement”: 1) the decoupling of UK regulation from Brussels rules and 2) a stop to the free movement of people within the EU will both affect the state of Fintech in the UK.
London is arguably the premier global financial centre. In a hugely globalised world, financial centres operate as primary access points to very large markets regulated by similar legal frameworks. New York is the access point to the US economy with 319m people with a $16.2T GDP, Hong Kong provides access to Chinese market of 1.4B people with a $8.5T GDP while London before the split was the access point to the EU with 508m people with a $17.2T GDP.
Access to the rest of the EU is based on the acceptance of shared rules, policies and regulations, a process called “Passporting”. Should the UK wish to pursue a separate regulatory regime, EU Passporting in its current form will cease. Making London the access point to a market of 64m people with a $2.8T GDP?—?still sizeable but not nearly as large as what it is today.
In the meantime, the EU will undoubtedly continue on its cross-Europe harmonising drive, suppertde by initiatives like the Single Digital Market programme, making it even more desirable for start-ups, FinTech and otherwise, to be located in an EU country. Both Paris and Berlin have already started positioning themselves as an ideal alternative to London.
Brexit will make access to the EU market more complex.
Post Brexit, businesses planning to serve EU countries will probably no longer see London as the natural choice for their first foray into Europe. English, a strong legal system and a good quality of life for expats may no longer be enough to make London the natural choice if access to rest of the continent is curtailed. Large corporates will begin to consider Dublin, Paris, Barcelona and Berlin more readily than before, depriving the UK from the talent pool that global players develop in the markets they settle in.
The European “Right to Move” has enabled foreign firms based in the UK to easily hire talented individuals from a pool of over 500m people. As these people got hired, they improved the quality of the already outstanding UK workforce, creating more interesting jobs that in turn attract more talented people. This process has become a virtuous circle making London one of the most dynamic workplaces in the world. Large global finance, consulting and tech firms have contributed and benefitted from this talent pool. A quick look at the backgrounds of founders and key people in UK FinTech start-ups reveals that a large number of them began their careers at large firms Goldman, City, McKinsey, PayPal and Google.
The current regulatory complexity and costs of hiring non-EU talent would be extended to EU citizens. No matter how streamlined this process will become it will have an impact on the talent pool. This will be an issue as qualified domestic talent will not be enough to satisfy demand?—?at least in the short term. Parliament forecasts that between 2013 and 2017 the UK will need to find 745,000 workers with digital skills.
All in all Brexit will make finding talent harder.
One of the reasons the digital revolution has hit financial services so late is the weight of regulation. The UK regulators are unusually progressive and keen supporters of innovation. The recent introduction of Project Innovate with its Innovation Hub and the Regulatory Sandbox by the Financial Conduct Authority is a great example of this mind-set. Firms based in the UK benefit from being regulated by a forward-thinking regulator with oversight that stretches across the EU.
Without regulatory “Passporting”, a UK FinTech firm with EU ambitions, would have to open subsidiaries or relocate to an EU country. These additional costs and complexity will inevitably lead to slower growth, need for more capital and eventually difficulty in attracting investment at the valuations of the pre-Brexit days.
Brexit will make it harder for UK based firms to serve Europe.
In 2015 the UK was the clear EU leader in FinTech investment. In the period between 2010 and 2015 the UK Fintech firms received $5.4B investment with the rest of Europe accounting for only $4.4B. London is a leading location for entrepreneurs seeking venture funding. Brexit could impact this in several ways:
Firstly, dealing with multiple regulators will lead to reduced valuations. Business will have the to choose to either be regulated both in the UK and in the EU?—?with more costs or focus on the UK only with reduced revenues?—?either way their costs will increase.
Secondly, if business will have to deal with a tighter talent pool they will either grow slower or have to pay more for staff. Again valuations will be impacted.
Lastly, if Brexit results in less financial services firms being based in the UK, access to capital will inevitably be impacted, especially for early stage and Angel investors. All said, as some start-ups will relocate to Europe those that remain in the UK may find less competition.
Brexit will make it harder for start-ups to find investors and to achieve the valuations they could expect in the past.
What Brexit will eventually look like is not yet clear. Politicians are aiming to negotiate a deal for the UK that will retain all or most of the benefits associated with EU membership, while giving up many of the responsibilities. The extent of their success in achieving this will determine the effect of Brexit on the UK FinTech industry.
All things considered it would seem unlikely that the role of London as Europe’s financial and tech hub will not be diminished. Especially as several other cities are already positioning themselves to take on the role.
At this stage all we can do is cross our fingers and hope for the best.