After Brexit, fintechs find new homes
The U.K.’s departure from the European Union is still causing lots of headaches for financial technology companies, but there’s now enough clarity to work with. And that often means operating from a new address.
“It’s been a challenge. Especially during the past year in 2019, mainly because of the uncertainty. Would there be a hard Brexit? Or no Brexit? It created a situation where we had to have a plan from one day to the next,” said Patrick de Courcy, CEO of Payoneer Europe Ltd.
Payoneer just received an Electronic Money License from the Central Bank of Ireland, which allows Payoneer to operate a Dublin office to cover licensing for all territories the EU. Payoneer is already licensed in Gibraltar, which covers the U.K. and previously allowed it to operate throughout the EU. Payoneer serves cross-border transactions for the gig economy, other B2B and supply chain transactions, and recently acquired German fintech Optile to bolster its ability to support consumer payments.
Brexit has been an ongoing headache for companies like Payoneer that rely on borderless payments to support e-commerce, contractors and small businesses. These companies, many of which do business in London as a bridge between the U.S., Europe and other markets, have had to navigate an uncertain political future while responding to normal business pressures such as raising capital and diversifying their products.
The uncertainty hasn’t totally gone away, as negotiations between the U.K. and EU could still change business conditions for the supply chains that many of these fintechs rely on for payment flows.
But the questions over whether the oft-delayed Brexit will happen are finally gone.
“Brexit required us to establish another entity inside the European Union,” de Courcy said, adding the Dublin license allows Payoneer to support uninterrupted cross-border commerce agnostic to other Brexit-related changes.
While Payoneer is maintaining a license in Gibraltar, Dublin will be its main European center. The choice of Dublin appealed to Payoneer because of the city’s status as a technology center, particularly for developers of regtech, or software designed to make it easier to comply with fast-changing laws and regulations in different jurisdictions. Dublin has become a Brexit haven for London fintechs.
For Payoneer, the decision was more about political stability than being in the midst of a technology hub.
“We looked at quite a few locations and had a number of criteria,” de Courcy said. “We wanted to establish a presence in a country that had an unwavering commitment to Europe. And in Ireland we’ll be regulated by the Central Bank of Ireland, which is a highly respected regulator.”
Access to skilled workers is also a factor, as de Courcy noted a depth of law firms, consultants and advisors with expertise in financial services. “It’s also a destination that’s attractive for talent from outside the country.”
Payoneer did not base its strategy on recruitment, though that’s a Brexit side business as cities across the EU offer perks to U.K. technology companies to relocate.
Fintechs like Revolut have obtained licenses in EU countries such as Lithuania, which has made a concerted effort to lure firms from not just the U.K, but other parts of the world as a local point of entry to the EU. Lithuania has opened a regulatory sandbox and maintains a list of dozens of digital payment firms that have established a Lithuanian presence as a Brexit hedge.
The idea of Lithuania becoming a fintech hub dates to 2017, when the Bank of Lithuania saw it as a way to increase competition in the local financial services market. There was also a high concentration of banks but a lack of challenger bank alternatives and innovation, said Titas Budrys, chairman of the board of the Fintech Hub LT Association in Vilnius.
“There are strong local and international companies in Lithuania, yet the local fintech market is in the initial stages of development in areas like licensing, product development and testing, clients’ acquisition, etc.,” Budrys said. “However, given that there are so many companies here trying and working on different innovative products and business models, there should be a number of successes in the coming years.”
But Lithuania is not an easy market and comes with legal risks. The Bank of Lithuania, the Financial Crime Investigation Service and other government agencies are establishing a competence center for risk mitigation and anti-money laundering, which is a growing concern given the expanding fintech sector in Lithuania, Budrys said, acknowledging money laundering in the Baltic states is a risk that challenges the region’s hope to become a fintech hub.
“It can be difficult to find corresponding payment partners for any financial institutions including banks coming from the Baltic states, making the payment system infrastructure provided by the local central bank even more essential,” Budrys said.