Let there be no doubt – Brexit is a tragedy. Instead of taking on challenges with its European partners, Britain is taking precisely the wrong course, injecting needless uncertainty and negativity into the economy.
Tech will particularly suffer. The UK’s start-up scene, nurtured by international venture capital and skilled workers’ willingness to move here, was starting to create global challengers – and thousands of well-paid jobs. Development will now stall as companies struggle to find the staff and cash they need to scale.
Gloomy projections of London’s forthcoming tech decline are now ten-a-penny. And for financial technology, forecasts are particularly bleak, with banks and start-ups alike seen ready to abandon the UK for more welcoming climes in Dublin, Paris, Stockholm or Frankfurt.
However, these fears are overblown. Indeed, Brexit could be the making of the UK’s fintech sector – and even the trigger point that transforms some British companies into world leaders.
The reasoning is simple. London is the financial centre of the world, based on its banking hegemony, its role as the global hub for foreign exchange, and passporting rights – which allow international financial firms to operate across EU member countries.
With that position under threat, banks will spread staff and operations to other European financial centres. However, financial institutions are hugely cumbersome, both in terms of their back office technology and their armies of well-renumerated staff. For a big bank, moving any function out of London takes considerable time, energy, and money.
In contrast, fintech companies are infinitely more agile. With minimal sunk costs and far smaller numbers of staff, start-ups can pivot quickly and solve the new problems created for companies by Brexit – meeting evolving compliance requirements, finding new suppliers and customers and making data-driven decisions.
And although the potential end of passporting rights does significantly impede the UK financial sector, it has far less impact on fintech than for banks.
Most fintech companies plan to expand not by becoming regulated entities in every country, but by working with institutions in other countries who can sell, trade or clear their products – a strategy that won’t be seriously affected by a regulatory change.
So while slow-moving banks are bound in regulatory red tape, fintech companies can navigate past it – allowing them to take a larger slice of banks’ profit margins. Start-ups like Funding Circle will look to fill lending gaps created by institutional inertia, and this pattern will be replicated across fintech as nimbler companies outmanoeuvre incumbents.
Looking from London to the world
Fintech companies won’t have it easy. There are substantial challenges ahead, from data protection alignment between countries and companies, to London potentially losing the right to clear euro-denominated securities – a disaster for money transfer firms. Some start-ups will fail as their paths to profit stop making sense.
However, London is still a financial technology capital – all the financial institutions operate here, and it is a vast market regulated by forward-thinking, business-friendly bodies. I also believe that many skilled EU workers still want to work for market-leading companies and live in one of the world’s great cities.
Investors in this space understand this, and are prepared to cope with short-term turbulence. Fintech returns on investment are sizeable, but long-term. VCs will be patient and will back companies with strong business ideas and a clear path to market – so well-managed firms will find the funding they need to scale.
The real impact of Brexit on fintech will be twofold. First, there will be a flight to quality, as investors focus on more established companies at the expense of riskier start-ups. This will squeeze some air out of the fintech bubble, but not burst it.
Second, firms will end their London-centricism and focus on international growth. Companies can no longer develop a UK financial services product, before slowly rolling it out elsewhere. Businesses will look abroad much more quickly – a strategic shift that actually favours fintech companies, whose businesses are based on commodities like information and data, which can easily move across borders.
Ultimately, Brexit could create opacity in the markets and a regulatory quagmire. This is unfortunate for the UK and the economy, but it also creates precisely the right environment for fintech firms to thrive. UK startups will act where the financial institutions can’t and provide innovative solutions to new problems, helping consumers and businesses use their money more wisely.
That’s why I believe that Brexit will be the making of UK fintech – if not, overall, good for Britain.