After U.K. Vote to Leave the EU, Will Payment Companies Leave London?

London has been a magnet for technology startups, buoyed by a favorable regulatory environment and proximity to many of the world's largest financial institutions.

While it's still too early to detail impacts on specific companies or ongoing investments because of the U.K.'s referendum vote to leave the European Union, one result in the first 24 hours has been a dose of cold water on London's reputation as a friendly venue for innovation in payments and other industries. More than half of a recent ranking of top startups in London are in financial services or payments, a track record that's threatened by the new political climate.

The U.K. is not immediately leaving the EU. To leave, the U.K.'s government would have to evoke Article 50, which would be followed by a long negotiation. Economists are predicting a downturn in U.K.'s economy as a result of a depature from the EU, and that will have a downstream impact on the country's payments technology scene. The vote is also expected to cause substantial volatility in the banking industry, both inside and outside the U.K.

"The U.K. economy is likely to suffer and that will impact payment volume," said Tim Sloane, vice president of payments innovation at Mercator Advisory Group. "As an example,  several fintech startups are located in the U.K. specifically because of EU laws that enabled companies to deploy payments across the EU. That’s over and so I would expect relocations might occur."

Speaking to the U.K. financial technology wire Finextra, Simon Black, CEO of the PPRO Group, predicted the U.K.'s exit could cost the country £5 billion in lost tax revenue over the next 10 years as the country's estimated 500 fintech companies assess their options.  

There's also political fallout that could hurt other payment products.

"This vote also reflected some concerns around immigration, if the UK places stronger controls on immigration, which seems likely, it will impact cross border remittance growth," Sloane said. "The anti-immigration stance may also spread to other European countries which would further impact volumes."

In a statement to the general media, Craig James, chairman of the Prepaid International Forum, called on the U.K. government to maintain the country's favorable regulatory environment for financial services companies. “Many financial services businesses, especially the rising number operating in the fast-growing prepaid and e-money sector, have chosen to base themselves in the U.K. due to excellent access to the EU, a skilled workforce and high quality sector regulation," James said.

Not all predictions were as dire. Mike Laven, CEO of Currencycloud, a London-based payments automation company, said the city's future as a financial technology hub was still strong.

“There’s no doubt that the nation’s decision to leave the EU has major macro-economic implications - negotiations will be long and ongoing – and this uncertainty alone means we can expect significant volatility ahead," Laven said in an email, adding London’s advantageous time zone, strong financial history and FX expertise aren’t going to disappear overnight.

"It took decades to develop the infrastructure of firms, services, lawyers, insurers, intermediaries, and myriads of financial niches and massive personnel base that makes London special," Laven added. "Talk to European tech entrepreneurs and they are concerned about being cut off from London’s resources. Will it get more difficult—of course.  But with our contingency plans in place we’ll avoid the doomsday scenarios.”

As the U.K. negotiates its withdrawal from the EU, a process that may take years, there will be pressure to maintain a collaborative posture in building international standards for faster payments processing and security, such as the Single European Payments Area (SEPA), a "faster payments" initiative, and PSD2, an initiative to ensure regulations accommodate new payment technology.

"There are more questions than answers at this stage, including what happens with various payment initiatives and regulations, such as PSD2," said Zil Bareisis, a senior analyst at Celent. "Having said that, the U.K. has already taken a leadership position regarding a wide range of changes in financial services, such as Open Banking, and I expect that will continue regardless of the outcomes of negotiating with the EU."

Carole Cisse, communication manager for the European Payments Council, would not comment on the vote, but noted that countries that are not part of the EU, such as Iceland, are part of the geographic scope of SEPA, and the U.K. vote won't change anything for the U.K. regarding the SEPA schemes.

"It would seem obvious that the U.K. will still need to utilize standard payment messaging protocols for moving money, and that some networks, such as Swift, have its own governance that should make usage transparent to Brexit," Sloane said.