Looking at Brexit with a FinTech lens

We naturally expected our FINTECH TWIN$ journey to end somewhere in Asia-Pacific. We were mistaken! The UK’s decision to leave the EU presented us with an exciting opportunity, to connect-the-(FinTech)-dots, meet other inspiring Fintech minds and gauge their opinions on the post-Brexit FinTech scene in Europe. Brexit has so far been associated with doom and gloom for the UK economy. But how will it affect the dynamic, and slightly peculiar world of FinTech?

We started by investigating the positive and negative impacts, by perusing dozens of articles, and meeting subject matter experts to catch the post-Brexit FinTech pulse… But our ‘gadget inspector’ DNA discovered much more! We invite you to look at Brexit with a ‘FinTech lens’, and share or comment on our vision:

1 - Our initial investigation:

In the short-term, the value of the pound has dramatically decreased and the Brexit has clearly brought uncertainty in the financial markets and corporates’ investment plans – thus making it harder for start-ups to raise funds. Yet, not for all… The UK-based invoice finance platform MarketInvoice raised £7.2million just after the Brexit vote. As Sylwester Janik (MarketInvoice, new member of the Board of Directors) said: ‘following the result of the UK referendum, many might perceive investing in FinTech as a risk. With MarketInvoice, it's actually the opposite.’ Kantox, the UK-based currency and risk management solutions provider with Spanish subsidiaries, shared with us the same view: ‘Brexit was actually good news for us, as it brought us more clients that needed to manage their FX exposure in Euro/Dollar’ (Philippe Gelis, CEO and co-founder of Kantox). As markets have become more uncertain, we might see a consolidation in the FinTech industry whereby the most robust business models with a scalable and global vision will continue to attract investors. We interviewed Rémy H.Guilbert, Structured Credit Analyst at Goldman Sachs, who confirmed that ‘FinTech is still a hot topic when it comes to investing, despite a natural and logical first movement of panic after the Brexit vote’.

In the long-term, Brexit’s outcomes on FinTech will all depend on the results of the negotiations made by the new UK-government and whether/when the Article 50 (which defines the exit-process of an EU-member state) will be triggered. Still, we can forecast possible scenarios, based on the 3 directions in which Europe has been developed:

• A single economic market with free-flow of goods, services and capital. On the ‘threat-side’, some have already questioned the planned fusion of the Frankfurt and London stock exchanges. Others, like Chris Skinner, CEO at the Finanser, mentioned that London might lose its highly prized business of clearing euro-denominated derivatives: ‘Brexit might indeed have provided the European Central Bank (ECB) with a stronger case to say that the Euro Clearing Service should be moved outside of London’. Clearing houses manage credit risk in the event one party in a swap deal defaults. Over the years, London has become a world leader for the clearing of all types of currency-denominated derivatives, thanks largely to the widespread acceptance of English law. Above all, many UK-FinTech entrepreneurs are afraid of losing the benefits of the current financial passporting regime. Up until now, an FCA-approved financial business could indeed operate in any other European states without the need to apply for a new licence in this state. In a nutshell: getting licensed in one EU state while selling products across 27 markets. Yet, with Brexit, British FinTech startups might lose their passporting privilege and might have to submit a licence application – and the costs/time associated with it - in each single market they want to operate. On the ‘opportunity-side’, Brexit might well lead British FinTech start-ups toward more global ambitions, as Chris Gledhill (founder and CEO of Secco Bank) anticipates: ‘The UK might become less European-focused and more global’, with a focus on scalable and globalised FinTech solutions. ‘FinTech hubs are emerging and are already collaborating globally’, as Nicolas Janssen (Business Development Lead at Startupbootcamp) recalls: the UK has signed partnerships and ‘FinTech bridges’ with Sydney, Singapore, Seoul, thus helping British entrepreneurs to expand globally.

• A political union with harmonised regulations: Brexit is not all negative in terms of regulations. We could imagine that future British regulations will be reshaped by ‘cherry-picking’ the best European directives. A sort of ‘directive buffet’, as imagined by Chris Gledhill (founder and CEO of Secco Bank). Brexit might be an opportunity to keep and further develop beneficial regulations such as the PSD2 Directive, which promotes competition and innovation into the payment industry (see Chris Skinner’s work here), while emancipating the UK from the so-called European ‘Red-tape’ and bureaucracy (see the work of Janos Barberis here). Another opportunity is that uncertainty in the coming new regulations will give rationale for the development of agile regulatory technologies (RegTech): in other words, how firms will adapt to new regulations and manage their compliance risks thanks to smart technologies? (see Deloitte report: is RegTech the new FinTech?)

• An area with free movement of people: Directive 2004/38/EC lays down the rights of EU citizens and their family members to move and reside freely within the territory of the member states. This was instrumental in attracting the best talents and positioning London as a global and multinational FinTech hub. As Chris Skinner points out: ‘around 1 third of FinTech talents comes from outside of the UK. If those talents can’t benefit from the same treatment as UK citizens (eg, access to government loans, education benefits, or tax incentives), will they still be attracted to London?’ This is the main threat in the eyes of any European expat currently living in the UK or considering moving there. On the ‘opportunity-side’ however, Brexit might be an opportunity to reform the British immigration system and position ethnic diversity and selected expertise as the core of the immigration system. This is the view of Eddie George (founder of the NewFinance group): ‘An independent UK could include immigration rules that attract more high-skill workers to enter the country…The UK could adopt an immigration points system like in Australia but with slicker processing and amnesty for those already in the UK for instance’

2 - Our 'FINTECH TWIN$' vision:

While the old idea of Europe is sinking, the one who dares will win.  The relationship between the UK and Europe could be compared to the relationship between FinTech start-ups and traditional banking - both veering between cooperation and competition. Many FinTech entrepreneurs were daring enough to abandon an old sinking ship (traditional banking), to develop agile and innovative solutions and empower the people. Evidently, Brexit poses a risk. But it might be seen as an opportunity for UK-based FinTech start-ups to make their mark on the global scale, by creating new partnerships, or developing regulatory technologies (RegTech) which adapt to an evolving regulatory environment. On the other hand, the challenge posed by FinTech forced traditional banking to reinvent itself, placing digital at the heart of the bank's strategy like the Bank of England, which recently opened a FinTech accelerator for the central bank. In the same way FinTech start-ups have challenged traditional banking to react and reinvent themselves, Brexit might be where the future lies for Europe: an opportunity to reinvent itself, be less complex, closer to the people, with a start-up spirit, swapping conservative bifocal spectacles for FinTech contact lenses!