Many surveys, and there have been a lot recently, try to indicate which city or country is a leading FinTech hub. Time and again New York, London and San Francisco come out on or close to the top. But what impact will will the Brexit decision have on the UK's standing? Will we see it plummet down these league tables? Read on to see my view!
UK's leading position as global FinTech Hub
Having spent last week in New York as part of a UK trade mission to NYC, during the city's FinTech Week, it is easy to see why the UK presents such an attractive proposition for FinTech firms. Unlike the multiple supervisory bodies and regulations, at both a federal and state level in the US, the UK operates with much less regulatory complexity. FinTech firms in the UK are by and large supervised by the one body, the Financial Conduct Authority (FCA), with one set of regulations.
The UK regulator, the FCA, is also progressive in having established initiatives, such as the regulatory sandbox, that allows FinTech firms to test their technology prior to starting down the authorisation path. These types of initiatives are critical for FinTech firms when seeking venture capital investment because they have a proof of concept.
One other factor that became apparent last week in New York through discussions with the US FinTech stakeholders, such as supervisors and VC's, is the challenge of technology adoption. Some of the FinTech start-ups I've met in NYC have technology solutions that are unqiue, innovative and provide positive consumer benefit. However, the US seems to lag behind the UK in adopting this technology on a widespread basis. It is only in the past year that chip and pin became common place in the US, whereas in the UK we have progressed onto contactless. The UK presents a really attractive market for FinTechs because the market and users are quick to adopt the technology.
How can Brexit harm UK FinTech?
Not all FinTech firms seek passporting permission into other EEA member states but it is reasonable to claim that a significant percentage do. Whilst FinTech comprises many sub-sectors, such as WealthTech and InsureTech, the largest sub-sector is payments. The firms in this sector are providing consumer friendly platforms to facilitate cross-border payments within the EEA. These firms are therefore heavily reliant on passporting permissions.
Early indications seem to point to a potential loss of passporting rights from the UK into the EU single market. Whilst there is still much water to pass under the bridge before this becomes a reality or not, should the UK lose passporting rights into the EU it surely would encourage FinTech firms to setup in other markets. One option may be another EEA member state to seek passporting permissions or perhaps try and enter a very large market, such as the US despite the complexity around regulation.
The other notable impact of Brexit for potential UK FinTechs could be on business valuation which may make the UK less attractive. As outlined earlier, loss of a UK based FinTech to passport narrows their potential market size impacting revenue capacity. A way around this challenge could be having a UK and another EEA authorisation to still have a broader market. However, this could significantly increase costs. Revenue loss and/or increased costs will ultimatley reduce earnings before interest, tax, depreciation and amortisation thus affecting business valuations. FinTech firms are often driven by providing a tech solution and valuation may not be their mission, but it is critical to any seed or venture capital funding.
So the critical question is does the loss of passporting and potential impact on business valuations outweigh the other positive features of the UK as a FinTech hub?
Ultimately, a smaller market that is UK focused and not EEA wide may not have as much impact for FinTechs as initially thought. The reduction in market capacity is offset by greater market participation/takeup by the end users of FinTech. As my experience has shown me last week uncomplicated regulation, positive supervision and government support are factors that outweigh a reduced market size. Cleary post Brexit, the UK goverment will make even more efforts to attract FinTech firms, which I expect will help bolster the industry further.