With the dust barely settled, it is time to take a deeper look at the potential consequences of the UK leaving the EU for good.
Licensing: The strategy of acquiring a license from the FCA then passporting to operate across the EU is dead. New strategies will have to be implemented. Some firms will move their operations to the EU, others will have to acquire an additional EU license. The higher the level of dependence a firm’s model has on pan European, the higher the probability a firm will chose to relocate for licensing purposes. Some firms may even have to rethink their entire business models due to the loss of passporting – in situation where it neither makes sense to relocate and the additional cost of compliance and licensing in the EU will render their models uneconomical.
Payments Businesses: The entire value chain is going to be impacted to the extent business is conducted across the EU. The problem is going to be exacerbated as many payment businesses operate with thin margins. If you are a UK merchant acquirer of small to medium size doing business in various EU countries, you are going to hurt going forward. Brexit might force some M&A activity down the road. The problem will not stop with merchant acquirers, think gateway providers, speciality providers around mobile payments, fraud, any type of service that requires some type of licensing. Size is going to be a major differentiator as admin and licensing costs will increase.
Remittance Businesses: Those firms that do extensive business with the EU are faced with an existential decision. I will not be surprised to see some startups pack up and leave for an EU city that offers the best of all worlds (workforce skills, tech hub, infrastructure, local regulator reputation). Even incumbents will be impacted – maybe not to the point of fully relocating, but certainly to the point of rebalancing their operations.
Fintech startups building a digital experience: Other than remittances businesses we have startup banks, PFM like aggregators of data, lead generators, digital insurance wallets, roboadvisors, payment wallets, digital brokers. For those EU startups, the UK may not be as high of a priority. Might it be farfetched to see EU startups looking at the US before eyeing the UK? UK startups eyeing Asia or the US before Europe?
US Fintech Startups: Will these startups be attracted to Dublin, Frankfurt, Luxemburg or Paris ahead of London?
Payment Networks: Quid of Visa and MasterCard? Visa Europe is headquartered in the UK while MC is located in Belgium. Will Visa rebalance its operations towards continental Europe? If so London will suffer. Beyond location, these two behemoths rule over network rules and regulations for the acquirers and issuers that participate in their respective networks. We may expect change to some of these rules over time. How much divergence will that create to interchange fee schedules for example?
Regulators: How will the FCA approach current and future European Directives for the financial services industry. Will the FCA try to keep gaps in interpretation and implementation as minimal as possible to facilitate UK based startups and incumbents competing in the EU? Will the FCA be proactive and collaborate with Brussels? Will Brussels be receptive to collaboration? These questions are very difficult to answer. What is guaranteed is the bigger the gaps going forward the more difficult it will be for UK based companies. The leadership of the FCA’s sandbox approach also has to be in doubt. Paris, Frankfurt, Dublin, Luxemburg or Brussels will want to raise their hands to welcome a EU regulatory sandbox and that sandbox will attract more activity, more innovation, more attention than its FCA counterpart. Mark my words what happens in the arena of regulatory sandbox is going to have a major impact on fintech, none of which will be positive for the UK.
Future Initiatives: Has anyone forgotten about the Tobin tax? I am forecasting or advocating such an initiative. My point is that with the UK not being able to influence or block certain initiatives, it is probable we may see high level initiatives revisited or drafted within the EU, favoring EU members or favoring a tighter integration with non-EU members to the advantage of the EU. Fintech startups based in the EU would benefit from such trends.
Capital Markets fintech: Supply will follow demand, inevitably. Several i-banks have already announced their plans to relocate to continental Europe. I would not be surprised if other participants in the ecosystem were to follow suit – buy side firms, service providers. Fintech startups will want to be close to their clients. Relatively speaking this means less emphasis on London.
Fintech Lending: Probably not much change in SME lending which tends to be more local than multi country. With consumer lending any EU based lending platform will hold a clear advantage due to potential economies of scale. UK based lenders with operations in EU will be faced with higher operating costs.
Cities: Dublin, Frankfurt, Paris, Luxemburg… will grow in stature with more activity leading to more innovation, more investments. I will even venture to state that Geneva & Zurich will emerge as winners to. Switzerland may integrate further with the EU to take advantage of Brexit which will lead to fintech and finserv firms having an easier time choosing Geneva or Zurich as a base. Expect a surge of p.r. and special deals aimed at attracting business from a variety of european cities. Further, these cities will reinforce, explicitly and implicitly, their ties with one another, as a network operating off the same EU framework. London may become a lonely place disconnected from that grid.
