- European and British Fintechs After Brexit
- Who Wins, Who Loses
- What are the Effects for the Bulgarian Fintech Ecosystem?
After four years in the making, Brexit has finally concluded, making the UK the first country to have ever left the EU. And as everyone expected, the 1200-pages deal between the two parties contains new rules for working, living, and trading between the UK and the EU – factors, which will greatly impact one of the things London is famous for, its fintech ecosystem. Just to sum up, the key points of the deal are that the free movement of services will end and British fintech would no longer be able to rely on the country-of-origin principle. In practice, this means that the British fintech companies will lose their passporting rights, which are at the core of the EU single market for financial services – basically, they enable companies that are authorized in any EU country to trade freely in any other with minimal additional authorization. Instead, UK fintechs now need to apply for licenses before offering their services to EU consumers, which will multiply their compliance costs and will have more difficulty employing tech talent from EU member states and that may slow down the growth of the UK fintech ecosystem.
Therefore, after Brexit, both established and starting fintech companies are considering finding a new home across Europe. And taking into account that many fintech professionals recognize Bulgaria as one of the fastest-growing fintech hubs in the CEE region, can Sofia become the next fintech destination after Brexit? Well, according to last year’s report of the Future fDI, which is an intelligence division of Financial Times, Sofia was ranked as the number 1 fintech location of the future when it comes to cost-effectiveness.
The Recursive team talked with Georgi Penev, the Director of the Bulgarian Fintech Association, and Dea Markova who is the Senior Director of the Brussels-based business and public policy advisory firm FTI Consulting EU, to see how they believe Brexit will impact the European fintech ecosystem.
The Recursive: Which are the main aspects of the deal that will have an impact on the fintech industries of the EU and the UK?
Dea: There are actually many aspects that are missing from the deal. The so-called equivalence between the British and the European financial markets is left outside of the deal – therefore, the capability of British fintechs to sell their products and services on the European market without additional complication and new licenses is still unclear. This stems from the fact that it is unknown whether the direction that the UK will choose to take will be completely different from the direction of the EU. For example, last month the UK Chancellor of Finance announced that the UK was expecting a 2.0 financial revolution that would focus on market liberalization. This announcement was opposed by the comments of the EU Commissioner of Finance that the EU was expecting no such financial liberalization.
Besides the market equivalence, the other major thing that was left outside of the deal is the data flow between the EU and the UK. Up until the middle of 2021, data will freely flow just as it had been before Brexit, but after this transition period is over, there will follow some serious privacy adjustments.
In order for one environment to become a major fintech hub, five factors needed to be present – the talent, capital, access to market, regulatory framework, and the capability of the sector to create collaborations. From these five factors, there is uncertainty of how difficult it will be for tech talent to obtain visas, how difficult it will be for UK fintechs to sell their products to EU customers, and the future policy directions. All of this will impact capital too.
Georgi Penev: What matters the most is to see what are the advantages and drawbacks for both sides. On the one hand, the EU will lose its most developed fintech market and fintech innovation hub. On the other hand, however, the UK fintech companies will lose a huge customer base and will have to get banking licenses. The biggest problem ahead of the UK is the talent acquisition and the possibility that investors may change their appetite for London fintechs and instead start seeking an alternative in Frankfurt or Munich.
Who wins and who loses? It seems that the deal will bring more negatives than positives, but is there any chance for new opportunities to arise?
Dea: At first sight, both parties will be disadvantaged. The fintech ecosystem of the UK grows due to the abundant tech talent and investment capacity in the country, as well as the capability of big corporations to work with fintech startups, and the well-developed regulatory framework. It is not a surprise that a lot of innovative fintech solutions are developed in the UK. UK entrepreneurs will miss access to the single market and steady inflow of talent. EU citizens and companies will be disadvantaged as they may have more difficulties accessing such cutting-edge financial solutions.
Of course, it is in every entrepreneur’s DNA to look for the opportunities in crisis situations and there are some fintech CEOs from the UK who have made positive comments. Whenever there is friction, there is a product that can solve it.
Georgi: Even though, overall I share the opinion that the cons outweigh the pros, I also see an opportunity for UK fintechs as they will be able to start doing business with countries outside of the EU, which is one of the main reasons why we got to Brexit in the first place. Looking at the situation from a different perspective, new opportunities might arise for countries like Bulgaria as fintech companies will want to get licenses and open offices in a member state that is both cost-effective and has educated IT talents.
Will Brexit lead to any emerging trends for the EU fintech ecosystem and the EU customers?
Dea: The trends will be mainly driven by the policy initiatives and new financial, digital, and security regulations that both the EU and the UK introduce. The European fintech policies will be dictated by the Digital Finance Strategy which the Commission published in 2020. It encompasses a number of spheres – e-paymnets, e-identity, cryptocurrency, the use of supervisory data, and cybersecurity. Other policy initiatives that would be decisive for the emerging trends in the European fintech ecosystem are the policies related to sustainable finance. There is a big momentum for the development of sustainable finance and sustainable business practices in general. This is a major topic for Bulgaria and our neighboring SEE countries. The last policy initiative that might lead to some emerging trends is the plan of the EU Commission to start regulating the large digital platforms, also called “gatekeepers”, to ensure that such tech giants use fair practices and don’t disadvantage customers and business users.
Georgi: There are also concrete technologies, which will be decisive for building the financial future of Europe – for our region, in particular, this is blockchain. We are awaiting the introduction of a major European project – the digital euro, and in the next couple of years, we expect to have some rigid regulations for cryptocurrencies which will increase the trust of customers and investors.
To sum up, the question marks left in the Brexit deal protocols will probably cause some turmoil in the fintech industry – leaving UK fintechs with limited access to talent and customer base, and restricting the access of EU customers to advanced fintech solutions. On the other hand, lost passporting rights might cause UK companies to start opening offices across cities in the EU which is an opportunity for Bulgaria. Even though from a regulatory point of view, Bulgaria has a long way to go before reaching the level of London, Berlin, or Paris, cost-effectiveness and availability of IT talent might turn out decisive for the future development of the local fintech ecosystem.