With Article 50 triggered and the UK’s impending exit of the single market, a new US president, and a raft of European elections in 2017, the number one question I am asked is how Brexit, Trump and populism affect fintech.
Here are my verdicts on these issues:
Brexit impacts UK fintech in three areas: investment, financial services passporting, and access to talent.
VC investment in UK fintech was down 34 per cent in 2016, but we retained our global position of third place behind China and the US. The UK had a bumper quarter of fintech funding in the third quarter following the referendum, with four of the largest deals completed in 2016. Half of UK VC funding comes from abroad, so ensuring we remain attractive to foreign investment is a top priority. On call outs with global VCs, the consensus is that Brexit was a blip on 2016 investment with most stating they invest in talent, which creates great companies.
Verdict: Investors are fickle. Whilst some of the Brexit dust appears to have settled, follow the money in global fintech for signs of change in momentum. Watch for the government’s Patient Capital Review to incentivise the participation of institutional capital.
Passporting will be unavailable to UK fintechs once the UK leaves the single market. It might be extended by a transitional arrangement for a temporary period before full withdrawal.
Only a small percentage of fintechs doing business on the continent use passporting, mainly in the payments, remittance, foreign exchange and e-currency space.
Less than 20 per cent of Innovate Finance members that are authorised to passport use it, and our member surveys indicate that many look to scale their businesses to the US before Europe.
Verdict: The removal of passporting does not currently appear to impact a large number of UK fintechs. Pay attention to Brexit negotiations and fintechs threating to move their headquarters to Europe. Watch for signals that the EU plans to incentivise fintechs in the single market by enacting new fintech passporting legislation that reduces barriers to capital requirements and enables easier cross border trade.
Talent drives innovation and attracts investment. If your fintech ecosystem is not in the US or China, you are likely to sub-scale on both talent and VC investment.
The UK government’s position on European residents in the UK is being watched closely, though it appears likely to be resolved to the satisfaction of most unless negotiations become acrimonious.
Some 30 per cent of Innovate Finance startup members’ founders or CEOs are non-British - the competition for STEM talent is global and becoming more competitive.
Verdict: The UK has built its financial services hub over many years and has fintech talent in spades with over 60,000 fintech resources. Look for the expansion of visa schemes to attract more global STEM talent.
The new President has made Initial calls for the repeal of Dodd-Frank and the scaling back of the Consumer Financial Protection Bureau through a review by the Treasury. Banks and fintechs in the US have demonstrated that they are successfully collaborating, though the result of the Review could tilt benefits either way.
Measures aimed at curbing immigration are at the top of the US tech sector lobby, it is estimated that 40 per cent of the talent in Silicon Valley is non-US residents. Though VC investment in fintech was down by 13 per cent in the US in 2016, there were 650 deals funded, a sign of healthy ecosystem.
Verdict: Too early to tell - politicians and pundits are focused on how effectively the new administration will be able to legislate. The West Coast has led the technology sector for more than 50 years, the East Coast still dominates global financial services, and fintech is booming, none of which is likely to be excessively slowed down by government.
The UK referendum and the US election caught many by surprise. With the rise of populism, mature democracies are learning that half of the voters feel they are not being listened to, and this is reflected in voting results. European elections in 2017 are being watched closely.
Populism is often used as a proxy for anti-globalisation. It implies a focus on nationalism, bringing back lost jobs back, and filling those jobs with domestic rather than foreign workers. History teaches us that the practical consequences of such measures can often result in a reduction in investment and flight of skilled labour.
Verdict: Governments must find ways to attract foreign talent and investment while ensuring their homegrown populations are equipped with the right skills for the digital industry, with fintech and the movement of money at its core.