On June 23rd a majority of British voters opted to leave the European Union bringing to an end the UK’s 43-year relationship with the politico-economic union of our continental neighbours. So what happens next for the UK’s emerging fintech scene? The traditional fintech market in the UK generates £20 billion in annual revenue, with emerging fintech companies accounting for £6.6 billion of that total. Both figures owe a lot to London’s position as a global financial services centre, favourable regulations, a readily accessible, large customer base and high availability of capital. But it remains to be seen how much the referendum result will disrupt these factors.
Much of the wider conversation surrounding the referendum has been the impact of immigration. The tech industry has long depended on help from outside to push innovation and fill the UK’s severe and ever-growing IT skills gap. According to a survey by Wayra, 34% of UK startup workers come from abroad, of which 20.7% are from EU countries. Labour from the EU gives a significant boost to British tech companies’ headcounts; they could now find themselves starved of crucial workers they need for growth.
According to the Department for Business Innovation & Skills, a shortage in suitable skills for digital jobs persists in the UK labour market, a major risk to business growth, innovation and broader societal development. This may make the UK a less attractive investment location to do business. As demand for digital skills outstrips supply, employers across a wider range of sectors are experiencing digital skill gaps in the workforce with 49% of SMEs encountering difficulties in filling advertised vacancies. There is a clear mismatch between the types of skill offered by the labour market and those required; a trend that is likely to be holding back the growth of tech and non-tech companies alike.
Still reeling from the shock of a result that could have major economic ramifications, startup founders in London have to consider new strategies for growing their companies in a country that suddenly doesn’t seem as attractive for the European talent that they want to hire. While the situation remains unclear, London might have to work harder than before to market itself to technology hires from overseas.
A major headache for fintechs will be the potential withdrawal of EU “passporting”. Presently, a fintech company operating in the UK only has to be regulated once to “passport” services into other markets within the EU. UK companies have the advantage of being regulated by the Financial Conduct Authority, a regulator that is viewed by many as business friendly, innovative and progressive. Moreover its positive influence with European counterparts helps shape and implement European-wide directives. Thus, losing the right to passport services may reduce competitiveness, and even force some companies to consider re-locating to be regulated and maintain single market access. Berlin, Dublin and Luxembourg would all be attractive, for example. For those that wish to stay in the UK, the prospect of negotiating with 27 different financial regulators would impede single market entry.
Access to the single market confers other regulatory advantages via EU directives. For example, the UK is subject to Single European Payments Area (SEPA) regulation without being a part of the single currency. This means that the cost and complexity of conducting cross-border payments with other EU states is greatly reduced. Any change in this status quo would greatly affect the way fintechs, particularly those in the payments space which accounts for around £10 billion of fintech’s overall annual revenue, operate.
The upcoming Payment Services Directive (PSD2) requires financial institutions to share data with third parties, and is due to be implemented in January 2018. Post-Brexit the need to implement this directive could be postponed delaying the benefits of open APIs associated with the legislation. Other regulations brought into question include the Second Electronic Money Directive (2EMD) and Interchange Fee Regulations (IFRs). Again, fintech companies currently based in the UK face the prospect of a complete withdrawal from the aforementioned directives and regulations. Organisations will need to decide whether to continue operations in the UK and function outside the common market, or seek a move to an EU member state where they would continue to enjoy the benefits conferred by European regulation.
But what happens in the event of a full withdrawal from the union and its single market? There is every possibility that such a withdrawal may allow the UK fintech industry to become more competitive. The FCA, free from EU mandates which direct its operations, will have more discretion when it comes to the regulations that govern fintech companies. Indeed they may regulate to ensure that fintech companies can better compete with their European counterparts. This can already be seen in the decision to exempt bitcoin from VAT and declaring the UK as a ‘safe space’ where firms can experiment with blockchain technology. It is no great leap to suggest that such allowances could be extended to other areas of financial technology.
Moreover, the UK capital’s current position as a global fintech leader relies in no small part on its association with the City of London, which in turn enjoys access to a large base of technologically sophisticated customers. Over many years, the market infrastructure of banks, insurers, legal advocates, intermediaries and countless other financial services, as well as the vast skill base required to staff them, has become part of the fabric of the city. Post-Brexit, there is no huge threat to London’s position as a financial services centre.
So a vote for Brexit may lead to certain operations relocating within the European bloc, but a full exit is unlikely. Consequently, why would fintech companies, who rely on the custom and cooperation of said firms, wish to move away from their customer base? A point can also be made that the relative infancy of fintech, as with other startup industries, means that it is nimble enough to adapt to any changes that arise post-Brexit.
Ultimately, the impact of the Brexit on the UK’s fintech industry is difficult to ascertain in the immediate aftermath of the vote. Only through invoking Article 50 and determining the country’s relationship with the European Union will fintech firms be able to adapt, adjust and move forward. It may take months or even years for this uncertainty to settle, but in the meantime fintech companies should look to the entrenched strengths of the UK’s financial and technology sectors and continue to make the most of these opportunities.
Please follow our financial services expert Joshua Ablett on Twitter.
Joshua Ablett has worked on multiple large scale IT transformation projects within financial services and the public sector, often running concurrently, and delivered demanding requirements to tight timescales and budgets.
With a background in physics, Alvaro Barata brings an entrepreneurial attitude and excellent tech skills to bear in his role as a Technology Business Analyst identifying needs and providing solutions to business problems.
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