Bon voyage, EU, Hello world.  Or something like that.

Last Friday, Britain said good-bye to the EU, embarking on a new life as a fully independent country no longer tethered to the mast of regional integration.  But there are plenty of questions to come—like how will it leverage its independence to its economic (and financial) benefit.

One theory holds that Brexit, especially a Hard Brexit, will be catastrophic for fintech—immediately.  London’s status as a global financial center derives from its status as a gateway to Continental Europe.  Traditionally a firm coming from the US, Japan o r China, could establish itself in London, and then sell its financial services or products throughout Europe.  But if a hard Brexit occurs, and all economic ties are severed, the UK will loose its ability to offer firms a ‘passport’ to EU member states. Overnight, the valuation of all UK-based financial firms could fall if they haven’t set up affiliates in a EU-member state and gained from European regulators the appropriate licenses for their operations.  And for fintech firms have borrowed in dollars (or euros), which not infrequently the case for start-ups, the cost of borrowing—and servicing outstanding loans—could spike as the value of the GBP sinks.

Another more optimistic take holds that this won’t necessarily be a dramatic event. Fintechs, despite the impasse—and despite at time bellicose language coming from Brussels and London—are still raising money, and at a brisk clip to boot.  Accenture recently reported that in the last two quarters, investment flowing into UK fintechs nearly doubled, to approximately US$2.6 billion. The volume was also impressive, with the number of deals involving fintech firms jumping 25%, to 263. Of particular interest has been, according to Accenture, young technologically sophisticated banks and payments companies like Monzo, Starling Bank, TransferWise, and WorldRemit.

Finally, a third theory suggests a long, protracted decline.  Whatever the UK’s particular problems for traditional financial firms, the interest in fintech is high.  Some of the potential solutions—from AI-driven investment strategies and advice to distributed ledger payment infrastructures—have an international interest.  And with the talent in London, investment dollars have flown to the capital and nearby areas to drive forward the scaling up of new players in the sector as well as novel collaborative partnerships between fintechs and banks.

However, as the investment cycle matures, and investors begin to scrutinize the returns on their investments, as well as their sustainability, Brexit will start to compromise the industry. Not only will new (and in some instances permanent) compliance costs be built into UK firms providing services for activities based in the EU, but also the human capital serving as the basis of the city’s comparative advantage will gradually atrophy.  According to some estimates, up to twenty percent of people working in the fintech sector come from the EU.  However, Brexit could end up cutting off the spout for such foreign workers. EU nationals looking to work in the sector and migrate to London would have to apply for a work permit—which in a post-Brexit UK may be difficult to come by, and in any event departs dramatically from today’s open borders policy for EU nationals.  Just as important, talent may not want to come to Europe due to a sense that they may be disadvantaged, discriminated against, or restricted in terms of their employment and career goals.  Instead of going to London, they might choose  to move elsewhere, like Toronto or Singapore.  Or they might just stay in their home countries scattered across the EU.

If I had to choose a theory, the third sounds most likely, but the results could depend on what subsector of the fintech industry you’re talking about.  Peer to peer lending could be very differently impacted than, say, cybersecurity or blockchain-backed financial industry.  But I do think it’s safe to say that if the UK’s economy contracts because of Brexit, which is what one would expect, fintechs will have fewer potential clients—and suitors like banks seeking to purchase them from entrepreneurs and investors.  Thus though money for fintech projects and ventures may be plentiful now, there will be more pressure for innovative and young to show positive business results sooner.

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