What Might We Expect To See For FinTech In The UK In 2021? 

What Might We Expect To See For FinTech In The UK In 2021?

After a year marred by a pandemic and Brexit negotiations, the future seems uncertain for FinTech in the UK in 2021. 

The financial industry has been largely left out of the UK-EU deal negotiated by Boris Johnson. “Services have been the dog that hasn’t barked in the Brexit negotiation,” wrote Pat McFadden, MP for Wolverhampton South East. “Harder to understand than car production or agriculture, and governed by rules rather than tariffs, the debate has often been conducted as though 80% of our economy didn’t exist.”

The UK has a large trade surplus when it comes to services; Finance, in particular, is a sector which accounts for vast swathes of employment – and thus significant tax revenue for the exchequer – as well as successful exports. In 2018, total trade between the UK and its biggest national trading partner, the US, was worth over £190 billion, with Financial Services representing the UK’s largest services export to the US, at £11.8 billion.

The financial sector could play a leading role in ensuring the UK’s return to form on international markets. Following a period of investment shortages and economic downturn triggered by Brexit and worsened by the pandemic, the financial industry’s embrace of innovation could drive British economic resurrection.

The sector has demonstrated unrivalled willingness to adapt and innovate, responding to growing customer demands during the pandemic. Indeed, the utilization of technology to deliver financial services has massively increased; a Salesforce-sponsored study investigating ‘The COVID-19 Effects on the Financial Services Industry’ (August 2020) found that the top three tech priorities among FS providers are virtualization/cloud services (79% of respondents), personalization (77%) and automation (76%).

Craig Vosburg (President, North America, Mastercard) argues that the acceleration of digital transformation in the financial sector is largely motivated by a growing aversion to cash, “a desire” to “avoid touching things”. Interviewed by Stuart Lauchlan, co-founder and editor of Diginomica, Vosburg cited the adoption of contactless forms of payment as the main area of growth in 2020 (alongside the surge of e-commerce). Writing for Diginomica, Chris Middleton confirmed this trend:

“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.” 

This makes for a more competitive landscape, with FinTech firms now facing rivalry from traditional banks; Goldman Sachs and Santander, for example, have developed their own digital platforms, Marcus and Asto (respectively).

The UK’s FinTech sector is currently worth approximately £7 billion and employs around 60,000 people, according to government figures. While London has held its place as the FinTech capital of Europe so far, the tide may be turning. Berlin, where an evolving community of startups and tech firms has been dubbed the ‘Silicon Allee’, is emerging as a competitor. Germany provides an attractive business climate for entrepreneurs, pooling skilled labour and offering swift access to the rest of the EU. Moreover, American tech presence is gaining prominence there, with Facebook and Airbnb establishing offices in the capital. Finally, Berlin hosts 2,500 active startups with $2.7 billion in venture capital in total, meaning the city attracts more venture capital than any other in the EU. Finally, a recent study observed that 26% of European entrepreneurs believe Berlin will become the EU’s new business centre – Frankfurt came in second, with London far behind (Sangeetha Deepak and Pritam Bordoloi for internationalfinance.com).

The Brexit transition period illustrated this shift from the UK to Europe as a preferred hub for financial activity. In 2019, around 275 financial firms moved a combined total of $1.2 trillion in assets out of the UK to other parts of the continent. Deutsche Bank shifted €400 billion from its balance sheet to Frankfurt, while JP Morgan moved €200 billion to various offices in Germany. In 2020, Thinktank New Financial found that 332 financial services firms had moved jobs out of London because of Brexit. Another report by Ernst & Young estimates that $1.5 trillion in banking assets left London for Europe since the Brexit referendum – a sum equivalent to more than half of the UK’s GDP – along with 7,500 Financial Services jobs. This trend is likely to accelerate now that it is clear the Financial industry has been neglected by the Prime Minister in his Brexit negotiations.

Despite all this, London still attracted a wider international variety of investors than other European hubs, with 39% of investors coming from outside Europe, compared to 32% in Berlin and Paris with 24%. Furthermore, in 2019, the UK was still the country where FinTech firms received the highest amount of investments in Europe ($48 billion). Since September of that year, London has led the overall fintech investment in Europe at $2.11bn, followed by Berlin ($881m), Stockholm ($734m), Paris ($330m) and Milan ($49m). In fact, London saw 2019’s investments exceed previous years’ totals within the first eight months alone, with 114 deals, overtaking both New York (101) and San Francisco (80).

The landscape, then, might not be so bleak. In addition, a loophole in the Brexit deal exists which makes the UK an attractive place to set up financial headquarters. The deal includes a clause which removes obligations for the UK to comply with the EU’s Code of Conduct on Business Taxation; accounting professor Richard Murphy discusses this in a recent blog post, in which he recalls battles with the governments of Jersey and Guernsey over the code through much of the 2000s. “Their tax laws were radically changed as a result of the campaigns I worked on then,” he writes. “Their planned ways to avoid the obligations of this Code were defeated.” With the code no longer applicable, Murphy argues, the jurisdictions will be able to recreate “full tax haven status” again.

Tax avoidance sympathies run high amongst current cabinet ministers, made clear by their championing of freeports: designated economic zones where imports can enter with simplified customs documentation and without paying tariffs. Writing for The Independent, Ben Chapman remarked that Michael Gove and Rishi Sunak “have extolled the virtues of [freeports] … claiming that they promote regeneration”. A report published by Bovill shows that around 1,400 EU-based firms have applied for permission to operate in the UK after Brexit, with over 1,000 of these planning to establish their first UK office, possibly  hoping to cash in on relaxed taxation policies.

The EU will no doubt attempt to curtail this potential discrepancy in financial regulation, upholding the UK’s commitment to a level playing field ensuring healthy but fair competition. Further deliberation is also required from both parties on the matter of data protection. The UK and EU agreed a temporary fix to allow companies to keep sharing data after 1 January, but a longer term deal on whether Britain meets European data privacy standards will still have to be found. Otherwise, UK businesses with EU data centres risk not being able to retrieve data transferred to Europe. ‘The Cloud’ is not a fog of code that crosses international borders at leisure; the reality is vast data centres built on land under national and regional laws. Going forward, UK-based FinTech firms would do well to remember that much of their data is processed in the EU via the many cloud platforms run by US companies in low-cost European locations.

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