The UK’s Brexit vote was the biggest electoral surprise of 2016—until November 8. And since the details behind Britain’s separation from the European Union (EU) continue to evolve—to put it mildly—its resulting economic impacts remain uncertain.
I visited London a couple of weeks after the referendum, and met with a shell-shocked colleague to discuss its likely ramifications for the UK’s financial services industry. He reminded me of an EY report issued earlier in the year that outlined the key components of a successful fintech ecosystem.
Since this report predated the Brexit vote it was mostly devoid of political pretext (despite its pro-UK lens), making it a valuable framework for evaluating the likely landscape changes.
With that in mind, let’s look at the four pillars identified by the advisory firm EY as essential to a thriving fintech ecosystem, and how they are likely to be impacted by Brexit.
For those who wish to play along, it’s easy enough to extend the model to evaluate the U.S. fintech market outlook given its own policy uncertainties.
This factor should remain mostly unaffected by foreign entanglements or the lack thereof.
Absent a protracted economic slowdown, consumer demand is likely to return to equilibrium.
After an adjustment period, business demand should reset as well, provided there aren’t fewer globally focused enterprises remaining on UK turf.
As defined by EY, policy considerations should likewise be OK. As UK lawmakers learn to interact with the EU, a pragmatic approach is likely to prevail, laying the groundwork for a reasonable level of interoperability.
This sentiment was echoed by another London-based fintech expert whose perspective I sought. He pointed to Norway (a non-EU member) as a model worth emulating.
A common foundation with their peers and customers on the European continent is essential to UK banks, and they’ll find a way to achieve it.
Herein lies the danger zone. A highly skilled and rapidly replenishing workforce is by most accounts the fintech commodity in scarcest global supply.
The loss of free movement and the resulting loss of access to talent can only be a negative from a fintech perspective.
One could argue that educated employees filling in-demand roles were not the target of those who saw Brexit as a means to limit immigration. While a revamped visa system could conceivably be implemented to address these needs, it would offset at best a portion of the damage done to the UK’s access to the EU talent pool.
At a minimum, the transaction cost of recruiting human capital will increase. More worrisome is the potential message conveyed to these in-demand technicians.
Won’t other world capitals with fewer restrictions and similar job openings suddenly look more attractive by comparison?
This one remains something of a wild card. There’s no question that capital—whether for investment or acquisition—was scared off in Brexit’s immediate aftermath.
The market soon rebounded, thanks perhaps in part to the pound’s seemingly permanent 10% devaluation that made UK assets less expensive. It’s a well-worn adage that markets hate uncertainty, and Brexit is poised to limit visibility for years to come.
At this point lawmakers are still kicking the can down the road, unable to agree even on when to file formal notice of intent to leave the EU. Until greater clarity is achieved, it’s difficult to tell whether access to capital will be a short- or long-term issue.
To be clear, London still holds many advantages as a fintech capital. Given time to reclaim their stiff upper lips, the city’s proponents have built a solid case for ongoing success.
Several tech bellwethers have reaffirmed their local commitments, and arguably a post-EU London may offer an improved tax environment. But in an intensely competitive market, it’s hard to envision a scenario in which Brexit doesn’t constitute some net negative to the ecosystem.
Two things are clear to me amid an otherwise murky outlook: Skilled human capital is a precious commodity and a necessary ingredient for success, and fintech remains a field coveted by business communities worldwide.