After nearly three years of negotiations, the UK left the European Union on January 31, 2020. The UK & EU have until December 31, 2020, to iron out their new policies and the details of their new relationship going forward. When it comes to finance and fintech, most of the new and emerging players in the market have previously banked on free-market regulations to be able to operate in multiple countries in the EU from the UK.

Passporting

Financial players aiming to enter a new market in the EU have the advantage of doing so by applying to provide their services in other member countries if they possess the required licenses in their home country. Emerging fintechs in Europe have expanded their services across multiple markets because of passporting, for instance, German digital challenger bank N26 can provide its services in the UK even though it only possesses a German banking license. However, now that Brexit has formally been initiated, N26 has announced that it will cease operations in the UK from April, thus exiting a very profitable market due to regulatory concerns. The neobank will shut more than 200,000 customer accounts across the UK.

This will be a growing issue among other fintechs as well — UK fintechs hoping to expand into other countries in the EU with their UK banking or e-money licenses can no longer do so. While EU fintechs have the benefit of applying for only one additional license in the UK, in comparison, UK fintechs will shoulder heavy costs and administrative expenses for each new country in the EU going forward. Some fintechs, such as Payoneer, have begun applying for EEA licenses by opening offices in Ireland in a bid to continue their operations for their clients across Europe. Several UK fintechs that meet the requirements to acquire licenses and provide their services in the EU are considering expanding to the US instead, in favour of a larger, untapped market with fewer competitors.

Will London continue to reign supreme as Europe’s fintech capital?

As of September 2019, London led the overall fintech investment in Europe at $2.11bn, followed by Berlin ($881m), Stockholm ($734m), Paris ($330m) and Milan ($49m). The UK capital saw 2019’s investments exceed previous years’ totals within the first eight months itself. In fact, London (114) overtook both New York (101) and San Francisco (80) in the number of deals. In Europe, London has long since held the title of ‘Fintech Capital’ — both the level of investment and the number of deals far surpass any other region in Europe. London attracts a wider international variety of investors than other European hubs, with 39% of investors coming from outside Europe, compared to 32% in Berlin and Paris with 24%.

Several major financial institutions and fintechs have chosen London as their main branch because of the higher levels of funding & investment opportunities as compared to other European cities. Additionally, the law of free movement has allowed startups & established players to hire the best developers from applicants across Europe. London’s multicultural environment allows for people all over Europe (and the world) to work for such fintechs, leading to a concentration of world-class talent in the city. But with Brexit now officially underway, London (and the UK) will lose access to their pool of EU applicants, forcing some major fintechs to either relocate their businesses or open a new branch in the EU, increasing both operational & administrative expenses. As a result, UK fintechs will most likely expand their operations to the US. For instance, recently, TransferWise and Monzo have both entered the US market, partnering with incumbent banks across the pond to reach a larger market.

What’s Next?

While it is too early to fully understand Brexit’s impact on fintech, the industry will witness slow but steady changes over the course of the transition period in 2020. N26’s exit from the UK is not likely to be the last fintech pulling out of the UK market as costs of operating outweigh the benefits. While the UK treads lightly on its new relationships with the EU, it is forming closer bonds with the US, Australia, Singapore, Canada, and India in a bid to explore new markets. The UK is also exploring new regulations to provide its residents with better control over their financial data. The recent Open Banking mandate within the PSD2 aims at providing customers transparency over their finances and who they choose to share their financial data with.

While the UK is not currently poised to face any major threats when it comes to fintech and finance, it is expected that the growth rate might hit some obstacles once the transition period ends. With the loss of passporting regulatory licenses into the UK, several global players might reduce or completely withdraw their UK presence as it becomes a considerably less commercially valuable European base.

 

At Penser, as experts in fintech, we track new developments in digital banking, payments, cryptocurrency, blockchain across the globe. We offer digital transformation, strategic planning, and due diligence services. Contact us to find out how we can help you boost your business. We are based in London but our clients span the globe.