International Finance
FintechMagazineSeptember-October 2019 Issue

How does Brexit impact UK’s fintech companies?

UK Fintechs Brexit
A smooth landing is essential for the UK’s fintech sector after Brexit, if the UK has to retain its edge as a top financial services centre in Europe

The financial services sector is the heart of the UK’s economy after manufacturing fell along the wayside decades ago. With the prospect of a hard Brexit looking ever more likely than not, UK’s financial technology companies and the investors who invest in these companies face unpredictable outcomes. With the fintech industry reliant on the EU for talent and capital, what is the stance that investors and fintech companies should take in the face of surmounting uncertainty? The changes that happen to regulatory licences for fintech companies, and to passporting rights as well as visa regulations for EU and non-EU nationals are key to the future of the fintech industry and financial services in the UK.

So, why is the fintech sector important to the UK’s economy and the Brexit discussion? It’s all about high quality jobs and, more importantly, its about the UK retaining its edge as a leading financial services centre in Europe much after Brexit. Speaking exclusively to International Finance, Nick Chouksey, financial services director focusing on fintech at consulting group PwC, said there were in total 76,500 people working currently in this sector across the UK and this was expected to grow to 105,500 by 2030. In terms of the number of firms, he said there were 1,600 fintech companies operating across the UK and this was estimated to more than double by 2030. These figures, he attributed to a report on UK FinTech jointly released by the Department for International Trade, HM Treasury, and Innovate Finance.

What happened after the referendum?

In terms of the impact since the 2016 referendum decision, Chouksey said the UK’s decision to leave the EU had certainly not impacted the growth of this sector in the country. He said this was evident with the increasing number of fintech businesses being incorporated and the significant investments being made into them by both domestic and international investors.

Pablo Mayo Cerqueiro, mergers and acquisitions correspondent at London-headquartered media firm Acuris, told International Finance that it was worth noting that fintech startups in the UK had raised just under $3 billion in the first half of 2019. Cerqueiro cited this number from a report by Innovate Finance, an independent membership association that represents the UK’s global fintech community. According to the report, this cumulative fund raise represented 85 percent of the total capital UK fintech startups raised in all of 2018.

Among the 123 investment deals that the UK fintech startups witnessed in the first half of 2019, the two largest deals were at Greensill Capital, a provider of working capital finance for companies globally, and OakNorth, a provider of business and property loans for small and medium sized companies. According to the report, the two companies attracted investments of $880 million and $440 million respectively. These figures further accentuate Chouskey’s views.

Meanwhile, a representative at Revolut, a UK fintech company that offers banking services such as currency exchange and peer-to-peer payments, said they too had not seen any impact since the 2016 referendum decision. “For us it is business is as usual. Nothing much has changed,” the spokesperson told International Finance.

UK fintechs growing irrespective of Brexit

Outlook for fintech sectorRevolut, which was founded in July 2015, about a year prior to the referendum decision, today has 12,000 employees and operates across the UK, Europe, and Australia with plans to expand into the US, Canada, Singapore and Japan this year the spokesperson said, indicating that the company is growing irrespective of the UK’s decision to leave the EU.
Chouksey too had similar views. He said there was currently no negative impact on fintech companies. This, he said was because of two reasons. One, he said was because the exact impact of Brexit was still to be seen and second he said was amid “the need for newer, more tech enabled solutions in the financial services sector.”

He however added that while UK had not seen any impact, they had seen a change in the international fintech landscape amid UK’s decision to leave the EU. “Shortly after the referendum in 2016, a number of European cities, notably Berlin, Paris, and Amsterdam, started to actively compete for new fintechs to set up their operations in those cities rather than the UK. While setting up in one of these cities rather than perhaps London, and thus being in the EU was clearly appealing, it certainly has not stopped fintechs being established in the UK. Instead, what it has perhaps done is enhancing the European fintech landscape, helping to bridge the gap between the key European financial services centres,” he explained.

