On June 24, 2016, voters in the UK decided by a majority in a referendum to leave the European Union (EU). After months of debate by those supporting and opposing the move, the decision has now been made for Britain to exit the EU, commonly referred to as Brexit.
Those in favor of Brexit argued that exiting the EU would bring the UK greater autonomy in defining its own regulations and allow the UK to have full control over how its tax revenues are spent instead of sending a large portion to the EU. Meanwhile, those opposing Brexit believed that the UK leaving the EU would be harmful to the UK’s trade with EU member states and cause businesses to relocate outside of the UK to retain trade advantages within the EU.
Now that the referendum has been decided, many are seeking answers about the impact that Brexit will have. Among those asking questions are fintech startups based in London, which has arguably become the world’s leading fintech hub.
How will Brexit affect UK’s strong fintech sector?
Possible Brexit Benefits
New strategic alliances
Although the door of open trade with the EU may be closing, Brexit could allow the UK to look beyond Europe and further afield to other fintech hubs around the world. The UK could further diversify its trade portfolio by building other strategic alliances.
“Leaving the EU gives the UK more political freedom to strengthen alliances outside of the EU, [such as] with Israel and their burgeoning FinTech hub in Tel Aviv and rekindle historical relationships, [such as] with India,” said Chris Gledhill, CEO and Co-founder at Secco.
New opportunities for fintech
Without a doubt, Brexit will continue to create uncertainty and concern within the UK, especially for financial services companies. No longer having unrestricted access to the EU market may seem like an issue for some, but some fintech entrepreneurs see an opportunity.
“It took decades to develop the infrastructure of firms, services, lawyers, insurers, intermediaries, and myriads of financial niches and massive personnel base that makes London special,” said Mike Laven, CEO at Currencycloud. “Will it get more difficult? Of course. But with our contingency plans in place we'll avoid the doomsday scenarios.”
Growth opportunities for RegTech
Regulatory technology (RegTech) could also see greater growth. Analysts from JWG see the need for companies to develop a comprehensive RegTech strategy in anticipation of the slew of regulatory changes expected because of Brexit.
“Having a central managing framework will be crucial in dealing with regulatory overload without becoming overwhelmed by the revised policies,” said Aoife Quinn, Research Analyst at JWG.
Janos Barberis, Founder of Fintech HK, says “that the uncertainty created in the markets and the upcoming wave of (re)regulations will give further rationale for the development of RegTech.”
Possible Brexit Pitfalls
Harder to attract talent
Despite the optimism of some UK fintech leaders, not all share the same outlook. Others have expressed their concern that Brexit will result in greater restrictions on immigration that will make it harder to bring in the skilled professionals from abroad needed to quickly fill roles within startups.
“[Brexit] is likely to make it harder to attract top calibre tech talent to the UK,” said Husayn Kassai, CEO and co-founder at background checking company Onfido. “Now the tech industry and the UK needs to play with the cards we've been dealt and work out how best to move forward.”
Fintech startups might relocate
As a result of the difficulty that UK startups could face in bringing people with the necessary skills, they may begin to consider other options. One possibility among them could be to leave the UK altogether and relocate elsewhere within the EU.
“If you are a Fintech startup already in the UK, in the early stages of building your operations, you will start thinking whether a move is the right decision,” said Pascal Bouvier, Venture Partner at Santander InnoVentures.
Key investors may withdraw
Venture capital (VC) firms are concerned about a loss in investor confidence due to the Brexit breakup. The European Investment Fund (EIF) is the single largest investor in European VC funds. If the EIF was to scale back its investments as a result of Brexit uncertainty, the repercussions for UK VCs could be serious.
“There are institutions we have been talking to that were enthusiastic and committed to investing in our next fund, with the only caveat being in the unlikely event of a Brexit that they will rethink,” said the founder of a London-based VC firm. “That unlikely event has happened and we will find out soon how many institutions will no longer want to back us and that is of huge concern to us.”
New Horizons for UK Fintech
While 90 percent of tech startup founders were opposed to Brexit, many are looking to the silver lining within the cloud. In spite of the doubts that may arise among international investors, the UK has built up a significant financial industry that has already withstood many storms.
“We’re going to be opening up new offices,” said Damian Kimmelman, founder of London-based startup DueDil. “We have to. We’re scaling far too quickly to jeopardize our ability to scale because we have to hire people in the UK.”
What do you see for the future of the fintech sector in the UK after Brexit?