How Brexit impacts FinTech players

After Britain has voted to leave the European Union, uncertainty looms large over the country’s financial sector. So far as companies engaged in financial technologies, also known as FinTech, are concerned, they are trying to figure out the impact of Brexit on their current business and prospects.

Already on the forefront of financial technologies, UK is home to about 1500 FinTech startups, which constitute around 6.8 percent of the world’s FinTech startups. These companies offer their services in financial transactions, money transfers, loans, fundraising and, asset management.

Ernst & Young, highlighting the financial significance of FinTech sector in Britain, says in its report that FinTech companies have generated ?6.6bn in revenues and attracted roughly ?524m in investment in 2015. In all of the Europe, London has emerged as the FinTech hub due to it being favourably placed on the global time zones and easy access to the US and the rest of Europe with a population of nearly 700 million. The UK has access to highly skilled and educated workforce and has a friendly tax environment, among other benefits. Not only that, the UK acts as a base for many large global investment banks for their Europeans operations. Many FinTech firms have emerged to assist large investment banks in managing their business transactions and third party services.

Regulatory Dilemma

Now after Brexit, what will happen to a company operating from Britain and having a business interest all over Europe and even beyond that?

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Before Brexit, FinTech companies used to acquire the license from UK Financial Conduct Authority (FCA) – a regulatory body for protecting consumers’ and financial institutions’ interest ? and operate in any of the 27 EU countries.

Now, most likely they will have to obtain a separate permission to continue to offer their services and have branches in European countries. The same will apply to companies having offices in Britain and headquarters out of it. Even those enterprises that don’t have their branches outside Britain but merely providing services will also be subject to new regulations.

Companies that handle foreign exchange trades for businesses in the UK are said to make gains from the Brexit as some experts believe that Brexit could increase demand for FX hedging services. Brexit may also work for small fledgeling firms, which operate within Britain, but multi-national companies with pan-Europe presence might have to worry about the new regulatory regime and change in passport rules to pursue the business interest in other European countries.

Another area of key concern is the role and future of London-based European Banking Authority (EBA). EBA plays a crucial part in developing the rules and standards around third party providers, authentication and security measures across the EU. It relates to the functioning of the FinTech companies, which develop software and applications to access data of account holders from banks. While representatives from the UK played a significant role in negotiating open network and experimentation in revised Payment Services Directive (PSD2) of EBA, German and French counterparts advocated conservative approach as far as rules and guidelines for modern payment services in the European Union were concerned.

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Now companies based in the UK don’t need to follow EBA guidelines, which will create further confusion and lack of clarity in their functioning. Some payment research firms say that it will hamper their business till the time payment environments are well defined.

Impact on APAC

The Impact of Brexit on UK and Europe is well accepted. However, experts don’t foresee Asia-pacific (APAC) region getting affected from the Brexit upheaval for long. The Asian markets haven’t shown any significant reactions to Brexit till now. Experts have a difference of opinion on the short-term impact. Some say that emerging tech hubs such as Singapore and Honk Kong might face a challenge in attracting investment from the UK and the European Union due to prolonged uncertainty. Since UK-based FinTechs have a pan-European presence, Brexit challenge impacts the EU more than any other countries out of it.

It?s opportunity for some, headache for others?

FinTech companies are engaged in multiple financial activities such as Lending, Payments/Billing, Personal Finance/Wealth Management, Money transfer/remittance, Blockchain/Bitcoin, Institutional/Capital Markets, Equity crowdfunding, Insurance, etc. Some of these companies, which provide backend support to banks and big financial institutions in the UK, gain from the situation. But mid and small size companies engaged in e-payment or e-wallet with pan-Europe exposure will be hit hard because their profit margins are low, and they will have to take additional measures now for licensing and secure transactions. Some might have to take the path of mergers & acquisitions (M&A).

Brain drain will impact company’s operations

With a regulatory headache comes the challenge of attracting and retaining talent, which might become expensive and complicated. Britain’s best tech talent belongs to countries such as Portugal, Poland, Spain, US, etc. Reports suggest that out of 61,000 people that FinTech firms employ – which is 5% of the total financial services workforce of the country ? 20,000 come from other nations. Apparently, Britain will lose a huge number of techies – engineers, innovators, growth hackers, compliance officers, business development executives – to other emerging FinTech destinations in Europe.

After Brexit, restrictions on free movement of people and change in export and import laws will force companies to shift their workforce out of UK. Perhaps, that’s the reason, Tech London Advocates, a body of tech leaders, experts and investors, in its survey found that 87% of its members want to stay in the EU. Even if the UK relaxes its regulations for FinTech companies, it’s highly unlikely that the government will comprise with tougher immigration laws as one of the reasons for Britain parting its ways from the EU is the rise in foreign population.

All eyes on government policies

A silver lining amid a pall of gloom is the optimistic view of some experts who believe that this can be a significant opportunity in disguise for the UK as well. They argue that if the government will make simple regulations and offer tax benefits to FinTech firms along with supporting innovations, UK can emerge as a competitive alternative to the EU.

But if the government fails to do so, cities like Dublin or Berlin may replace London as the FinTech hub of Europe. These cities will try to exploit the opportunity to create more friendly environments for UK based FinTech.

Alex Kong