The UK has triggered Article 50, setting Britain on the path to separation from the EU within two years.
Many have asked, how will the UK’s exit from the EU impact fintech in London, the world’s capital?
The outlook, especially within the fintech community, has been gloomy. The industry generally opposed exiting the EU – to be expected from an international group whose businesses depend on the free movement of labor and capital from Europe and the passporting of financial services throughout the EU.
Immigration will always be an emotional topic, but the shortage of technical talent in the UK is a fact. Emotions aside, to prosper after leaving the EU, the UK must have a framework for welcoming foreign talent to fill gaps in the local employment pool, especially in technology.
Having lived in the UK for two years and observed the efficiency of the government, I’m confident in its ability to design and implement a progressive, highly functional immigration policy to meet the needs of the UK economy.
Access to Capital
Access to capital is one of the primary indicators of a vibrant startup ecosystem. London has a solid angel and early-stage VC presence, but it lacks large investors able to support scalability – providers of so-called growth capital. Generally speaking, for a range of factors I won’t go into here, the capital available to UK startups pales in comparison to what’s available to new US companies.
Continental Europe is even less generous when it comes to startup capital, but access to European investors for good UK fintechs isn’t dependent on EU membership.
Access to capital remains an issue for UK fintech, but it isn’t a function of EU membership.
Besides immigration, the item at the top of the fintech industry’s list of post-Brexit concerns is passporting. EU fintechs authorized in their home country can easily apply to provide the same regulated financial services in other EU member countries as well. The passporting of financial services effectively expands the size of the market available to EU financial services companies, including fintechs. When the UK leaves the EU, it will lose the right to passport financial services into the trading block, unless a special deal is reached.
While the loss of passporting is, in principle, a blow to London fintech, further analysis must be undertaken to determine the true impact. Thousands of incumbent banks and financial services companies rely on passporting to access the European market, but what about fintechs? How many fintechs actually passport regulated services from the UK to the EU?
London’s fintech supremacy is sometimes attributed to its cultural alignment with large English-speaking markets – most notably the US – combined with its geographical proximity to Europe and, by nature of passporting, the entire EU market.
In practice, however, trade agreements alone do not make a single market. Language and cultural differences across EU countries mean “accessing Europe” is not as straightforward as it sounds.
Passporting is hugely advantageous for the right type of service, but for the majority of successful London fintechs, it’s a nice-to-have. According to Lawrence Wintermeyer, CEO of Innovate Finance, a not-for-profit association representing the UK's fintech community, “the removal of passporting does not currently appear to impact a large number of UK fintechs.” In fact, he says, “less than 20 per cent of Innovate Finance members that are authorized to passport use it, and our member surveys indicate that many look to scale their businesses to the US before Europe.”
The biggest market opportunity for UK fintechs is the US. Those that make the leap across the Atlantic have the potential for exponential growth. Early examples include TransferWise and Funding Circle.
Moreover, when a fintech reaches critical mass, opening an EU office and qualifying for passporting via the local member country won’t be overly burdensome.
In short, while the loss of passporting isn’t ideal, it’s an entrepreneurial challenge like many others that spark creativity and drive new strategies.
I’ve addressed the biggest changes resulting from the UK’s impending exit from the EU, but that’s only part of the picture.
The UK’s increasing alignment with non-European countries, most likely in Asia and North America, will lead to new opportunities for fintech.
As the UK takes full control of its domestic and foreign policies, expect them to increasingly favor fintech and related technologies like AI and computing, which are perceived as homegrown industries in which Britain has formidable strength.
As fintech matures, it will increasingly involve incumbent institutions as customers, partners and acquirers. Fintechs will no longer serve only the early-adopting fringe but an increasing number of mainstream end users. As domestic adoption grows, international expansion will become a less immediate concern.
Current expectations are for a hard Brexit, with an end to freedom of movement and passporting. Even in this scenario, the impact on UK fintech will be minimal.
All things considered, London is poised to consolidate its position as the world’s fintech capital over the next few years.
Bragging rights aside, the more fintech hubs, bridges and capitals the better. Fintech founders, staff, investors and customers win as policymakers and regulators coordinate globally for the benefit of all.