Data: How data is treated will have untold consequences given the array of activities involved – data processing, data storage, data sharing, data privacy. If you process data as your first order of business or as a derivative, where will you want to locate if you are a newcomer or relocate if you are established in the UK. Payment processors, sell and buy side firms in capital markets and asset management deal, fintech startups building digital front ends to acquire customers (roboadvisors, PFM, insurance…), startup banks… everyone deals with data. Where will they want to locate themselves, operate their back office, acquire customers. Will it be more efficient to cover the EU from the UK or the UK from the EU, or split. The EU has more stringent approach to data privacy and security – a more consumer centric one – which may be a material deciding factor for commercial purposes.
Venture Investing: You invest where you see the biggest opportunities. If opportunities shift towards the EU based on access to a wider market, as an investor you will shift your investments away from the UK, relatively speaking. Of course some investors have strict mandates. Funds that raised to only invest in the UK will not adjust their investments. Those whose mandate is to invest in Europe will adjust. Those whose mandate is to invest in the EU will adjust drastically. To a certain extent venture investors, through their preferences may favor certain business models against others.
Fintech M&A activity: With the value of an FCA license impaired and doubts about business models soundness, it is not unreasonable to state that more than a few acquisitions of UK based startups will either be put on hold or cancelled altogether. On the other hand a UK based startup acquiring or reverse merging in the EU to mitigate Brexit may be an interesting strategy.
Fintech Talent: How many young, educated fintech engineers, growth hackers, compliance officers, business development executives will leave London? Even more appropriate to ask, how many will leavers will it take for a marked reduction in the rate of innovation?
Scotland: Given that Scotland voted overwhelmingly to remain in the EU, will the Scottish National Party plan to organize another referendum on independence? If independence wins the day and Scotland elects to join the EU – I know this is a long shot and not an immediate move – Edinburgh could rise as a global fintech center and in the process cripple London’s standing. Edinburgh is the second largest financial center in the UK just after London and is home to Royal Bank of Scotland, the Bank of Scotland, Sainsbury Bank, Tesco Bank, Virgin Money, TSB Bank, Scottish Widows, Standard Life and many other top asset managers, insurance companies and global tier 1 asset servicing firms.
The EU: The more accommodating the EU will be to the UK when negotiating new trade deals, the better Fintech will fare. The more accommodating the EU will be, the more it may embolden political parties from other countries to stage their own exit.
To me “fintech” is all about reorganizing the financial services industry away from a vertical, closed and siloed framework and towards a networked, collaborative, opened and sharing framework. In a certain way this reorganization mirrors the societal and cultural reorganizations we are witnessing and experiencing with how countries interact with one another and how we interact within countries. Nation-states are dying because they are vertical, siloed and closed.
The Brexit vote, as far as I interpret it, is a reaction against some of the consequences of a realignment away from the vertical organization of our lives. The consequences of the excesses of globalization have been ill-understood or underestimated. Increased wealth disparities, increased unemployment or under-employment and exclusion from value creation have left many seething. This helps explain why only those who benefited from globalization and change voted to remain: the young, the educated, urban centers. I bet an overwhelming majority of individuals employed in fintech specifically and the financial services industry in general voted to remain.
Those that voted for Brexit had the reflex of yearning for the past, for the UK as an independent nation state, better off on its own. “Britain for British people” may be there motto. This vision is fundamentally flawed and may be the main “meta” explanation for why UK fintech will suffer going forward.
Granted it is an understatement to state there is much to criticize about the EU. The path towards a supra nation state is as flawed as the one towards reinforcing a single nation state. Still, the EU has created a large and peaceful open market and cutting oneself from such a market comes at a cost, especially without a clear plan to do so.
We need to consider two paths for the EU. Either the EU will reform itself and optimize along a more open and integrated framework, or it will go about its business as usual. Even if going about its business as usual is not tenable – other countries will be faced with similar Brexit moments and capitalism needs a reformation moment – considering it as an option still leaves the UK facing the above changes, choices and negative consequences I outlined above. Reformation of the EU is the most probable path and that will make Brexit even more of a suboptimal decision.
The UK could adopt two strategies after Brexit. One can be loosely translated as “To Hell with the EU, let’s look somewhere else.” Fintech and Finserv would be royally fu&*%d if that were to be the case unless and only unless the EU crumbles which I view as extremely unlikely although not impossible – again successful reformation is much more likely. The level of integration the UK economy at large enjoys with continental Europe both explains why this would be a poor strategy as well as the very low probability of such a strategy to occur. The other strategy can be labelled as “Let’s figure out how to keep on integrating with the EU.” which will inevitably mean more free circulation of people, goods and capital rather than less. This is the most likely strategy in my opinion and the best outcome for Fintech. Needless to say that such a path would disappoint many who voted for Brexit.
Whatever the rollercoaster of Bremotions, Branger for some, Bregret for others, Brisapointment, Bronliness, Brictory, Bredemption – i am pushing corniness to its limit here I realize – Fintech Brexistentialism tells me it is easier to influence an integrative movement from the inside than the outside.