11 July 2016

Brookings: After Brexit, London can kiss fintech startup growth goodbye

London’s role as Europe’s financial services center has been called into question as a result of the UK’s decision to leave the European Union – the “City’s” future in the world of finance is very much in doubt.

London may suffer more as it relates to financial technology (aka FinTech) firms. FinTech is a growth industry with new firms emerging daily to challenge the existing system of how we transmit money (PayPal), use credit cards (Square), get a loan (Lending Club), or even what we think of as money (BitCoin). Before Brexit, London had many advantages, including a smart regulatory system for FinTech and a strategic desire to attract and grow that part of the industry. Already there are over 60,000 FinTech jobs in the UK -- more than in other potential hubs like Hong Kong, Singapore, and Australia combined. A report by E&Y ranked the UK over states like California, cities like New York and countries like Singapore in terms of attractiveness to FinTech, leading the UK’s Economic Secretary Harriet Baldwin to conclude that “We are the global capital for FinTech.” [...]

Today, in a post-Brexit world, if you were a start-up financial services firm, would you locate in London?

Given the uncertainty about access and rules going forward to reach the European Common Market, as well as reaching the United States (recall that the US and UK have no independent free trade agreement), it is hard to justify choosing London over the alternatives. Leaving or locating outside of the UK can be a rational choice even if you are expecting that deals will ultimately be worked out in the UK’s favor, just because of the large downside and uncertainty of what would happen in the event that deals cannot be reached to guarantee favorable access. Major European Union members have publicly stated that they are opposed to granting the UK financial services access (passporting) without agreements by the UK on freedom of movement, which was a major driver of the vote for Brexit. The risks are just too high if you are a start-up, assuming that alternative environments can be found.

For start-up FinTech firms however, they may want to change more immediately as they do not have the large, sunk costs of already being London-bound. This is where the biggest impact could be felt longer term, even if established financial firms stop expanding in London and target their growth elsewhere on the continent. London is not going to go the way of Constantinople (the world’s largest city in 500 AD). But in a post-Brexit world, growth in financial services, particularly FinTech where London was poised to thrive, is likely to look elsewhere.

Full article on Brookings

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