What happens after UK leaves the EU?

Going forward, however, Chouksey said there could be some challenges the UK could face once it eventually leaves the EU. The loss of passporting of regulatory licences is one of the most significant impacts Brexit could have on the entire financial services sector, he said, before adding that fintech companies would then be required to obtain a secondary regulatory licence in an EU jurisdiction to allow themselves to serve EU customers. “Banks, asset managers, and insurers have been considering plans to establish EU regulated entities since 2016, and although the majority of fintechs are not as far advanced as the more traditional financial services businesses, this is still very relevant to them,” Chouksey said.

He further suggested fintechs to be agile and responsive to this kind of a new environment. “Practically, this will start with fintechs ensuring they meet their regulatory obligations under their new EU regulation. Perhaps the key point here is not just to meet the new regulators compliance requirements but ensuring that the new operating model has been executed by the time the UK leaves the EU.”

The Revolut representative and Acuris’s Cerqueiro too voiced the same concern. They said UK companies may have to get a separate EU licence in the event of a hard Brexit. Additionally, both of them also said they may have to also get an office in Europe, to ensure access to EU markets post-Brexit. Indicating the readiness of UK companies to face this challenge, Cerqueiro said TransferWise, an online money transfer service founded in January 2011, had already applied for a licence in Belgium earlier this year.

The Revolut representative said it too was prepared for this challenge if it faces a hard Brexit situation. The representative explained that while the fintech company already has an operational electronic money licence in the UK, it had applied for and received one for Europe as well last year. And while this is currently not being used, Revolut will make it operational in the event of hard Brexit or if the need arises. “It is a little bit of annoyance but we have to fulfil whatever obligations are required by various regulatory authorities after a hard Brexit,” the representative said.

As for an office in Europe, the Revolut representative said, the company already had an office in Poland with over 500 employees, one in Portugal with about 200 employees, an office in Lithuania, with a new technical office getting ready in Berlin as well. “So basically, we are well prepared and have taken all the necessary steps to ensure our business runs as usual and our customers are not affected despite a hard Brexit,” the representative said.

With regard to the impact on customers, the Revolut representative said there would be none. Of the six million plus customers, Revolut has, over half of them are based in Europe and in the case of a hard Brexit, it would transfer EU clients under the Europe licence, the representative said. The person added there may, however, be some minor changes in the terms and conditions which these customers may have to agree to in the app.

Talent crunch ahead?

Apart from potential regulatory challenges, a few media reports had said that the UK could find it difficult to get the right talent following its exit from the EU amid the potential loss of passporting rights. With regards to this, Chouskey said it was unlikely that country would struggle for talent, with the UK being a key financial services centre having a very strong universities and academic environment. He added that they perhaps would be more likely to be impacted, by an increasing competition for talent rather than lack of talent.

“Certain fintechs are likely to choose to set up in an EU country rather than the UK, thus potentially drawing talent to particularly EU cities and fintech hubs. However, even with the loss of passporting rights, it is still likely that those UK regulated fintechs will only establish a small presence in a new EU market and look to maintain their current UK operations. As such, roles and opportunities should remain in the UK, which should continue to prove attractive to talent. Perhaps where we will see changes is the mix of the talent pool driven by the impact on immigration both into and from the EU as a result of Brexit,” he explained.

Meanwhile, the Revolut representative said that the financial industry as a whole was struggling for technical talent and this would not be a specific Brexit-related concern. The person explained that only 25 percent of its 500 staff in London were from the UK and that the remaining 75 percent who were from Europe, Canada, US, Asia and other parts of the World, would not mind staying back in the UK. “From the employee’s perspective, I am sure our existing employees will not mind shifting here even if passporting rights are gone. Also, we are hiring up to 30 people a month and they have not shown second thoughts to move into the UK to work for us and we do not think this would change post Brexit either,” the person explained before adding that the situation would of course become more clear from October.

