Much hot air was generated on either side of the Brexit debate, both before and after the 2016 referendum, right up to the official exit date last year. Around 80% of the CEOs and employees of FinTech firms voted "Remain" according to an Innovate Finance poll carried out soon after the referendum vote. This will have had an impact on the way a post-Brexit UK FinTech ecosystem will have been perceived and forecast in the run-up to 31st December 2020. But now we're five months into the new year; rhetoric and personal beliefs no longer matter. What counts is the reality.
For UK FinTech firms to compete within the EU, there are now more - and in some cases higher - hurdles to jump. Chief amongst these is the requirement to have an actual EU base of operations. Being based in London or other UK cities is no longer sufficient.
Jack Wilson, Head of Policy and Regulatory Affairs at TrueLayer, an open banking TSP (Trusted Service Provider) and API intermediary, says, "Brexit has been a challenge for all UK-based firms who want to continue providing regulated services into the EU, the biggest obstacle being the need to establish EU headquarters in order to provide regulated services into EU member states."
However, when it comes to the ease of setting up such a headquarters, not all EU countries are created equal. Some have a more welcoming regulatory regime than others, along with the necessary infrastructure and educated workforce. Lithuania, for example, has more than doubled its FinTech sector in the past four years, partly as a result of Brexit.
Some of that increase has come from home-grown FinTech firms but a significant number are familiar names that started elsewhere but have created or enhanced their presence in Lithuania partly in order to tick the "EU HQ" box. Curve, Square and Revolut are among hundreds of FinTechs with a significant presence in the country.
Other countries may follow Lithuania's lead in welcoming UK FinTech firms, if the rewards make it worthwhile. UK-based FinTech firms with sufficient resources may also look to acquire smaller EU-based firms, if the cost and time of setting up their own EU HQ are too great.
Then there's operating legislation. FinTech compliance is a complex and varied beast across the EU. Although broadly based on strict EU regulations such as PSD2 (the Revised Payment Services Directive), interpretation of those regulations isn't the same in all EU countries. In an interesting twist, some of the existing UK regulations and implementations are actually of a higher standard than those in the EU, meaning that UK firms are already fully compliant with EU laws - at least for now.
Kieran Hines, Senior Analyst, Banking, at Celent, explains: "In addition to setting clear guidelines and standards for the industry, these have been strongly enforced by the OBIE [the UK's Open Banking Implementation Entity]. The situation in Europe is a little further behind, and varies quite a bit between markets."
TrueLayer's Wilson agrees that the regulatory environment in the UK is a plus point: "Although [Brexit has been] challenging, there are also opportunities because the UK is still home to a lot of FinTech innovation thanks to the regulatory environment that has been established here."
Another significant challenge is data regulation. The European Union's GDPR (General Data Protection Regulation) governs the storage, processing and usage of personal data on EU citizens, wherever in the world that storage, processing and usage may take place. The UK is still bound by GDPR when processing EU citizens' data. The UK and EU are currently discussing a data adequacy agreement that would be acceptable to both sides, but there's no knowing at this stage what might happen should - in the worst-case scenario - the UK decide to withdraw from GDPR altogether. More clarity will hopefully come within the next two months.
What's sometimes forgotten is that Brexit is a two-way effect. Although the UK’s exit makes it harder for UK FinTechs to operate in Europe, it also potentially makes it harder for EU-based FinTechs to operate in the UK. So while UK firms may find themselves less competitive in Europe, they may also have less competition at home. This, if not an outright benefit, may soften the blow of Brexit for some FinTechs.
There are other reasons to believe that the UK FinTech industry won't vanish in a puff of EU compliance requirements. "We've also seen, for example with the Kalifa Review that there are opportunities for the UK to get ahead on Open Finance, and to fix issues with existing legislation based on EU rules such as PSD2," says Wilson. "However, with that comes the potential for divergence from those EU rules that could present future barriers for cross border trade."
Brexit has certainly been a challenge for UK-based FinTechs, and those challenges will continue, but where there are challenges there are opportunities. UK FinTech firms aren't simply going to roll over and die. After all, these are firms that by definition were set up to be innovative, disruptive and flexible. Regardless of one's personal perspective about Brexit, the future of UK FinTech firms in Europe is far from a foregone conclusion.