Brexit's Shadow Grows Over London's Fintech Scene

Azimo is happy to call tech-friendly London home for its money transfer business, but it can't help peeking at a map to scope out a new base of operations should the politics of Brexit turn sour.

"We are planning to stay in London, which is the fintech capital of Europe thanks to the access it provides to investment, world-leading talent and a positive regulatory environment," said Marta Krupinska, Azimo's co-founder and general manager. "However, in the event that London loses its ability to [export] financial services, we would need to reconsider our position. If we did need to move the company to protect our staff and our future, we would do so."

The Brexit vote has had all sorts of fallout, most of it speculative since it may be years before the U.K. actually leaves the European Union. However, companies that rely on the U.K. as an easy portal to Europe or a bridge between Europe and North America stand to face serious challenges and are suddenly thrust into a big set of unknowns, from uncertain regulations to how to manage worker passports.

And businesses that rely directly on U.K. currency as part of their business model, such as Azimo, face an immediate near term impact even though the U.K. remains part of the EU today, and it isn't good. "The decrease in the value of the pound resulted in migrants getting less for their hard earned money when they send it to their families and friends back home," Krupinska said.

Compliance for remittance and other transfer companies could get sticky, according to Talie Baker, an analyst at Aite Group. Getting licensed in London allowed companies based in the U.K. to do business across the European Union, Baker said.

"With Brexit, it is now possible that separate licensing will be required in the U.K. from the rest of the European Union," Baker said. "This could add some additional cost for companies doing business across Europe along with some additional hurdles to being able to do business."

The Brexit vote caused immediate volatility with the dollar moving to 30-year highs against the pound, said David Nicholls, a vice president at USForex. "Some of the strength has waned but the U.K. decoupling themselves from the European Union is a complicated road and further sharp movement can be expected."

The volatility could lead to unforeseen costs. To manage the risk, Nicholls said transfer companies need to work with a partner that can collect in other countries, reduce hidden FX costs of up to 3%, speed up the delivery of payments and, when necessary, help hedge against volatility.

The uncertainty around currency is an opportunity for Ripple, a distributed ledger company that has supported virtual currencies but is also increasingly becoming the guts behind cross-border payment companies looking to avoid fee-extracting parties such as correspondent banks.

"Geopolitical changes like Brexit help put a spotlight on issues in our industry, and we've seen banks and their customers become increasingly vocal about the need for faster, more secure settlement solutions," said Chris Larsen, Ripple's Co-Founder and CEO. "We can't afford slow and uncertain payments across borders when the markets are changing so swiftly, and that's why many banks, and not just those in the European Union, are looking to adopt blockchain-like technologies."

The real solution is interoperability between payment systems, which is why Ripple and other companies support the Interledger Protocol, an open Web protocol for payments, Larsen said.

Like Azimo, Ripple is confident in London's ability to endure as a technology center, at least in the short term.

"Earlier this year we chose London as Ripple’s first office in Europe due to its role as a global hub for innovation, and we believe it will continue to be one of the most important financial and fintech centers in the world," Larsen said.

For the fintech sector, Brexit has created great uncertainty, Krupinska said, and that may pressure the company to relocate.

"Even now that we know that the final decision is to 'leave' the European Union, we do not know how this is going to evolve in the next few months and it could even take years," Krupinska said.

Many companies here depend on both European market access and the legal right to export their services to the rest of Europe, Krupinska said. "I anticipate that we’ll see many finance players moving some, or potentially all, operations to elsewhere in Europe. Frankfurt, Amsterdam and Dublin are all obvious candidates. "

The uncertainty does not worry WePay, a U.S.-based company that is opening an office in the U.K. to serve North American companies planning an expansion, as well as British companies that serve WePay's specialities in powering cross-border payments for crowdfunding, fundraising and software companies.

"London is at the heart of European financial technology innovation and a natural place for us to expand our product," said Bill Clerico, WePay's CEO.

The long process tied to Brexit, and less-than-stable politics on the continent, should help London keep its allure, according to Gareth Lodge, a senior analyst in Celent's banking group.

"Until Article 50 is triggered nothing changes and that may take up to two years," Lodge said. "Even then, as no country has ever left, it's not clear what then happens. Assume a conservative estimate of five years to negotiate trade deals; what happens in those five years?"

The U.K. also has its time zone and the scale of its financial services industry working in its favor, Lodge said. "Given the political turmoil across Europe, it's difficult to imagine a U.S. firm considering setting up anywhere else."

But entrepreneurs are known to look past the risks when the opportunity is clear.

"The good news is that the fintech industry is thriving across the whole of Europe, and Azimo already has a second office in Poland, so we would be well-positioned to continue to thrive from elsewhere. But in the meantime we will continue to hope that the U.K. maintains its leading position," Krupinska said.