What impact will Brexit have on fintech start-ups?

The UK&rsquo;s decision to withdraw itself from the European Union on June 2016 sent shockwaves throughout the entire financial technology sector. Since then, the ramifications of Brexit have had many UK-established fintech start-ups questioning their place within the current ecosystem. This is exacerbated by the fact that London has so far been the premier hub for fintech companies in Europe, with champions like Revolut or Kantox headquartered in the capital, and $783M invested in the industry last year alone. Fintech businesses are maturing on a global scale, and investments are as ripe as ever ($8.4bn invested in Q2 2017 globally, up from $3.6bn in Q1) [1] ; in such an environment, what impact will Brexit have on fintech startups, and will UK fintech startups still thrive amidst the uncertainty? There are a number of key factors that will determine the success of fintech startups in a post-Brexit era, such as regulatory and passporting rights, continued investment and access to capital, and the UK&rsquo;s continued attraction for fintech entrepreneurs. Let us review these factors. Regulatory and passporting rights: the disrupting factor One of the most uncertain outcome from the Brexit negotiations is linked to regulation, especially passporting rights. Passporting currently allows financial services firms in the UK to operate throughout the European Union. The passporting question has proved a tricky topic, as it is related to the wider discussions surrounding taxes, the freedom of movements between EU nationals and the transfer of goods within the single market economy. If the passporting rights were removed, UK fintech startups selling financial services in other EU countries would be heavily impacted. If this were to happen, it could prove highly damaging to the UK fintech ecosystem, mainly for investment related fintech, such as the ones trying to digitalise wealth management that would not be able to trade with the European market from London. According to London-based fintech trade association Innovate Finance, nearly half of the UK fintech startups [2] currently rely on passporting. But changes in regulations can also affect fintech indirectly: for those directly serving banks, a move of banking departments to other jurisdictions would mean they could lose valuable customers. The latest seems to be the most concerning one, with for example the recent announcements of JP Morgan, considering transferring some of its resources out of the UK. It is important however to note that all fintech companies will not be impacted by Brexit. Some do not rely on passporting, nor are solely serving banks, such as Novastone. Their proximity with other countries within the European ecosystem will remain, and they will continue to establish partnerships within Europe with little restriction, regardless of Brexit. Fintech access to talent pool: keep calm and remain in Britain? The growth of fintech start-ups over the past few years has superseded expectations in the UK, and was supported by European resources and talent - attracted to, and established in - London. Many fintech start-ups have relied upon European technical knowledge and entrepreneurialism to build industry champions. If the UK deters the movement of individuals, it may well simultaneously deter the influx of strong European expertise. It is unlikely that the May government will implement legislation that would bare skilled workers from working in the UK, thus resulting in a massive brain drain. But in the likelihood of EU citizens&rsquo; freedom of circulation being restricted in the future, this could affect many tech workers&rsquo; partners joining them, who would then reassess the UK opportunity, contributing in curtailing the growth of the UK&rsquo;s rich talent pool. Furthermore, if fintech companies needed to sponsor their talent, that would also represent a financial burden unlikely to be bore by young ventures. The UK as gateway: a launch pad towards US and Asian markets As expected, Brexit has placed a limelight upon the relationship between the UK and its European neighbours, with less attention devoted towards its connection to the rest of the world. It must be remembered that although the UK currently enjoys a tumultuous relationship with the EU, it is also a trade partner to the US and Asian markets. The UK already serves as a gateway to the East and West for traditional businesses, and its links to North American and Asian financial hubs should also be exploited by fintech ventures. Already, London has also proven to be a platform from which entrepreneurs could easily reach foreign investors: UK-based fintech companies pulled in $564m in S1 2017 in venture capital investment, more than half coming from outside the country [3] . With capital investment flow internationalising, Asian conglomerates looking to invest beyond their core markets are likely to seek fintech opportunities within the UK, as it&rsquo;s the case of the Malaysian Sovereign Wealth Fund, which opened an office in London in 2015. Early stage vs mature fintech startups: Brexit losers and winners So far, investment in UK fintech companies do not seem to have slowed down. Venture capital investment for FinTech firms increased by 37% [4] compared to 2016 figures according to Innovate Finance. However, these figures need to be put in perspective, and in strong relation to UK fintech startups&rsquo; maturity. Out of the $564m raised in early 2017, 80% were raised by established fintech ventures, companies that have been operating for an average 5+ years [5] . If the maturity cycle of a fintech startup is closely examined, two distinct phases appear: phase 1 (3-4 years existence), when product-market fit is tested; phase 2 (4+ years), when product traction is established. Phase 2 - when the startup is mature - is when peak investments occur. If we look at the Brexit impact on fintech investment, it is unlikely that it will slow down investment for mature ventures. But the big question is that of early stage investments, that heavily rely on local market investments (EU private and institutional funding included). Fintech startups vs banks: too small to fail? Brexit may be the most significant economic demerger of economies since World War II, and it is clear that Brexit will have a strong impact on traditional financial services and corporate banks. Already, some are designing contingency plans to move some departments in more favourable legislations &ndash; plans that the Bank of England has ordered be disclosed earlier in July. For international financial corporations of this scale, the impact on their bottom line would be hard to ignore, and relocating trading and investment teams, the best option for the likes of Deutsche Bank, Goldman Sachs or JP Morgan [6] . Startups however, operate in micro environment rather than at a macro level. Their scale mean that they are ultimately less directly impacted by macroeconomic events, and are by nature more flexible to adapt to policy changes. While it is true that Transferwise and Azimo have announced transfer of HQ in continental Europe, other fintech champions such as Revolut or Trussle have not declared any plans to settle outside of the UK, focusing on the growth strategy defined pre-Brexit. How fintech start-ups can capitalise on Brexit Ultimately, Brexit will bring along pitfalls but also opportunities for the fintech industry. For those start-ups not exposed to passporting requirements or regulatory changes, they should be able to withstand the Brexit storm and continue to do business as usual. Brexit, while impacting their strategy, should not prevent their future scalability in terms of access to investments or an access to talent pool. However, if a startup is reliant on heavily regulated activities in a post-Brexit environment, then it should consider re-shaping its business model and establishing organic growth within and beyond Europe, perhaps by moving part of its workforce, or establishing local branches to diversify its bottom line. When it comes to the relationship between a fintech startup and a corporate client, Brexit will undoubtedly generate a considerable amount of complexity, namely if the two players are to operate in different legal environments. But it will not threaten fundamental relationships; similar to post financial crisis&rsquo; increase in regulation, Brexit, while adding challenges, will not discourage entities that rely on each other to grow. The UK&rsquo;s affirmation to remove itself from the European Union has raised more questions than it has provided answers. Whilst London remains the capital hub for fintech for now, there are clearly concerns about its economic status in the long-term. Already, several hubs are racing to capture talent and investment. It is likely that Brexit will provide an opportunity for other startup ecosystems to strive, and that we will assist in the long run in a fragmentation of leadership. Any good entrepreneur will assess its environment and make profit of the best opportunities. 1 KPMG, The pulse of Fintech &ndash; Q2 2017 2 Lynsey Barber (2017), &ldquo;Post-Brexit passporting questions hang over fintech too&rdquo;, City A.M.(www.cityam.com), 5 July. 3 Jemima Kelly (2017), &ldquo;UK fintech investment smashes pre-Brexit levels so far this year&rdquo;, The Independent (www.independent.co.uk), 26 July. 4 Innovate finance :new.innovatefinance.com. 5 Atom Bank ($102M), Funding Circle ($101M), Revolut ($66M), Receipt Bank ($50M), Zopa ($41M), Prodigy Finance ($40M), Monzo ($27M), and Currency Cloud ($25M). 6 Jill Treanor (2017), &ldquo;Deadline looming for firms to give Brexit strategies to Bank&rdquo;, The Guardian (www.theguardian.com), 8 July.

