Although the jury is not yet out on what will happen, Brexit is undoubtedly damaging to the UK’s status as the world’s foremost fintech hub. As background, around half of all European fintech investment has been made in the UK, with UK fintech estimated by Ernst and Young and the UK trade Commission to be worth ~£20bn in annual revenue. This breaks down into payments (~£10bn), software (~£4.2bn), data and analytics (~£3.8bn), and platforms (~£2bn)
The key reasons lie in:
(i) uncertainty over how fintech companies do business across the European block due to regulatory fragmentation and lack of a financial services ‘passport’
(ii) disruption regarding how fintech can work with incumbent banks and networks
(iii) concern about a talent drain from EU developers and whether startups will be able to secure the expertise needed to grow
(iv) hesitancy by investors when UK based startups seek fundraising
(v) indecision around what the post-Brexit Europe will look like could paralyze a startup’s ability to make decisions and pivot
From our perspective, point (i) is the most devastating for our UK based competitors as, by definition, cross-border transfer services need to engage multiple jurisdictions. Previously, startups based in the UK with a business model focused on currency matching have done well in the past because of the (a) strong two way flows across all countries in the EU single market and (b) lower regulatory costs due to the EU wide financial services passport.
At this stage, (a) is no longer guaranteed if the UK no longer has access to the EU single market and (b)’s regulatory costs will increase if the startup wants to maintain access to multiple EU jurisdictions. Even at a transactional level, a cross-border transfer service will suffer due to uncertainties around currency hedging, since a primary business objective of a cross-border transfer service is to dampen currency volatility. Given the turbulence of the currency markets over the past few days, we are unlikely to experience much calm as the UK negotiates its way out of the EU over the next few years.
Lastly, the UK Financial Conduct Authority (FCA) will lose its clout concerning its pioneering sandbox approach to regulating startups. As mentioned by Pacal Bouvier, a partner at Santender InnoVentures, ‘the leadership of the FCA’s sandbox approach also has to be in doubt. Paris, Frankfurt, Dublin, Luxemburg or Brussels will want to raise their hands to welcome a EU regulatory sandbox and that sandbox will attract more activity, more innovation, more attention than its FCA counterpart. Mark my words what happens in the arena of regulatory sandbox is going to have a major impact on fintech, none of which will be positive for the UK’. Indeed, the sandbox approach championed by the FCA risks being completely derailed by Brexit, especially since the FCA commented on its website that ‘much financial regulation currently applicable in the UK derives from EU legislation.’
‘Nothing’s changed yet but everything’s changed,’ wrote Taavet Hinrikus, CEO and co-founder of TransferWise. Even as a startup based in Asia, we couldn’t agree more.