In January 2020, the UK left the European Union, ending 47 years of partnership. The transition period of 12 months ended on December 31st, 2020 - and the UK is now into its complete post-Brexit state.
At a time when digital transformation has turbo-boosted growth in the industry globally, we take a look at the changes that have occurred in Britain - the world’s second largest fintech hub - and how it is managing the changes.
Fintech outposts in Europe
While the pandemic has been raging and dominating the headlines, fintech operators in the UK have been quietly managing a crisis of their own. The impact of Brexit has resulted in significant changes in several key areas - not least the fact that many talented, UK-based fintech experts originally hailed from EU countries.
Other challenges include licensing problems, increased costs, reduced market options and confusion over how data should be handled now the industry is no longer under the strict regulatory eye of the EU.
Karl MacGregor, co-Founder and CEO of Vyne, an Open Banking account to account payment technology firm, says the greatest impact of Brexit on fintech companies has been caused by the restricted access to EU markets. He explains, “In order to offer EU businesses payment services, or sell to EU merchants, we now need to be regulated in Europe, which requires having a European entity, or partner with another business to provide these services.”
And though setting up an outpost presence in Europe can circumvent this problem, it's an expensive and time-consuming business, which, MacGregor points out, introduces, “significant new costs, delays, and complexity – especially as neither the UK nor the EU have increased the speed at which they approve new businesses.”
As such, he concludes, “there is currently a huge backlog of businesses unable to operate effectively.”
Overcoming post-Brexit challenges
However, despite the obvious difficulties that have faced UK fintechs, some experts say that preparation has been key in limiting damage, and many companies have managed to cushion the impact due to good forward planning.
He explains, “The fundamental change, without a doubt, is that the UK is no longer part of a common system, which means that so-called license passporting is changing. Therefore, even before Brexit, during uncertainty, everyone hastily started looking for licenses in Europe. As a result, many companies now have both licenses in the UK and the EU.”
However, he admits the cost of that preparedness has not been cheap for the sector, even though the investment has ultimately paid off. “Fintech itself has clearly faced a negative impact as a result, requiring additional investment, time, and so on. On the other hand, for some, this has become an advantage for licensed activities. Two licenses instead of one can significantly reduce several risks. Of course, providers who have adapted to a more diverse environment have advantages.”
Passport problems for UK fintechs
Brexit resulted in the rights of EU professionals to work in the UK automatically being removed. Many European nationals also returned to the EU following Britain’s exit from the trade collaboration.
In February this year, the UK government put legislation in place to decrease the problems surrounding fintech experts from the EU working in Britain. The scheme provides visas to fintech experts from the EU, and is similar to the currently existing Global Talent visa, which was developed in partnership with the industry body Tech Nation - the UK’s startup network for technology entrepreneurs.
It is hoped that the move will fill the gaps in the workforce in the financial technology sector, created due to a loss of skills from the EU following the UK’s departure from the European bloc at the end of January 2020.
However, the problem is not that simple to solve, says MacGregor, who points that there are still far too many roadblocks in place that are hindering companies in their hiring processes.
He says that until the UK Government and EU agree on streamlined equivalency and passporting processes, most UK fintechs will suffer. “The UK fintech industry has been built on diversity and expertise, attracting people from across the EU and, indeed, the world. Brexit introduced restrictions that reduced the talent pool, particularly for technical roles, which could hinder innovation across the sector.”
For those Fintech companies already established in Europe, the repercussions of Brexit will have been fairly minimal. But for those companies only based in the UK, the impact would have been significant, points out Andrew Doukanaris, CEO of the payment solutions fintech start-up Pomelo Pay.
“They would have lost all their European customers and been unable to trade on the continent until they’d managed to register an office somewhere in the EU and secured a new banking license. Consequently many companies would have wasted an entire year of business trying to navigate this transition.”
However, he continues, it's not all doom and gloom. The pandemic created an increase in demand for cashless and contactless payments, with more and more businesses and consumers turning to digital banking. “So, despite Brexit, the UK Fintech sector has experienced significant growth and recently hit a multibillion pound peak of investor interest.”
Governance changes to the fintech sector
The ongoing COVID-19 pandemic also took a toll on the route the UK had designed to keep its services sectors streamlined. Yet, despite all these, companies in the fintech sector must comply with so many changes in governance that Brexit has brought.
For example, offering services and products to an EU-based market will involve more paperwork than ever. Considering that fintech institutions must deal with contracts, KYC, and relatively complex things, handling everything from a UK-based headquarters could become problematic.
Similarly, there is an even bigger puzzle when it comes to GDPR and data management. Britain was one of the many countries to accept the EU’s GDPR. As a result, institutions now must move the data stored in the EU back to the UK for seamless access.
In short, the governance changes brought by the fintech sector are not to be overlooked.
