Implications of the Brexit vote continue to reverberate. While market pundits debate whether or not Article 50 will actually be enacted, it will have implications for the Fintech sector worldwide. Regrettably, the lack of decision/action has consequences, and Frank T. Troise, managing director of digital distribution & communications (Asia) at Leonteq, examines what’s anticipated as Brexit drags on through 2016
History was made on 24 June with the Brexit vote and its implications continue to reverberate globally. While many market pundits and strategists debate whether or not Article 50 will actually be enacted (it is this authors humble view that it will not), it will have implications for the Fintech sector worldwide.
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Regrettably, the lack of decision/action is an outcome in and of itself that has consequences. Overall, we anticipate the following as Brexit drags on through 2016:
A step up in Fintech M&A: Investment capital for Fintech in Europe will inevitably pause and assess the implications of Brexit. As a consequence, so will FinTech funding worldwide. As many young Fintech firms are still pre-revenue, those Fintech firms in their seed, Series A, and even Series B rounds will be pressed by shareholders to consider selling their firms. FinTech themes like robo-advisory and blockchain, all far from profitability, will be the first “acqui-hires” to roll into corporate parents in the remainder of 2016.
A focus on local human capital: Brexit has highlighted the implications of politics on the operations of any entity, regardless of sector. But for FinTech firms receiving subsidies from the government, there will be renewed focus on hiring locals and avoiding the administrative headache of international hires, regardless of the caliber of talent.
Scrutiny of the cloud: Brexit was also a statement on globalization, and the cloud represented one of the most efficient tools for that type of global implementation. But, as Brexit re-defines the regulatory framework for data we expect each jurisdiction to slow the pace of “going to the cloud,” and any reciprocal data exchange.
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By GlobalDataA new leader in regulatory leadership and collaboration: Prior to Brexit, London and Singapore had signed a pioneering Fintech collaboration agreement. While London may have previously argued that the bulk of the innovation would be derived from them, Brexit has demonstrably lowered that expectation. As the value of passporting through the EU via the UK diminishes, so will the value diminish of an FCA license.
Accordingly, the global focus of Fintech will shift to the next growing market: Asia. In Asia the Monetary Authority of Singapore, Hong Kong’s Securities and Futures Commission, and Monetary Authority (HKMA) will lead the regulatory efforts of the region. However, global Fintech tactically will be lead by China’s consumer market and Dragons: Alibaba (AliPay/Ant), Tencent, and Baidu.
Licensing, Franchising, and Valuation correction: Passporting was the key for many Fintech firms to establish a beachhead in the UK. Now they will have to pause and reassess the viability of that model. Given the sunk cost they have already incurred (regulatory licenses, paid up capital, etc.) it is unlikely that the Fintech’s can easily reinvent themselves in a new jurisdiction (i.e. Ireland, Frankfurt). Therefore, they will wait and develop a plan for monetising their current IP. Without additional investment capital, they will have to partner with other local teams in local jurisdictions, and license/franchise their offerings (similar in some respects to Acorns international model).
While a pragmatic decision, this will inevitably cause valuations to be recalculated and subsequent funding rounds to be impacted accordingly.
Brexit will allow other markets to manifest themselves and gain prominence in the eye of the consumer. Asia has long been the quiet giant of Fintech and we now expect the world to now realise its significant presence. As we sometimes remind our colleagues: “Dragons can eat unicorns.”
