What impact has Brexit had on fintech innovation?

This year’s Kalifa Review of UK FinTech is a clear sign of two things. The report, published in March 2021 by HM Treasury, will direct national policy thinking on the fintech sector in the wake of Brexit. It shows that the UK Government:

• recognises that fintech is at serious risk from growing global competition and regulatory uncertainty caused by Brexit
• wants to ensure that UK fintech will continue to have the resources and business environment it needs to thrive

The review was carried out by a man with his finger on the pulse: former Worldpay chief Ron Kalifa.

His report highlighted the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies. In it, he urged the UK to "move fast" to maintain momentum for fintech.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry,” he said. “We should be setting the standards and the protocols for these emerging solutions.”

The facts behind his findings speak for themselves:

• At the end of 2019, the UK’s fintech sector was worth £11 billion in revenues
• Fintech accounted for roughly 8% of total financial services output
• 44% of fintech companies based in Europe and valued at over $1 billion are located in the UK

London retains its financial edge

London sits behind only New York and remains Europe’s only major global financial centre.

But Brexit has resulted in several EU Member States seeking to position themselves as safe harbours for fintech.

So while the City of London is still top for banking in Europe, its rivals are growing fast. Among them are Frankfurt, Amsterdam and Paris.

Even Lithuania and Malta have let it be known that they can provide new homes for UK-based fintechs. Lithuania even ran a PR campaign pre-Brexit, promoting itself as ‘the new capital of fintech’.

Does the UK remain a fintech world leader?

The answer, currently, is yes. London is home to two thirds of the UK’s fintechs and remains recognised as a world leader.

Firms are coming to terms with a new Brexit reality. There has been much friction for companies shipping goods between the UK and the EU. But for fintechs it has been less disruptive.

Most fintechs are international by design. So compliance with different regulations across jurisdictions is something they are used to.

Positively, Deloitte has led a comprehensive data review of the UK fintech landscape. It analysed fintech locations, fintech growth patterns, their strengths, and the driving forces behind them.

Deloitte identified identified 25 clusters of fintechs in the UK. Of these, 10 were high growth fintechs: a London ‘superhub’, three established clusters and six emerging fintech clusters.

Future fintech outlook in the UK

The outcomes of the Kalifa Review give reason for optimism, notably on two important issues: data regulation and access to talent. (Much of London’s tech expertise is foreign.)

The review recommendations provide a pathway to ensuring that the UK retains its leadership.

This will be via sweeping changes that will lead to a ‘digital big bang’. On the table are a new listing regime, new visa rules to draw talent and a £1 billion fintech growth fund.

These have been broadly welcomed by the fintech community. “I welcome the Fintech Strategic Review and the Government's commitment to ensuring that the UK remains a world leader in innovation and growth,"said Nik Storonsky, co-founder and CEO of Revolut.

"As Revolut’s founder I know the importance of the UK's commitment to innovation and to being the best place to start and scale a fintech.”

Currently, the UK is also still the leading European fintech hub when it comes to funding startups.

According to a report published by Innovate Europe, the UK ranked second globally, after the US, with €3.3 billion funds raised in 2020 for venture capital.

But there is steady growth among other European countries: notably Sweden, Germany and Portugal.

The story of fintech in the UK, and Europe, is yet to be played out.

But with the Kalifa Review, the UK has put its mark in the sand.

As John Glen, economic secretary to the UK Treasury, has said, the UK must not rest on its laurels.

"All it takes is a bit of complacency to slip from being a leader of the pack to an also ran.”