RECHERCHEZ UN ARTICLE, UNE CHRONIQUE, PARMI L'ENSEMBLE DES PUBLICATIONS

RECHERCHEZ UN AUTEUR

Archive

European Finance in a post-Brexit era

What impact will Brexit have on fintech start-ups?

Numerous key factors will determine the success of UK fintech startups in a post-Brexit era, such as regulatory and passporting rights, continued investment and access to capital, and the UK’s continued attraction for fintech entrepreneurs.

À retrouver dans la revue

Banque de détail

[Web Only] Tarifs bancaires : les banques amortissent l’inflation

Blockchain/Cryptoactifs

Les garanties bancaires
sont d’excellents cas d’usage

Banque de financement et d'investissement (BFI)

« Paris est le centre de gravité
pour tous les instruments financiers traités en euros »

Paiements

Le droit de la responsabilité civile appliqué à des virements frauduleux en devises

Archive

Panorama réglementaire des actifs numériques

Archive

Sberbank : une valeur anéantie à zéro en fonds de portefeuille

Archive

La transformation repose sur des directions responsables et des équipes pluridisciplinaires

Suivez-nous

RECHERCHEZ UN ARTICLE, UNE CHRONIQUE, PARMI L'ENSEMBLE DES PUBLICATIONS

RECHERCHEZ UN AUTEUR

European Finance in a post-Brexit era

What impact will Brexit have on fintech start-ups?

Numerous key factors will determine the success of UK fintech startups in a post-Brexit era, such as regulatory and passporting rights, continued investment and access to capital, and the UK’s continued attraction for fintech entrepreneurs.

À retrouver dans la revue

[Web Only] Tarifs bancaires : les banques amortissent l’inflation

Les garanties bancaires sont d’excellents cas d’usage

« Paris est le centre de gravité pour tous les instruments financiers traités en euros »

Le droit de la responsabilité civile appliqué à des virements frauduleux en devises

Panorama réglementaire des actifs numériques

Sberbank : une valeur anéantie à zéro en fonds de portefeuille

La transformation repose sur des directions responsables et des équipes pluridisciplinaires

Les garanties bancaires
sont d’excellents cas d’usage

« Paris est le centre de gravité
pour tous les instruments financiers traités en euros »