London has earned its title 'Global Fintech City', boasting a strong financial center for successful tech-startups in the UK and a key regulator of the global fintech community. Brexit is one of the most important changes in UK history and is sparking many debates over the future of many industries, with financial institutes thinking of moving their operations overseas. In this article, we will identify the key factors which may affect the future of Fintech in the UK and for companies outside the UK.
So, what is Fintech?
Financial technology, also known as fintech, is a line of business based on using software to provide financial services. Financial technology companies are generally start-ups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.
Potential for growth
As with many other markets in the UK, fintech has an unpredictable future in the unknown fate of the EU Single Market and other trade deals. There will be a dramatic change whatever the outcome of the deals negotiated and one major impact will be the way UK businesses interact with other EU states, both for trade and investment.
In the financial services industry with specific focus on Fintech, one major consequence of Brexit will be the change to the cross-border validity of UK authorisations in EU member says. One benefit of being a member of the EU is that many UK authorized firms are capable of 'passporting' their UK authorisation to continue to provide regulated financial services within the EU. This has not only enabled established UK financial services to expand their business overseas but also provided non-EU businesses with a base in the UK to provide regulated services to the rest of the EU.
If there are no specific agreements as part of the UK negotiations with the EU, there could be an end of transferable, cross-border authorization out of the UK and this will have a drastic impact on Fintech in two ways:
- Market access - UK Companies' ability to scale may suffer when the ease of access to EU markets is restricted. Without the passport, fintech’s may need to seek authorisation in each of the states where they wish to operate, making market access more expensive and heavily administrative.
- Investment– another effect of limited market access would be the decline of foreign investment into the Fintech community, who without investment are not able to expand to other countries and without international expansion they may become less attractive for investors and other stakeholders. Consequently, the UK’s Fintech sector and the surge of start-ups choosing the UK as their primary headquarters, could be tempted to move to other jurisdictions to develop their offerings where financial backing is less uncertain.
With easy access to the EU market taken away, and separate compliance for UK and EU operations, investors and Fintech companies may look at places like Berlin or Dublin for their HQ because of time zone benefits, common languages, and a diverse workforce. A loss of revenue from UK Fintech’s as well as financial ‘incumbents’ becoming more inclined to acquire or merge with tech companies outside of the UK could lead to a potential loss of investment over the coming years.
The free movement of people
Your people are your key assets and another key factor governing the success or failure of UK’s fintech industry post-Brexit will be their ability to continue harnessing talent in technological expertise from EU countries and beyond.
UK fintech companies employ the services of developers from countries all over the EU, and the growth of the sector is reliant on continuing to attract the best-skilled labor for those businesses, be that from the UK or abroad. To impose limitations on the free movement of workers into the UK following Brexit may, therefore, be to put the UK’s fintech sector at a disadvantage, as it becomes more administratively complicated and expensive to employ foreign talent. As suggested, this could, in turn, become a motive for Fintech companies to turn their backs on the UK in favor of alternative EU Fintech centers.
Impact on UK financial services
The effects of Brexit, and its impact on fintech, are unlikely to be felt by the technology side of the industry in isolation. Indeed, it is arguable that the effects on financial services generally will be of greater significance. The potential negative effects outlined above may impact the entire financial services industry, and the UK’s competitiveness as a leading financial services jurisdiction could be weakened. The inability to passport regulatory authorisation from the UK into other EU member states, as well as being outside the EU single-market, may cause global banks based in London to reduce or even withdraw their UK presence, as it becomes a less commercially valuable European base.
Further, should fintech companies leave the UK, in search of single-market access and, ultimately, investment, the innovative and progressive mould of the UK’s financial services that has been building up could fall away.