One month on from Britain’s vote to leave the European Union, markets are volatile and the tech industry could face years of uncertainty. With banks under pressure and questions flying around investment, EU skilled workers and passporting (to name a few) is there a light at the end of the tunnel in the form of fintech?
After a period of initial panic in the wake of the referendum, where concerns over withdrawal of investment in the UK market made many a headline, we are starting to see the scales regain balance with high-profile tech investment deals like Mastercard’s acquisition of London fintech VocaLink for £700 million or Softbank’s plans to acquire the chip designer ARM Holdings for £24.3 billion. Technology investors have always had an element of risk to weigh up; while Brexit has indeed exacerbated that risk the potential reward will still be enough to entice some, perhaps at lower rates and on a less frequent basis for the time being, but as the innovation continues, so will the people who see its potential and want to become part of it.
A rise in fintech
During the lead-up to the Referendum, the financial technology (fintech) market has continued to grow and develop. Last year the UK’s alternative finance industry grew to £3.2 billion (84 per cent up on the previous year). New digital start-up challenger banks such as Atom, Mondo and Starling Bank are marketing themselves to young internet savvy users who are fed up with the restrictions that come with traditional players.
This new breed of digital bank is looking to plug into our rapidly increasing use of technology as old-fashioned branch visits decline, with the offering of competitive savings account rates, user friendly app interfaces to manage your money and small business loans solely via an app. It is this use of real time data and modern technology to speed up and simplify processes that gives fintech companies an edge.
This was demonstrated recently in the announcement that NatWest and RBS are considering charging firms to hold deposits. With global interest rates at consistently low levels and the announcement of the BoE interest rates, these traditional lenders have warned 1.3 million of their combined business and commercial customers that they may be the first forced to introduce negative interest rates – an action which will undoubtedly spur business customers to explore other, more agile forms of funding.
The traditional banking sector will continue to be at risk as the UK economy fluctuates in the coming months or even years; an increase in unemployment and lower wages is expected, bringing with it an increase in bad loans. Banks will need to tighten up their loan books which will not be an easy task given their inability to act quickly. Archaic systems and technology does not stand traditional banks in particularly good stead when it comes to rapidly identifying performing vs non-performing loans. Their appetite for new business will likely decrease as they focus on sorting out what they already have.
These archaic and legacy systems, developed over hundreds of years, have become a burden to traditional banks. They are expensive to maintain and inflexible in times of change, causing the big lenders to take a step back and slow down lending. Established banks face higher costs than newer fintech companies who are unencumbered with expensive high street branches, tens of thousands of staff, big pension funds, and layers of management.
In UK fintech hubs, success lies largely in a high concentration of talent where former banking professionals mix with tech-savvy entrepreneurs to create the fintech hybrid. And with post-Brexit headcount reductions on the cards, the pool of banking talent is about to get even bigger. However with the future uncertain for overseas workers, who make up a large proportion of tech experts working in UK fintechs to plug the skills gap which has become evident in UK graduates, will the UK hold the same appeal? My money is on yes.
The capital of Fintech
Obstacles and uncertainty aside, London is still a vibrant and exhilarating place to live, it is still the Fintech capital and it is still brimming with innovative and exciting start-ups. The global talent that makes up our culturally diverse tech ecosystem hasn’t gone anywhere, it’s important that we keep it that way. A sentiment displayed earlier this month when fintech coalition Tech London Advocates, issued a message signed by Mayor Khan and over 150 tech leaders to all overseas and EU nationals working in London to thank and reassure them that they are welcome in the community that they helped to create.
While there are some aspects of post-Brexit life, like investment or EU skilled workers, that will undoubtedly affect all fintechs, there are others that don’t. Take passporting, at BlueZest for example we’re domestic so do not rely on access to the EU’s single market and are therefore (at least in this respect) relatively unaffected by Brexit. This may be the case for many other domestic fintechs, for example challenger banks, crowdfunders or peer to peer lenders. In this respect some domestic fintechs could have the upper hand.
Obviously many of the payment and FX related fintechs will have some major hurdles to overcome now and in months to come. If the benefit of passporting is for overseas fintechs looking to scale into European markets, businesses like ours and the many other innovative fintechs out there, who don’t rely on this benefit could be better placed to operate successfully in post-Brexit Britain.
* ‘Pushing Boundaries’ report by University of Cambridge Centre for Alternative Finance and Nesta in partnership with KPMG
Russell Gould is CEO of BlueZest.