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September 21, 2016updated 30 Sep 2016 12:26pm

What Brexit means for UK fintech

The UK’s fintech sector feared the Brexit vote - three months on from the referendum, how has Brexit impacted UK fintech?

By James Nunns

In the run up to the Brexit referendum on the 23rd of June, the UK’s fintech sector was vocal in its fears about what the vote would mean for them.

Top of the fears for the sector were a squeeze on future funding, and a potential drain on talent out of the UK. Three months after the decision to leave the European Union was revealed, it is necessary to see what actual impact the leave decision has had.

Before Brexit, the UK, and London more specifically, was held up as being one of the world leading centres for financial technology and a global hub for the banking sector. On a global scale London ranked as a global leader of fintech, with strong competition from the likes of New York and Hong Kong, according to research from Robert Half Financial Services UK.

On a European level the UK dominated the FinTech 50 report in April, taking 31 of the 50 spots, with 29 of them in London.

The referendum ballot paper gave UK citizens the chance to vote to leave the EU.

The referendum ballot paper gave UK citizens the chance to vote to leave the EU.

This highly desirable position at the top of the tree has been hard earned and a large amount of thanks can be apportioned to the regulators, the Competition and Markets Authority (CMA), and the Financial Conduct Authority (FCA).

What is really important though is staying at the top; the more desirable the sector, the more the UK is likely it is to attract top talent and continue to push the boundaries.

So it is perfectly understandable that there would be a great deal of anxiety with regards to Brexit. The uncertainty it would cause with regards to venture capital funding, access to Europe, and the ability to attract the best talent.

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Monzo Bank (formerly Mondo) founder and CEO Tom Blomfield told CBR just after the referendum result: “It will damage capital investment into the country from abroad, it will damage our ability to passport across Europe and access 500 million customers, it will damage our ability to attract and retain the best talent across Europe, it’s really bad.

“It means we will probably be looking at a second license in Europe which entails millions more in costs, it probably entails opening a second office somewhere like Berlin, it means we will hire staff in Germany not in the UK, it means it will be harder to raise capital, all of these things are bad for this country, so it’s hard to put a positive spin on it.”

Currently it is unknown whether these scenarios will actually come to fruition as the banking industry as a whole came to terms with seeing large amounts of their valuation wiped out following the vote.

However, it would seem that not all is bad. Shares in Metro Bank reached an all-time high at the end of August, while some of the challenger banks are now also seeing it as an opportunity because the pressures of the EU may force banks to cut back on innovation, leaving room for challengers to sneak in.

When it comes to funding and the attractiveness of London there is no clear evidence to suggest that the capital and UK as a whole has lost its appeal.

In EY’s Attractiveness Survey in May, London was ranked as the second most likely city in the world to create the next big tech giant. So is fintech still an attractive proposition for venture capital?

According to KPMG’s quarterly Pulse of Fintech report deal activity globally dropped by 12% in Q2 2016 on a quarterly basis, down 11% on the same period last year. The quarter saw a slight decline in UK investment, although no figures are given, and Germany saw more than 80% more funding to VC-backed fintech companies than the UK did in Q2 2016.

KPMG's Pulse of Fintech Report for Q2 2016.

KPMG’s Pulse of Fintech Report for Q2 2016.

An argument could be made that this comes as a result of Brexit, and it might well be, but this might just be a short term reaction in fear of the vote. Until Q3 and Q4 VC-investment figures in the UK fintech sector are revealed, it is impossible to suggest a trend.

One thing is certain though, UK fintechs will be hoping that VC-investment returns quickly.

On the whole, investment into London and UK-based technology companies has remained strong since the vote, with British tech firms attracting $200m of VC funding across 42 deals, according to research from London & Partners, the Mayor of London’s promotional company.

The source of the research is important because it highlights the charm offensive that is being put forward by the UK and London to assure businesses, banks, fintechs that London is open for business.

In fact that is the campaign hashtag and slogan being put forward by senior business leaders from the likes of Google, Barclays, Baroness Martha Lane Fox, Sherry Couto, and the Mayor, #LondonIsOpen.

The problem with the result of the Brexit and the following three months is that nobody really knows what is going to happen. Challengers that have just been granted a banking license don’t know if they will have to apply for a new one in the EU, they don’t know if they will have the same access to the market.

That is currently the legacy of the vote and business will operate as usual until there is clarity.

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