What does Brexit mean for the Irish FinTech sector?
When it comes to Brexit, the only certainty is uncertainty, and that goes for FinTech as much as any sector. What we do know increasingly, thanks to the work of the Financial Services Governance Risk and Compliance Technology Centre (GR3C), is what good looks like.
The industry-led technology centre, which is hosted by UCC with NUI Galway and UCD as research partners, has members including major national and international financial institutions. It conducts innovative R&D to help solve the governance, risk and compliance problems facing the financial industry – work central to both FinTech and regulatory technology, or RegTech.
“At the GR3C we are developing a knowledge base of FinTech firms, initially within Europe and ultimately around the world, to better understand the performance of FinTech firms and clusters,” says Cal Muckley, professor of operational risk in banking and finance at UCD Smurfit School and principal investigator at the Enterprise Ireland initiated GR3C.
“Part of this is about visualising the FinTech ecosystem with a view to finding its drivers. The nascent literature suggests these drivers include funding availability, people or ‘talent’ availability, regulatory environment and proximity to global players.”
The extent of the impact of Brexit on FinTech here and in the UK, as well in the wider EU, remains to be seen.
“On triggering Article 50, I don’t see that it is going to change globally the importance of the UK as a FinTech hub in the medium term, over the next five years, because the UK is way ahead on this front,” says Muckley. “However, I do see some change in its growth trajectory. It has been compromised by the triggering of Article 50, even if only due to the uncertainty it has given rise to so far. At heart, the triggering of Article 50 is a regulatory change and that regulatory change introduces uncertainty in respect of the plans and projects of FinTech firms based in the UK.”
To date, one of the major concerns for financial services companies based in the UK has been in relation to “passporting”, the current situation whereby a company registered in one EEA country can open in, or sell into, others without having to gain further authorisations.
“It is a major matter of concern but one I suspect they will negotiate away. After all, it will be a very significant advantage for the EU to have access to the UK too. Nevertheless, it is more uncertainty and that will delay plans and will make FinTech firms look elsewhere, to Berlin, Frankfurt, Madrid, Paris, or Dublin,” says Muckley.
All are in the same approximate time zone, though Dublin has the advantage of being English speaking.
A further implication of Brexit relates to people. “UK FinTech employs 60,000 people, not including traditional banking employment. That puts it way ahead of major centres like New York and California in terms of headcount alone. One of the reasons the UK has these numbers is because of access to the EU’s labour market, and software developers across Europe. They just wouldn’t have enough of their own and the UK is compromising this. Again, they may negotiate out of this, but access to EU labour markets is a key driver of their success. That should be a major concern for UK FinTech.”
There are data protection issues too to be considered, with new EU data protection regulations (GDPR) due for implementation by May 2018. “The UK has now conceded its place at the negotiation table. If data is less secure in the UK than it is in Dublin, or Berlin say, that will be a major issue for the FinTech sector. The key drivers are all compromised and that is the downside for the UK, and, possibly, the upside for Dublin, Paris or Berlin,” Muckley says.
But only possibly. “There is the European FinTech ecosystem to consider too, if the UK is to leave,” he points out. “Europe could find it loses out to places such as Hong Kong, Singapore, California and New York. Europe as a whole might see its growth trajectory compromised.”
Other sectors too are reassessing plans. “Our overall economic view is that Brexit is bad news for everybody, not just the UK but anyone with economic ties to the UK. There is a strong body of evidence that the UK will be weaker than it otherwise would have been, and it will be more difficult to trade with,” says Simon Barry, chief economist at Ulster Bank.
In the short term the economic impact on the UK has been less than might have been expected, but it is becoming more visible, with real wages growth now falling and weakening retail sales. Inflation has risen while sterling has fallen.
From an Irish exporting perspective, a weaker sterling makes it harder to sell into – and harder to compete with abroad.
Within this framework there are “pockets of opportunity”, he says, including FinTech.
“It is probably one in which we can see an upside, in so far as we have a very strong presence in international financial services and in internationally traded IT, and FinTech is a marriage of those two,” says Barry. By simple virtue of our continued membership of the EU, we may stand to benefit. “We are hearing, anecdotally, of inquiries as to office space, making their contingency plans,” he says.
“But the best possible Brexit for us is one that enables the UK to stay in the Single Market and, secondarily, stays in the Customs Union. The worst case scenario is that the UK crashes out” on the basis that, as Theresa May put it, no deal is better than a bad one for the UK. “The disruption in that case would be enormous and nowhere more so than in the UK,” says Barry.
What Brexit means for Irish FinTech firms looking to export to the UK is also being reassessed. “Irish firms have always looked to capitalise on the large market opportunity in the UK. One of the big uncertainties is whether or not that can continue in the medium to long term and Irish companies are already looking to expand their reach beyond the UK,” says Anna Scally, international tax partner and FinTech Lead at accountancy firm KPMG.
“Uncertainty surrounds everything from the future entitlement of Irish firms to serve that market, future entitlement of UK firms to passport outside of the UK to serve the European market and the broader legal and regulatory framework in which FinTech companies will operate.”
Fintech investment in Europe grew in the first quarter of 2017 with €806 million invested across 89 deals. The KPMG Pulse of FinTech Report, published in more than 152 countries, found Ireland to be gaining prominence internationally with numerous initiatives focused on showcasing the country as an alternative to London.
“The beginning of 2017 saw a number of mature FinTech companies announce expansion plans here, including the client lifecycle management company, Fenego,” says Scally. “Ireland has also successfully attracted a number of FinTechs to set up regional offices here, and we hope to see further growth as Ireland continues to market its ability to be a bridge to both the UK and Europe.”
There are signs that Dublin is increasingly being chosen as the European headquarters for multinational companies, she says. “Other companies, especially in Ireland’s strong FinTech market, increased operations and added headcount throughout the first quarter. Brexit is certainly a factor in this trend and Ireland is well positioned to serve as a springboard to the vast European market. Ireland’s straightforward tax regime and strong tech talent base are also attractive.”