Doukanaris confirms, “The change in banking license requirements is without doubt the biggest governance shift impacting UK Fintech companies following Brexit. Previously, they could passport their UK banking license to other European countries enabling them to serve customers right across the EU. However, from March, their UK license was no longer valid in the EU and companies had to apply for a separate European license to serve European customers. This is a fairly laborious process requiring you to register an office somewhere in the EU, with license applications taking up to three months.”
Fintech in Europe after Brexit
It's not just UK-based fintechs that are feeling the post-Brexit pinch as users from the EU who are using UK-based fintech services could potentially face issues too. But MacGregor says positive strategies that work with the new restrictions could strengthen the UK’s fintech services globally.
He says, “The UK is in a fortunate position; we can take existing European regulations and build on them to create a world-leading framework that allows British businesses to innovate and create new market segments.”
MacGregor points to the recent Khalifa Review and says the report was the first step towards a future where the UK cements its role as the leading fintech hub ahead of challenger nations, but only in the right conditions.
“In order to continue to lead Europe in fintech, disruptors must be empowered to disrupt, challengers cannot be stifled by incumbents, and the fiscal gaps between startup and established businesses must close.”
He also believes that simplifying and streamlining regulatory and crossborder application processes will increase both market participation and competition. “These were two of the primary aims of PSD2. This will drive more, and faster, innovation in the UK and Europe and remove the regulatory hurdles that hinder growth today.”
The future of fintech
Ultimately, measures taken prior to Brexit seem to be paying off. The UK-based digital bank Curve is one example of this. Following Brexit, fintech obtained governmental approval in Lithuania and launched an operation that enables it to keep serving customers who are in the European Union. This move also transitioned the authority from the UK to the European Union, thus enhancing the company’s customer base.
“All challenges, both licensing and GDPR as well as simple business technicalities aspects, are currently being addressed. However, it is not yet clear what will happen in the future, whether there will be major differences in terms of regulation, in terms of data protection and whether there will be additional barriers,” Kanapienis says.
But ultimately, the future of fintech in the UK is bright, and although there have been some casualties along the way, in general, Brexit has not wrought the negative destruction that was predicted for the space.
Doukanaris says that despite Brexit and the pandemic, London has maintained its status as the Fintech capital of Europe. “Fintech is one of the fastest-growing sectors of the UK economy. New figures by Innovate finance show that the UK Fintech sector raised a total of $5.7bn in H1 2021, an increase of 34% from the previous year ($4.3bn).
“Over the next 10 years, we will continue to see the UK Fintech sector flourish in creativity and innovation and cement its position as the Fintech leader of Europe.”
He continues, “An important change is to make sure there’s enough financial support for early stage Fintech startups. Despite Rishi Sunak recently launching the government’s £375mn Future Fund, a scheme designed to drive investment in innovative firms of the future, some Fintech companies may struggle to be eligible unless they’re at the cutting edge of R&D. So, I believe there should be more allocated funds from the government to help Fintech startups thrive in this crucial early stage.”
The UK has not lost it’s international appeal either, and is still considered a leading fintech hub, says MacGregor. “Happily, despite Brexit, many skilled workers from across the channel do still find the UK an attractive place to settle and work. It is crucial that British businesses can continue to access European talent, so the government must eliminate as many of the unwanted logistical hurdles for these in-demand individuals as possible.”
Kanapienis agrees, and says stability has been achieved and fintech in the UK will continue to thrive and be world-leading, despite the dire pre-Brexit predictions and the added complication of a pandemic.
“A number of European countries have exploited Brexit by inviting financial companies to license and set up offices in their countries, but the pace seems to have slowed significantly and the need is no longer as pronounced as it initially seemed. As a result, the UK will certainly remain the capital of fintech for the next 10 years.
He adds, “Europe does not yet see an environment that can compete successfully with the UK, as there must be synergies between both the business environment and regulation.”
Fintech is forging solutions post-Brexit
Mark Lamers, CTO of Vartion - a Netherlands-based technology company, says, more challenges will be encountered, alongside new opportunities. “The expected move of financial services assets and people from London to the European mainland is yet to happen. London will remain an important financial hub and will continue to support the growth of an innovative UK FinTech industry to cater to its needs. However, we believe that many challenges lie ahead, starting with the attractiveness and retention of highly qualified FinTech professionals in London''.
"Brexit’s newly introduced immigration policies, followed by the COVID 19 pandemic, have deeply affected labour dynamics. We see a new generation of flexible and international professionals seeking dynamic, family-friendly and multicultural places to work and live, with great transport links and a favourable business environment. The Netherlands provides just that."
“We do not see a divergence but rather increased collaboration between FinTech hubs and solution providers, in Europe in the future. As the European Union has clearly stated its ambitions to become a global tech champion, we see greater opportunities to build synergies and partnerships. Ultimately, it will depend on the support the European FinTech scene gets from both European and national governments. We might see more private and public initiatives to foster greater innovation across Europe, assist with start-up creation and lead to the development of competitive hubs”.