FinTech at bay - Brexit alarm bells sound in US banks


Profile picture for user cmiddleton By Chris Middleton October 13, 2020
Summary:
There are big challenges facing UK FinTech companies as Brexit looms.

financial
(Pixabay)

The announcement earlier this month that a UK FinTech, ICC Solutions, had secured a deal with a US bank to implement and securely test card, contactless, and mobile payments appeared to be great news for Britain’s financial technology industry.

The UK’s booming FinTech sector is estimated to be worth around £7 billion to the economy and employs around 60,000 people, according to government figures. In 2018, total trade between the UK and US was worth over £190 billion, with Financial Services representing the UK’s largest services export to the US, at £11.8 billion. America is the UK’s biggest national trading partner. 

In 2020, many consumers and businesses have turned to digital and mobile solutions, not just for their banking needs during the pandemic, but also to help manage their finances and payments in the crisis. In six months from January 2020, adoption of Open Banking services doubled to two million, after 2019’s uptake had proven to be underwhelming. 

However, alarm bells are now sounding in the US about the position of London as a financial and technology centre post Brexit, according to a recent report in the Wall Street Journal, which describes US banks pulling more and more assets out of the City.

For example, JPMorgan is shifting $230 billion out of the UK to its German operation, along with 200 jobs – and more to follow in critical functions such as risk and compliance, where the UK has historic strengths. Goldman Sachs and Morgan Stanley are among others moving assets, staff, and/or operations to Frankfurt and Paris. Dublin and Luxembourg are also centres for what appears to be a major outpouring of assets from the City.

Accounting firm Ernst & Young (EY) estimates that $1.5 trillion in banking assets have left London for Europe since the Brexit referendum – a sum equivalent to more than half of UK GDP – along with 7,500 Financial Services jobs.

Yet London’s financial strength is not being quite as deeply eroded as these figures might suggest. The assets of all banking institutions in the UK remain much higher than at the turn of this century. According to Statista, in 2018 they totaled $14.16 trillion, against just $4.76 trillion in 2002 – an increase of nearly $10 trillion. However, there has been a clear and progressive decline from 2008’s peak of $19.8 trillion, just before the financial crisis, with year-on-year falls since 2016.

So the subtext today is that London appears to be losing face with US financiers and confidence is falling. At present, that process is happening in slow motion, but it may yet speed up. Since 2016, at least two surveys of industry leaders have placed New York above London as the world’s leading financial centre, though that was before the coronavirus hit.

Other challenges await UK FinTechs after the Brexit separation in 2021, when the one-year grace period ends and it is no longer ‘business as usual’. First, US strength in financial technology is growing at an extraordinary rate, making it now the world’s leading FinTech hub – above second-placed UK.

According to market analysis firm CBInsights, multimillion-dollar VC-funded FinTech startups can now be found in 43 US states – that’s 86 percent of the country, up from 70 percent in 2019. It stands to reason that US demand for UK solutions may fall in the face of such broad, stellar growth.

By contrast, much of the UK’s strength in this sector is centred in London, which is feeling the strain from a historically deep recession, not to mention continuing uncertainty over Brexit. 

Big picture 

The big picture is important too. The stark reality for policymakers is that while the US is the UK’s top individual trading partner, the EU collectively has a much bigger impact on the British economy. For many tech startups, growing into Europe first is much easier than attempting to set up shop in the US.

Almost half of UK exports went to EU member states last year, with eight out of its top 10 national trading partners being in Western Europe. Germany, France, and the Netherlands are currently the UK’s second, third, and fourth largest partners, respectively, above China.

The UK’s top 15 trading partners, which include Hong Kong, United Arab Emirates, Japan, Singapore, and Poland in positions 11 to 15, accounted for nearly three quarters of all UK exports in 2019. Out of all these to date, the UK has only negotiated a deal with Japan.

So Whitehall must urgently clarify its position on Brexit and do much more to underline business confidence in one area, FinTech, where the UK is genuinely up there with the world leaders.

With Financial Services so critical to an economy that is also seeing an outpouring of assets, jobs, and operations in other sectors, such as automotive, manufacturing, and engineering, the government must also do more to reassure business leaders of its competence.

Likely disruption on the roads out of UK ports from January may not directly affect a UK services sector that is predominantly digital and data based, but may undermine international confidence that the country is open for business.

My take

Often overlooked is another problem – one that is perhaps even more serious, as it appears not to be understood by anyone at high level in government. A potential No Deal with the EU on trade also means no deal on data, unless a data adequacy agreement can be reached before January.

As the Information Commissioner’s Office (ICO) has been warning for nearly two years, no data adequacy agreement could have a disastrous impact on any data stored, hosted, processed, or transferred to and from Europe: UK businesses with EU data centres may still be able to transfer data to Europe next year, but may not able to get it back.

The core issue, of course, is that ‘the cloud’ is a misnomer. It is not a fog of code that crosses international borders at will; the reality is vast data centres built on land under national and regional laws. Many UK organisations are perhaps unaware that much of their data is processed in the EU via the many cloud platforms run by US companies in low-cost European locations.

With the UK Government now sabre-rattling over GDPR in apparent ignorance of the impact of no data adequacy agreement, the UK may yet lose international confidence completely. In a pandemic, that would be catastrophic, and the blame would be entirely the government’s for ignoring the warnings of its own data watchdog – and doing nothing to restore confidence in Britain’s undoubted innovation.