What banks can learn from fintech CEOs’ reaction to Brexit

By:
Peter Lee
Published on:

Start-ups fear a funding stop and loss of access to the single market, but are already making back-up plans that could point the way for their peers in the more established parts of UK finance.

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The grey clouds couldn't be ignored at Level39 in Canary Wharf this week

Two weeks after UK voters chose to take the country out of the EU, members of London’s fintech community gathered at Level39 in Canary Wharf to work out their response.

Their chief short-term worry is a sudden stop in investment and liquidity from the financial backers that had amply supported tech-enabled start-ups in financial services until a slowdown in the run-up to the vote.

Lawrence Wintermeyer, chairman of Innovate Finance

Lawrence Wintermeyer,
Innovate Finance

Their medium-term worries – continued access to the European single market and ability to attract highly mobile top-class talent – are the same as for the bigger banks in London. The speedy response of the fintech firms might even point the way for the incumbents.

London is by far the biggest hub in Europe for fintech start-ups, having attracted over $10 billion of venture capital between 2010 and 2015, putting it in a global bracket with Silicon Valley and New York.

As Europe’s established financial capital, home to 250 banks and financial institutions, London had the critical mass to grow its fintech sector rapidly after the global financial crisis threw many experienced financiers out of the big banks.

The UK government has embraced fintech. The City’s lead regulator, the Financial Conduct Authority (FCA), sees it as part of its mission to encourage competition to the incumbent banks by helping fintech firms through the approval process.

It has just closed the first round of invitations into a 'regulatory sandbox’: a safe space for innovators to experiment with as yet unauthorized business models under the gaze of the regulator.

In the sandbox, the FCA hopes to learn how its own regulation might need to adapt to emerging technology while start-ups can reduce time to market by avoiding building something that regulators eventually knock back.

This regulatory support has been a key differentiator for London that leaves even rival hubs in the US green with envy.

However, many of those firms were set up in London with a view to offering their services into the European single market and disappointment at the referendum result hung heavily in the air.

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Mike Laven,
Currency Cloud

Asked for their one-word response to the Brexit vote, a panel of fintech CEOs responded variously with "opportunity", "uncertainty", "sadness", "democracy", while Mike Laven, CEO of Currency Cloud, a secure cross-border payments engine for SMEs, needed two words that drew most murmurs of agreement from the crowd: "It sucks."

Survey results suggest support for Remain ran at 80% among those employed in fintech in London.

Jeff Lynn, co-founder and CEO of equity crowdfunding platform Seedrs, spoke for many when he bemoaned the sudden diversion of all his efforts into re-assuring staff, customers and investors.

"It feels like I had been playing offence," he says. "But since the referendum, I’ve been playing defence."

Practical

Yet entrepreneurs are practical people. While the British government still has no plan for negotiating a new trading deal with Europe, within 10 working days Lawrence Wintermeyer, chief executive of Innovate Finance – a convening body for fintech firms in the UK – had already surveyed members, identified their key concerns and set up action plans.

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Jeff Lynn, Seedrs

Deloitte is offering corporate finance advice to young firms that might need to restructure terms of stalled funding rounds or face problems with liquidity. Ernst & Young is developing a lobbying effort around securing of tier-1 visas for workers with the essential skills and tier-2 visas for entrepreneurs seeking to build fintech businesses. Hogan Lovells is offering advice around passporting and regulatory compliance.

In each category there is mixed news. Gerard Grech, chief executive of Tech City UK, suggests the first funding term sheets closed after the referendum result, for three small deals, are encouraging.

"We are starting from a strong base," he says. "We are one of the few countries with a dedicated visa scheme for fintech people and smart talent will always look at the density of the ecosystem. Yes, there is uncertainty now. But that’s only going to get better."

John Egan, senior director at Anthemis – a venture investment and advisory group specializing in fintech – says that while local, sterling-based venture capitalists might pause now, "we may see a lot of new funds from the US and Europe reach across and fill the gap. We have raised a lot of money in the US and may actually become more aggressive in the UK. And we are not the only investors talking like that."

He adds: "We are seeing the beginning of a flood of corporate money into fintech. Capital is not going to be the problem that London will face."

That remains to be seen. This flood of corporate money will be needed to compensate for loss of capital from the European Investment Fund, part of the EIB group, which fosters innovation and entrepreneurship in Europe and which has channelled a large proportion of its investments in fintech into London.

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Damian Kimmelman,
DueDil

The more established fintech firms were groping for an upside if venture capital sits out uncertainty over passporting and access to the single market for the next two to three years.

Damian Kimmelman, co-founder and CEO of DueDil, says: "The market [for venture capital investment in fintech] has been frothy and investors have a lot of jitters. But actually, as a funded growth company, I would like to focus now on unit economics.

"What I would be most worried about is an overfunded new competitor coming into this space."

While fintech companies founded four or five years ago might now relish the funding ladder being pulled away from potential rivals, that is very cold comfort for start-ups and early-stage companies looking for series B and C funding rounds to build out newly proven business concepts.