U.K. fintech companies’ fears of Brexit triggering an immediate cutoff from Europe were eased somewhat by the European Union's recent proposal of a 21-month transition period beginning next year, but most operations are crafting survival strategies for worst-case scenarios.
So far, fintech companies' options range from relocating to other countries to finding ways to offset negative effects by attempting to “Brexit-proof” their businesses. The latter option can still be a substantial undertaking.
Cardstream, a provider of white-label payment software and services located 150 miles from London, is trying this. The company has restructured its payments systems so users outside the U.K. may easily access its platform in other geographies and manage data compliance and tax jurisdiction details remotely if needed, said CEO Adam Sharpe.
“The moment the referendum result was announced in June 2016, we started working on plans to ensure we’d be ready for every eventuality,” Sharpe said.
It took Cardstream less than two years to reshape its systems, so that processing for European payments, customer data and taxation now may be managed outside the EU while Cardstream remains in the U.K. town of Taunton, Sharpe said.
Other companies are developing similar strategies to work around the potential effects of a “hard” exit, which they fear could abruptly alter the current EU regulations and licenses enabling U.K. fintech companies to seamlessly serve European customers.
A potential nightmare for U.K. financial services companies would be the elimination of the traditional passporting rights U.K. companies rely on to do business across Europe, according to David Parker, CEO of U.K.-based Polymath Consulting.
More than 5,000 U.K. financial firms currently use passporting rights in the EU, and more than 8,000 European financial firms in turn rely on passporting to service U.K. customers, according to reports.
“Imagine the paperwork and effect on businesses if all of these firms need to either set up or find new partners to (continue to) work in the other markets,” Parker said.
Because government agencies are still negotiating terms on many aspects of the U.K.’s separation from the EU, experts say it’s too early to know exactly which processes may change, so many companies are making moves to protect their operations.
While the EU and U.K. governments appear to be working toward a transition period ending about two years from now—which is better than an immediate implementation—that’s still a very tight timeline, according to Parker.
“There’s no getting away from the fact that Brexit will have a major impact and absorb significant amounts of capital and management time just on sorting out aspects of regulation and being regulated, and how much it will all cost is anyone’s guess,” he said.
It's possible that some of the most extreme forecasts about London losing its place as one of the world’s leading fintech centers were overblown, some observers say.
TheCityUK’s earlier forecasts of more than 100,000 U.K. financial jobs threatened due to Brexit were downgraded to about 3,000, the Wall Street Journal reported last month. And Deutsche Bank, which had threatened to relocate 4,000 employees away from London, instead signed a new lease in the city.
“A fintech requires a number of things, including access to capital, skilled people and the right environment for innovation, and all of these things are still very much present in the U.K. To the extent the U.K. is still the bridge between the U.S. and Europe, it will likely continue to remain a fintech hub,” Parker said.
In the case of a hard Brexit, companies servicing European-regulated customers that want to continue operating from within the U.K. would likely be forced to add locations elsewhere in Europe, he said.
Cardstream is determined to remain in England, even if Brexit forces major changes, and its proximity to London is a key reason, CEO Sharpe said.
“Fintech in London has always been outward-looking, and thus has attracted the best ideas, talent and—importantly—capital from around the globe. Fintech businesses that started here generally are designed from the ground up to work well beyond European borders,” he said.
The EU and U.K. governments recently discussed a transition, or implementation period, beginning March 29, 2019 and ending Dec. 31, 2020, but details about how and when U.K. businesses must comply with any new regulations are unclear.
Sharpe remains optimistic.
“A ‘hard’ Brexit may cause a hiccup, but many U.K.-based fintech operations’ international business models will work—they just may need to make some operational changes and ensure their strategic suppliers have also taken the necessary steps," Sharpe said. "The most important thing is to plan ahead and not be caught out.”