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Brexit and the Future of British Fintech

London is at the heart of the worlds of Tech and Finance (lending, investment and insurance). This geographical win means that London has had the opportunity to not only hand pick the best talent from the UK and all over Europe, but also allow the city to become Europe’s fintech capital. With many European companies congregating in London for Tech Week, Thursday’s referendum left me wondering about the future of fintech if a Brexit were to occur.

Expensive innovations such as Fintech stem from the inflow of money, so I thought it might be helpful to explore how a Brexit could change investors’ appetite for the sector. To do so, I used the POCD framework devised by Bill Sahlman (a successful venture capitalist before becoming Harvard Business School Professor). This framework (People, Opportunity, Context and Deal) was devised to evaluate early stage business investments.

People – the people in the startup

While trading with the entire world sounds appealing, the reality is that Europe is on our doorstep and it is a lot easier to do business with neighbouring countries than to jump on a long-haul flight to either Asia or the USA.

Being part of the European Union has allowed British fintech companies to easily recruit english speaking European nationals, who bring strong IT competencies or drive pan-European sales

We have been told that a Brexit would allow UK companies to trade anywhere in the world and hire people from anywhere in the world, which sounds great. However, unless time and costs for such visas are reduced dramatically, this will not be a viable option for businesses involved in the startup ecosystem which are time and cash constrained.

Opportunity – total addressable market

The comfortable time zone difference and geographical proximity are not the only reasons why fintech companies want to trade with their European Union neighbours.

Indeed, the EU Passport allows British companies to freely sell into any other European country, without incurring any additional regulatory costs. Hence, by making some adaptation for local market specificities (eg language), a UK fintech company’s potential addressable market isn’t just the UK (65M people), but the entirety of Europe (500m people).

With a Brexit, the UK will no doubt be able to negotiate new terms but it is unlikely these would be as favourable as the EU Passport. This will come at a significant cost for the financial services sector and fintech businesses. Hence, one can foresee the greater appeal to be setting up in Paris or Frankfurt over London as the potential population (and customers) would be 440 million, not UK’s 65 million.

Context – regulations and economic conditions

The potential for dramatic change to the UK, European and International financial sectors is significant. However, regulation is a big barrier to entry into any country’s financial services sector.

Compliance with these regulatory costs can be prohibitive for a startup. British fintech companies presently thrive from the UK having the same regulatory frameworks as European countries as it allows them to sell into Europe without additional regulatory costs.

Hence, even if we were to ignore all of the warnings from various international economic institutions about the potential for the British economy to shrink in the case of a Brexit, leaving the EU would increase the regulatory cost of doing business for fintech companies seeking to sell to neighbouring countries.

Deal – the investment terms

In order to launch and grow, fintech companies need financing from investors. As highlighted above, for a UK fintech business to address a similar market size as presently available, it will need to incur more costs. As a result, more money will need to to be raised for a UK fintech business than a competing European startup. Smart investors always follow the money and as European-based fintech startups would have access to a larger market, they would be more attractive to investors than UK-based ones.

In conclusion, with greater regulatory and operating costs to maintain a similar market size opportunity, it is questionable whether investors would continue to favour UK fintech startups over European-based ones. Hence, if Britain were not to remain in the European Union, it would most likely see its status as Europe’s fintech capital waning. 

By Dylan Bourguignon, CEO at so-sure.  

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