After a month, the dust has settled somewhat on the Brexit vote. We have a new prime minister, a new government and a new outlook. There were many knee-jerk reactions to the vote that were extreme in the immediate wake of the shock of the vote. These ranged from the whole fintech community upping sticks and moving from London to Berlin, or Singapore, to the match that ignites the path to World War III. We still don’t know the outcome, but what we do know is that it has changed the world somewhat. My early reflections:
- What does Brexit mean for the City and fintech in the UK?
- Brexit probably won’t kill London’s booming fintech scene
- The best Brexit insights, including fintech, blockchain and more.
The main impact is that we need to keep single market access for bank passporting purposes. If we lose bank passporting, London-based fintech firms cannot take their ideas to the 27 countries that now comprise the European Union. They would need a regulatory licence for the UK and for Europe. That wouldn’t make sense, as they could just head office in Dublin, Stockholm or Berlin and passport across the whole region with one licence. Hence, London becomes far less attractive.
On the other hand, everyone says that you can’t have single market access without the four pillars that underpin the single market: the free movement of capital, goods, services and people. The last part is the sticking point for Britain, and is why the narrow majority voted to leave. It’s all about migrants and immigration policies. Without open borders, you can’t have passporting. And this is our quandary.
Anyway, we’ve raked over those coals enough, and it’s clear that Theresa May, our new PM, will be taking her time over Article 50 and the process of actually leaving. That just means a long time to wait and see how all this plays out.
So why am I blogging about this again today? Well, in light of the vote, many commentators wrote that it would have a negative impact on the London fintech scene:London’s status as the world’s financial technology – or fintech – hub could be under threat should a Brexit occur, lawyers, venture capitalists and startups have warned CNBC. (CNBC, 22 June 2016) Consensus among the technology community is that Brexit will topple London from its position as the most favoured fintech hub on the planet; the view of many startups and venture capitalists. There are three main reasons for this – firms rely on rolling out products across Europe, many technology companies rely on developers from all over the EU, and the concomitant fear and uncertainly [sic] which will curb investment pouring into the capital’s tech scene. (The International Business Times, 24 June 2016) London’s crown as the global capital of fintech is under threat by the decision to leave the EU amid worries about a squeeze on future funding and a brain drain of talent out of the UK. (Financial Times, 27 June 2016)
A month later, the commentary continues:More than 100 startup companies in London are looking into relocating to Germany’s capital following the UK’s decision to leave the EU, a senior Berlin politician has claimed. During a presentation at the financial technology industry’s conference London FinTech Week 2016, Senator Cornelia Yzer said every time she speaks publicly about Berlin post-Brexit, a number of startup companies approach her office about moving to Berlin. “Not 10 or 20 or 30, more, over 100,” she said, according to International Business Times. (The Independent, 27 July 2016) The vote to leave the EU was not the one the tech community wanted, but one month on and the British tech sector has shown its true colours in the face of adversity. We have continued to attract investors, support talent and remain at the heart of global tech developments. London has shown that it has what it takes to continue its reign as a leading light in the global tech scene. Don’t bet against us. (City AM, 22 July 2016) Investment into London and UK-based technology companies remains strong since the Brexit vote, with British firms attracting $200m of venture capital funding across 42 deals. (IBS Intelligence, 25 July 2016)
As can be seen, it’s still contradictory and no one really knows what the final outcome will be. Some worry that we will lose the London-based multi-billion-euro clearing business, and 100,000 City jobs that go with it, while others muse on broader horizons such as bilateral deals with Australia, China and other booming economies. For example, it’s noteworthy that we’ve already started such bilateral deals for fintech with South Korea, building on similar deals with Singapore and Australia.
The bottom line is that no one knows what’s going to happen, but everyone fears change. Innovate Finance, the fintech trade body for the UK, performed a survey of its members a week after the Brexit vote. Bearing in mind that London fintech firms are strongly European – 1 in 5 use EU passporting for their services, 1 in 3 founders and CEOs of startups are from overseas, and 1 in 3 employees are European – the results are unsurprising. When asked whether firms consider UK fintech a less attractive investment in light of the EU referendum, 14.3% “strongly agreed”, and 42.9% “agreed”, and half of those surveyed are considering moving out of the UK.
The following slideshow is from Innovate Finance …
Three possible scenarios
So what does all this mean longer-term? The Financial Times predicts three possible scenarios:Positive: Brexit could offer an opportunity to maximise London as a less regulated offshore centre for renminbi trading, private banking or fintech, making use of the UK’s timezone advantage between Shanghai and New York. Negative: Massive job losses as banks move out of the UK into Europe. Treasury analysis estimates that up to 285,000 financial sector jobs could be at risk after the leave vote. In addition, almost 11% of the City’s 360,000 workers come from elsewhere in the EU. Neutral: London stays as it is, due to the concentration of resources and capabilities. This focuses on the view that liquidity is hard to move, as the more you trade, the more you trade, and the more the talent comes to where you trade.
From a fintech viewpoint, I probably focus on the positive or neutral view, because there’s a key point overlooked by many (and because I’m very biased): London has become a fintech hub because there is the talent pool, access, government support and capital here. The sector has boomed in the last decade due to, in a similar way to the City, a concentration of resources and capabilities. If that is blown apart by the Brexit vote, what happens? Fragmentation of focus.
Back office startups move to Dublin, payments startups focus on Stockholm, trading front office companies land in Berlin, and regtech firms move to Brussels. None of these cities has the spectrum of infrastructure and advisory services, along with the financial strength, to match London. But if fintech firms have to move out of the UK, then my belief is there will be no central EU hub for fintech – just lots of cities with different capabilities. In other words, if fintech London is blown away by the Brexit vote, then it’s not only the UK that loses something, but Europe. London’s fintech concentration has been a bonus for all over the past decade, and for this reason I firmly believe it’s still here to stay.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Main photo: Iakov Kalinin, Shutterstock.com