The representative further added that the UK Government had assured companies, in general, that it will support retaining talent in the country even in case of a hard Brexit. “Will the UK be less attractive to work in post Brexit? I don’t think so. According to what the government has been saying over the last couple of months, high skilled employees will be given the rights to remain. They will not be asked to leave. Moreover such technically skilled people will also be allowed to enter London easily,” the representative said.

Indirect domino effect

Apart from such direct challenges, PwC’s Chouskey said the fintech sector could see an indirect impact once the UK leaves the EU. He explained that there were a lot of discussions that Brexit could have a negative impact on the overall UK economy and its currency and this would in turn have a domino effect on fintech companies. “There has been a lot of commentary on the likely economic impact on the UK and separately on the EU as a result of Brexit. Whether this triggers either the economy to fall into recession or the currency to get devalued remains unclear. Evidently, if the UK economy and strength of the pound declines, this is likely to have a negative impact on the fintech sector, as it would do across other industries within the UK – although only time will tell on this.”

Will investments continue?

So, amid all these potential threats, one question that persists in almost everyone’s minds is whether investors would show the same interest in British fintech startups even after an actual Brexit. With regards to this, Chouksey, replied in the positive. He said that while the fintech industry could see some impact as the UK negotiates its exit from the EU this year, the overall landscape looked positive, especially with regards to being an attractive investment destination. “Investors will continue to invest in fintechs in the coming years due to the requirement for financial services to move towards a digital, cloud based industry, with a significant element of the technology development and innovation coming from fintechs as new entrants to the financial services market.”

He however said what might change investment decisions would be the return on investment margins. Investors, he opined would check if other asset classes would provide better value to them when compared to fintech companies “as a result of the changing economic landscape as we move into a post-EU environment”.

Meanwhile, the Revolut representative too spoke on this aspect in the positive. The representative said that funding will not go away and the UK will continue to see a lot of investor interest. “We have various venture capitalists on board. They have all made it clear they are not going anywhere even if there is a hard Brexit,” the representative added.

Indicating that fund raising plans were still part of the agenda for UK fintech companies, Cerqueiro said that the UK based peer-to-peer lender Zopa was currently looking to raise capital for its digital bank in the UK. He also gave the example of London based Starling Bank. This digital, mobile-only challenger bank, he said, was also eyeing further fundraising later in the year.

The UK government’s role

When queried on the role the UK Government and PwC could play amid such Brexit-related challenges, Chouskey, said the government had been very supportive in recent years, of not just the fintech sector, but the broader financial services industry and was keen to ensure this remains a critical part of the UK economy. He cited the example of FinTech Alliance, a community-driven platform for the whole fintech Industry that had been set up in partnership with the UK government.

According to its website, all profits made from this platform would be reinvested back into the fintech sector, “providing a fully inclusive environment to support fintech growth and empower UK business with comprehensive information, services, and intelligence.”

PwC on its part, too, he said had partnered with the FinTech Alliance and was “working closely with a number of fintech businesses to support them with the implications that Brexit may have on their businesses, including providing support with regulatory approvals, labour and immigration considerations, and operating model changes among other services.”

Passporting rights a key factor

Chouksey suggested that the government should continue to invest in the sector accordingly going forward. This, along with the setting up of the FinTech Alliance, makes the future of UK fintech look positive, he concluded.

Meanwhile, the Revolut representative said the government should champion the continuation of passporting rights and fast tracking of visas. The former, the person said, would be beneficial not just for companies in the UK but even for those across Europe as well. This would further ensure things would remain as they are, at least from the employment side of things. With regards to fast tracking of visas, the representative said this was very important considering there is a shortage of software professionals and data scientists and such steps would ensure UK continues to remain the best country to work in.

Will the positive stance of the investors on UK fintechs continue in the event of a potential hard Brexit in October this year? Well, the actual implications are unknown and while there will be a few regulatory and workforce challenges, it seems that in the UK, both the government and fintech companies are well prepared to face them head-on.

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