Impact Of Brexit On The UK Lending And Fintech Industry

On 23rd June, 2016, UK voted to leave the European Union. Now six months later we are amidst the after effects of Brexit. Given the tremendous speculation on Brexit...

Auke Veenstra 16th December 2016

On 23rd June, 2016, UK voted to leave the European Union. Now six months later we are amidst the after effects of Brexit. Given the tremendous speculation on Brexit even before it happened, the decision, although with a slender margin, triggered immediate chaos across businesses. Stock markets plunged downwards, currencies dropped and business confidence suffered.

Financial services and banks, and especially, the growing fintech market also suffered from the aftershocks of the event.

Per a recent Barclays report, the uncertainty associated with the UK’s vote to leave the EU, seems to have made the UK corporates more cautious about carrying out financial transactions. Deal volumes were down 77% between 23rd June and 18th August, compared to the same period last year. Meanwhile, year-to-date loan volumes in 2016 are down 49% in the UK compared to 2015 year-to-date loan volumes. Brexit has cast a shadow of uncertainty in the banking sector and prolonged the current low interest rates.

And with Europe proposing stringent rules to  make the local subsidiaries of foreign banks in Europe stronger and safer, other concerns emerge. EU has proposed three strong pillars of regulations; chief among them  being toughened capital and liquidity requirements for lenders’ subsidiaries in Europe. The amount of debt banks can issue to investors will now be calculated at the level of the subsidiary vis-à-vis the group, requiring each European subsidiary to individually meet the requirements. This is costlier and raises concerns that EU is acting to protect its own banks against foreign competitors.

The lending industry will not only get impacted from the perspective of the big banks but for emerging fintech companies as well. London has been the fintech capital for long. With the decision to exit EU, this position is likely to be threatened. Post Brexit, investors have been cautious and uncertain. It is reported that more than 30 fintech companies in Britain lost funding.

With restricted movement of human resources across borders, UK now has limited access to the skill sets available beyond the UK borders among the 28 EU nations. With Brexit, Berlin was quick in claiming the European fintech crown, while Singapore is already replicating the sand-box concept that drove UK fintech to success and is close behind in attracting new startups.

While Brexit might not spell doom for the UK fintech industry, it has raised deliberations among companies while starting or expanding their business to Europe.

The major concerns that may lead to a slowdown in the lending, banking and fintech industry are:

  • The potential loss of passporting, the mechanism that allows businesses to operate seamlessly across 28 EU nations, is a threat to banks, financial services companies and fintechs.
  • Loss of access to skilled resources across EU nations will now restrict and discourage movement of knowledgeable resources in the UK economy.
  • Stricter banking regulations for foreign banks and businesses can also spike up taxes and ultimately lead to higher interest rates passed on to customers and borrowers.
  • Due to regulatory uncertainties, banks and fintech companies may decide to relocate their European headquarters hurting the overall lending market in UK.

Amidst all the above dire speculations, there is a view that Brexit could even potentially turn out in favor of the UK lending industry. Brexit may free UK from following EU regulations which are not necessarily favorable for the UK economy. Post Brexit, UK is free to implement regulations benefitting domestic companies and banks.   For foreign banks, operating out of UK as its European headquarters, a lot needs to be thought out and decisions need to be made. The regulatory changes in the UK economy and the European Union must be considered and evaluated, along with the cost of operations or relocation. The advantages of operating in the UK versus other European countries need to be debated. The availability and accessibility to human resources, consumer markets and technology needs to be weighed out. In short, this is no time to sit back or be reactive, it’s time to be proactive.

The actual impact of the above trends is still in play and yet to be fully seen, but, quoting Andy Grove, former CEO Intel, “Bad companies are destroyed by crisis. Good companies survive them. Great companies are improved by them.”

The 2008 financial meltdown, gave birth to the the fintech revolution, we believe that Brexit will inspire new innovations and positive developments.

Smart organisations are already investing in new-age innovative technologies like machine learning, big data, robotics, blockchain and more, while building strategic partnerships to counter the effects of Brexit and build the new generation of fintechs.

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