18

Jun

2016

Fintech Life after Brexit

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Let’s assume Brexit will happen. How will the the UK FinTech community react? We already know that more than a few financial services firms – mostly banks I believe – have drawn plans to relocate some of their staff away from London and scale back operations in the UK. Will FinTech firms follow suit? Have some started planning for Brexit? Are Brexit responses being hatched as we speak? Will moves out of the UK be sudden and immediate or gradual? All are questions worthy of an answer.

With the demise of its offshore business, London needed to reinvent itself to retain financial services relevance. Fintech, while maybe not being THE answer, was one of the answers. In the past years we have seen the City of London, the Bank of England, the Financial Conduct Authority and Government signaling they were all opened for FinTech business, launching initiatives and making it altogether easier, relatively speaking, for FinTech entrepreneurs to choose London as their home base.

The attractiveness of the UK as a homogenous market (think South East England with a concentration of tech savvy and affluent individuals in one time zone), a skilled workforce, the lure of a flexible UK economy and labor laws all helped. The relative strength of venture capital funding (both in terms of quantity and quality) compared to Europe should not be discounted.

There has also been a fair bit of regulatory arbitrage going on. There is no question many entrepreneurs will chose a country where the regulator is more sophisticated, enjoys a positive reputation globally, is “open for business” and easier to deal with than in one’s home country; especially when this choice will result in a FCA approved license that is recognized across the European Union, thereby providing optionality around a bigger addressable market. In other words, resisting the allure of London as a FinTech hub while noting all what you build can and will be applicable all over the EU is very difficult to do.

What happens if the EU link is altered? I doubt an FCA license would be recognized across Europe then, which means increased licensing and compliance costs, presumably.  Further, as mentioned above, some financial services firms will reduce their operations in the UK and relocate – to continental Europe, to the US… Plus there is the rising uncertainty of how life will be after Brexit – financial services life, business life, how removed the UK will be from EU, the types of barriers that will exist.

If you are a Fintech startup thinking of moving to the UK you are going to think twice. The decision will not be as easy as it was.

If you are a Fintech startup already in the UK, in the early stages of of building your operations you will start thinking whether a move is the right decision.

If you are a d2c Fintech startup with aspirations for European roll out you may decide to relocate some of your operations to continental Europe sooner than you had planned or more than you had planned.

If you are a b2b Fintech startup you will tend to follow your clients and their operations wherever they go.

Additionally, if Brexit results in a less opened environment for foreign workers, the tech community might see a net outward flux of engineers out of the UK which may sway Fintech startups to follow talent.

All in all, these trends are not net positives for UK Fintech dominance.

Where would Fintech startups move? There is no obvious FinTech hub that can immediately challenge London. None of the potential contenders are ideal candidates.

Berlin has a strong pool of tech talent and a vibrant startup scene and Frankfurt is the financial services center of Germany. Fintech startups relocating to either would deal with Bafin, the German regulator which is a strong and very well regarded regulator. Yet, language is an issue and the German market is not that easy to crack for a non German entity. Bafin would also have to show a tad more forward looking intent a la FCA.

Paris enjoys great infrastructure and a deep pool of tech talent, but the language is also an issue and the local regulator is not well known for its international and forward looking bent.

Stockholm, Amsterdam, Zurich/Geneva are also interesting candidates.

New York might even be a candidate – same language, much larger market, strong financial services hub.

I tend to think there will not be one clear winner among the above mentioned candidates. Most if not all will benefit. Although this might not be a good thing from a geopolitical point if view for Europe – as London’s Fintech star wanes relatively speaking compared to its global competitors and as no clear European city emerges as the clear leader – there may be a silver lining. Indeed, sensing an opportunity to gain market share, Euro regulators may become more open and forward minded – sandboxes, friendliness and collaboration with startups – thereby creating a healthy competitive environment across the continent towards tech innovation; Euro legislators in Brussels and Strasbourg may help with that process; City Councils may jockey for position with local laws and initiatives to attract startups. Further, UK Fintech VCs may allocate more funds to continental Europe. I can think of many intended and unintended positive consequences and far from putting a damper on Fintech in Europe we may see a revitalization of Fintech across Europe.

If you are a UK based Fintech, I am curious what your current thinking is. Or maybe Brexit will not happen.

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Pascal Bouvier
pgb2008@gmail.com

Life and work experiences have given Pascal an unmatched vantage point, seeing things as both venture capitalist and aspiring entrepreneur. He currently is a Venture Partner with Santander Innoventures – Santander Group’s Global Fintech fund.

1Comment
  • sergio Restrepo
    Posted at 19:30h, 21 June Reply

    Hi Pascal,

    As always it is very interesting to read you. I am not sure Brexit will occur and I cannot imagine what the consequences would be for the UK, for the EU and more specifically as this is the subject of you post for Fintechs and all its possible variations (Regtech, Insurtech…). We have many times consider moving there.

    London is very attractive for many reasons and most of them you already mentioned them on your post. We could add the legal framework that facilitate to raise capital and a very pragmatic way to do business.

    All the countries that you mention as possible Fintech leader have their strengths and weaknesses, but why not Luxembourg and it amazing financial sector?

    Luxembourg is the second largest fund domiciliation country in the world, beneficiates from an incredible pool of banks, funds and financial companies that represent a fantastic center for Fintechs. It is ideally located within three hours reach from Frankfurt, Paris, Brussels. Enhancing its regulatory and legal framework to become more attractive to Fintechs and startups.

    Thank you for your post.

    Merci

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