Time To Panic For London’s FinTechs?

It’s been a week since the Brexit vote, and the market has widely agreed that a wait-and-see mentality is probably the best way to survive the residual volatility. That may be true for some, but Tomas Likar, VP of Strategy and Business Development at B2B payments technology firm Hyperwallet, says the FinTech space and businesses maybe aren’t sufficiently concerned about the long-term effects of the vote.

“I find it interesting that the impact on the U.K.’s citizens has been well debated with volatile currency, higher interest rates and impacted real estate valuations named as the most likely Brexit outcome,” the executive recently told PYMNTS. “However, the impact on the U.K.’s businesses, specifically in the financial services sector, will be the crucial factor to observe.”

Brexit will deal a blow to the U.K. corporate community in several ways, Likar predicts.

First, for businesses of all kinds, FX volatility will present a few challenges. While FX hedging against volatility risk has been commonplace for European companies for some time, Likar added that the GBP has been pretty stable – until now.

“For most businesses that means additional FX exposure and another currency that they need to hedge,” he said, adding that the GBP may no longer move along the same path as the euro like it typically has. “This will definitely lead to higher cost, especially in the next two to three years when the U.K. will face a lot of uncertainty.”

The volatility of the British pound also presents a new obstacle for multinational companies’ accounts payable departments, he added. “I assume British companies will be pushed by their international partners to increasingly trade in EUR instead of GBP to avoid this volatility,” Likar predicted, though he did note that he believes the U.K. will remain within the EU’s SEPA payments clearing system, allowing British transactions to remain domestic.

Finserv‘s Future

Any business is likely to see some kind of effect from Brexit, whether large or small, at home or abroad. But the financial services industry, Likar argued, could be facing some strong headwinds.

Payments and FinTech firms are now facing an uncertain licensing environment, for example.

“The Financial Conduct authority as always been friendly to global payments companies and new FinTech business models,” he said, a position by authorities in London that explains why the country has grown to be such a destination for global FinTech innovators. Obtaining an eMoney license from the FCA is relatively easy, and that license could then be extended to help these businesses enter into the rest of the E.U.

Following Brexit, FinTech companies will no longer enjoy that ability, however.

“Companies that established their European headquarters in London, applied for FCA eMoney license and subsequently ‘passported’ this license to other European countries will have to find an alternative path to the European market,” the VP explained, adding that FinTech firms will now have to apply for licenses with different regulators, and are likely to consider relocating altogether.

Likar pointed to Switzerland as an existing example of this challenge; finserv firms in Switzerland, which may have close diplomatic ties to the European Union but is not a member, had traditionally used the tactic of securing U.K. licenses then passporting to enter into the rest of the EU, “a practice that they will have to quickly reconsider,” he said.

Regulatory hurdles will likely emerge as some of the tallest for FinTech, Likar suggested.

“Large processors and cross-border acquirers with physical location in the U.K. might be required to move their operations to the continent to satisfy the E.U.’s privacy and data security laws,” he said.

Finally, Likar said, the financial services and technology space is likely to take a particularly difficult blow thanks to incoming changes to the movement of people in and out of the U.K.

“I believe the impact on the U.K.’s prime talent pool will be critical,” he noted. “Even though I agree that this competitive advantage will not disappear overnight, Brexit, combined with the U.K.’s stricter work visa policies, the reduced attractiveness of British schools for European students, and a weakened pound could lead to a gradual outflow of some of the U.K.’s prime human capital.”

If an exodus of FinTech innovators out of London does indeed occur, it will only exacerbate this problem.

Last week, U.K. business minister Sajid Javid said corporations should not panic in the wake of the Brexit vote.

“Our economic fundamentals remain strong,” he said in an interview. “They’re strong enough to weather any short-term market volatility.”

But Hyperwallet’s Likar has some different advice, especially for London’s FinTech scene: be prepared.

“Europe has never faced a situation like this before and for payments companies, there are certainly reasons to be worried,” he warned. “The U.K.’s financial services economy is about to face some unprecedented challenges, so being prepared to make some tough business decisions is crucial.”