A lot has changed in the short amount of time since the day the United Kingdom formally severed ties with the rest of the European Union. We affectionately remember this day, June 23, 2016, as Brexit. The decision of Brexit by UK diplomats has been called into question by fintech experts around the world, especially given that London’s hard won status as the fintech hub of Europe has come under threat.
The Financial Hub of Europe – No Longer?
For the past few years, London has devoted a lot of resources into becoming the fintech capital of Europe. As a result, companies and individuals in the industry have flocked there to take advantage of the favorable atmosphere for doing business–including extensive government backing, a wealth of private investors, and an extensive pool of affordable talent. Fintech in London has grown thanks to the unique feature of providing support for those dealing with cryptocurrency and blockchain technology.
It’s only been about two months since Brexit, but it’s already possible to see the effect of Brexit on fintech around the world. At this point, it’s unclear whether London will retain its status as the financial hub of Europe.
The Effect of Brexit on Fintech Around the World
Before citizens voted for the UK to separate from the rest of Europe, politicians had an idea of what Brexit could look like. K&L Gates shared highlights of the likely consequences of separation, summarized below:
With the UK separated from the rest of the European Union, the Payment Service Directive (PSD) is no longer binding for financial businesses in the UK. The PSD provides the legal structure for the single market for payments across the European Union. This means that all new regulations (of the revised PSD2) that are to be implemented in January 2018 will become obsolete for banks and third party operations in the UK.
The effect of Brexit on fintech in the UK is also evident in their need to renegotiate terms related to data sharing and data protection for global customers – terms previously covered by existing European treaties.
Brexit also means the potential loss of passporting (uncertain as of now), a system that has been allowing businesses to easily operate across the 28 EU nations. Big banks and insurance giants would be affected the most by this loss.
Because of Brexit, all transactions between UK and EU organizations will no longer be considered “internal.” This will result in additional limitations, like tariffs when importing and exporting goods and new tax issues when working with members of the now-separate European Union. The possible differences in regulations between the UK and the EU can lead to increased paperwork and fees for fintech companies.
One of the most important features of the European economy is its free flow of goods, services, and workforce within member countries. After Brexit, UK companies will have a harder time staffing their workforce. Up until now, the UK has been benefitting from cheaper employees coming from all over the continent.
The immediate effect of Brexit on fintech around the world included these sobering stats that happened immediately after the UK’s split from Europe was announced:
- Various U.S. stock futures were down by more than 3%
- The pound plunged to a 31-year low
- The London FTSE 100 dropped ~8%
- The German Index fell by 10%
- The France Index took a 7% hit
- The Dow dropped ~3.4%
- The S&P 500 dropped 3.6% (the largest decline in almost a year)
Why did these drops occur? Many would argue that the UK’s exit from the EU signals a drop of confidence in central banks.
A New Fintech Hub?
The effect of Brexit on fintech around the world will likely see a gradual shift of financial service providers and professionals from London to Berlin. A recent report from Reuters’ author Caroline Copley shows an increase in the number of people from London’s fintech industry opting for similar jobs in Germany.
The effect of Brexit on fintech in the UK hasn’t been all confusing or negative, however. Due to stock market movements and the strength of foreign currencies (like the dollar) relative to the pound, the UK has become an investment attraction destination for many firms.
The UK becoming an investment attraction isn’t much of a surprise, as it’s common investment advice to expand during a recession or other events with a favorable effect on interest rates/other related cost savings. Some firms that have invested in UK fintech since Brexit include NFT Ventures, a Swedish fintech venture capital firm, and Credit Kudos, a startup reinventing the way credit scores are generated.
It’s unclear how long these unique market conditions will exist, and if companies will still stand by their decision to stay in the UK in the coming months and years. It’s important to note that although investments may grow in UK fintech for months to come, Jeremy Kahn and Adam Santariano of Bloomberg mention that it’s unlikely to see any new IPOs until uncertainty has shaken out.
The Future of Fintech in Europe
According to a recent MarketWatch article written by Victor Reklaitis, London is still considered to be the biggest fintech hub for the “foreseeable future.” However, in a recent column, Fintech Times founder Katalia Lang predicted that sectors will still become more decentralized and spread across the continent. As a result, some fintech firms in London have heavily considered leaving the English capital.
Ultimately, the future of fintech in Europe and the long term effects of Brexit are hard to predict at this time. It’s not yet clear how long it will take for the UK to become fully separated. Another pressing quandary is whether or not Scotland and Ireland (both UK territories)will also vote to separate from the European Union. Though not Fintech capitals in their own right, they still account for a significant amount of economic activity in Europe.
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