Brexit's implications for the U.K.'s technology industry are deepening political fractures, with no clear answer as to how startups fintechs and challenger banks can operate in the U.K., recruit workers and collaborate with partners in the European Union after the U.K. leaves.

The chaos was exemplified by Monday's resignations from Boris Johnson, the U.K.'s foreign secretary, and David Davis, the Brexit secretary. Prime Minister Theresa May, who has been scrambling this week to reset the cabinet and ward off a no-confidence vote that could result in a new national elections, has taken a more conciliatory approach that would include some common regulation and standards.

Theresa May, U.K. prime minister
Theresa May, U.K. prime minister. Bloomberg News

"Government instability at such a crucial time for negotiation with the EU is likely detrimental to [the U.K.] economy overall in the short term — and potentially, the long term," said Virginie O'Shea, a research director at Aite Group. "The government needs to keep the negotiations moving if it hopes to meet the self-imposed targets for Brexit, so any major revisions or significant delays will cause multiple problems for businesses including fintechs across the U.K."

The prime minister's position more closely aligns with a "soft Brexit" in which the U.K. would negotiate a deal with the EU to retain some nominal market relationships with EU countries. That position is at the heart of recruiting attempts to keep banking and fintech companies from leaving the U.K., an exodus that would damage London's economy and status as a technology hub. London's mayor, Sadiq Khan, has been a particular proponent of a "soft Brexit."

The financial and technology industries in the U.K. are mostly in favor of a "soft Brexit," with a particular interest in a deal that retains financial passporting to allow U.K. businesses an easier pathway to provide payments and other financial services in the EU.

There probably will not be clarity on passporting until the dust settles. The U.K.'s banking and fintech industries are already bearing the regulatory and strategic burden of having one foot out of the EU. That's lead to strategies among financial and technology firms such as moving processing for EU transactions to EU locations or moving staff. And payment companies such as TransferWise have been running dual regulatory tracks to prepare for two sets of laws.

"The financial sector as a whole also needs some certainty about important issues such as financial regulation and equivalence with the EU," O'Shea said. "Banks are already moving operations out of the country, which shrinks the overall pool of potential customers for the fintech industry in the long term."

Cities across Europe are trying to lure technology companies away from London, playing on the fear of Brexit. The fintech market in the U.K. is huge. Even following the Brexit vote, fintech investment in 2017 in the U.K. was more than that of Germany, Sweden, Switzerland and France combined.

The political uncertainty, along with unrelated political spats such as a trade war between the U.S. and China, have European countries confident they can peel off London's dominance. Paris, Berlin, Amsterdam and Stockholm have all made pitches to U.K.-based fintechs.

The U.K. has countered with a task force to attract and retain fintech developers. The results have been mixed, with overall fintech investment in the U.K. still setting records while it becomes harder for U.K. fintechs to attract talent.

"It is tough to attract and retain talent for the sector in a very competitive market, so hurdles related to political uncertainty and legal uncertainty, such as status of workers, status of the customs union, etc., put the U.K. at a significant disadvantage," O'Shea said.

The existing retention strategies face a new challenge this week because they were based on some form of a center-right driven exit from the European Union, with the hope of a soft Brexit. But this week's turmoil, which is in essence a fissure in the U.K.'s right political flank, could lead to new elections resulting in a dramatic leftward shift; or in a move farther right that could include Johnson or a hardline ally making a run for Prime Minister.

As a result, there's now confusion over what the domestic political and regulatory environment will be — in addition to the Brexit uncertainty.

"It is likely that U.K.-based organizations that have significant business in the rest of the EU will become ever more concerned regarding that EU business as Brexit talks appear to disintegrate," said Tim Sloane, vice president of payments innovation at Mercator Advisory Group. "The general swing of the electorate towards deregulation may also crate more caution within some organizations."

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry