By Tony Warren, SVP of Strategy, Capital Markets at FIS
Britain was already sailing towards uncharted waters before the global pandemic sent nearly its entire workforce scurrying indoors. While admittedly on the back foot, the United Kingdom now faces the unenviable task of negotiating the terms of its ongoing relationship with the European Union (EU) remotely. However, this challenge also represents an incredible opportunity. The independence provided by Brexit means Britain, and, specifically, the country’s fintech (financial technology) sector, is in a position to make bold, unprecedented policy steps to support the industry.
The financial sector has entered a time of volatility. Central banks have torn up whatever “rule books” remained after the Great Recession to pump trillions into their markets and societies. These changes may amplify shifts that have already begun in the financial markets, while also opening new cracks. Expect changes in regulation, trade, talent and even where financial companies choose to base themselves. This is a unique opportunity for the financial-services sector to cast fresh eyes on its own relationships with clients and to invest in building resilience into future disruptions.
The first signs of divergence will likely appear in the regulatory space. In a February public statement[i], the UK’s prime minister, Boris Johnson, alluded to the possibility of altering the application of current privacy laws under GDPR (General Data Protection Regulation). The industry can also expect small discrepancies to appear around PSD2 (Revised Payment Services Directive), despite this having been written into British law before Brexit. With regulatory deadlines extended or “no action” periods in place globally, there is additional time to carve out additional policies that work best for Britain.
But to quote an infamous character from a popular TV show: “Chaos is a ladder”. And digital and regulatory challenges did not, after all, begin with Brexit or the coronavirus. These are constants in our field and should be seized as opportunities: Digital disruption means that banks can offer increasingly innovative solutions for customers; regulatory and macroeconomic disruptions are chances to improve core systems and boost efficiencies.
Indeed, the pace of change in the financial-services sector has been more rapid than most. In retail banking, for example, we have seen a huge number of digital challenger banks with smooth front ends and low overheads and costs of entry joining the market. In capital markets, funds and fund administrators are facing increasing demand for data from both their investors and regulatory bodies. What’s more, they are expected to provide and service more complex financial instruments, and this a trend that is growing irrespective of the uncertainty generated by Brexit.
The UK has long led the way for regulation in financial services and is seen as the gold standard globally. Countless times, the FCA (Financial Conduct Authority) and PRA (Prudential Regulation Authority) go above and beyond the required standards set by EU directives to create an even stronger regulatory environment. This has, in turn, led to the UK becoming the most attractive destination for fintechs to open shop in Europe. Brexit is not likely to change this, and so long as the UK keeps ahead of the game, London can continue to call itself the “fintech capital of Europe”.
Win some, lose some.
On the other side, losing access to the single market will make a dent in the UK’s attractiveness to conduct business; it will lead to decreased access to funding, increased import tariffs and, most importantly, London will hardly be able to maintain its position as the gateway to Europe.
Due to not being able to offer their products and services freely across the EU block, many financial institutions have already or are now in the process of finding a new home on the continent. Other European financial centres wasted no time in bidding for London business, and cities such as Amsterdam, Dublin and Frankfurt stand to benefit.
But when looking at the fintech market closely, the worry is rather insignificant due to the way fintechs operate and the borderless nature of this business. I believe that in our industry, we can continue to deliver innovative solutions through industry collaboration and working with the regulator. However, what concerns me is the UK’s ability to attract the talent that fintechs need to grow.
Britain’s got talent
For half a century, the UK has been an attractive home for those wanting to migrate. London also became the crown jewel for those working in financial services or technology. The issue of talent and where it might end up in a post-Brexit world is of vital importance to all European migrants working and living in the UK. Following Brexit, EU net migration to the UK has hit its lowest level for 16 years, and, in an interesting turn of events, British emigration to continental Europe has hit a 10-year high.
According to data released by the Office for National Statistics (ONS), approximately 80,000 EU citizens came to the UK to seek work each year, peaking during the EU referendum. Since the referendum, this has fallen drastically to around 20,000. Such a stark decline has meant that many companies are having difficulty recruiting talented and technically competent employees. More than three in five organisations have reported that it is hard to fill vacancies, according to CIPD’s (Chartered Institute of Personnel and Development’s) Labour Market Outlook Spring 2019 report[ii]. If this trend continues, growth will stagnate, and fintechs may be driven to look for talent wherever they can find it.
The UK Government must issue very clear guidelines on keeping and attracting the international tech talent that has been vital to London’s fintech success. So far, the new points-based immigration system announced by the Home Department’s secretary of state, Priti Patel, which stipulates that all EU and non-EU citizens shall be treated equally from January 1, has sent shock waves as companies envisage a significant increase in costs if they want to employ non-settled EU workers.
Potential solutions to this issue include hiring talent remotely or employing permanent work-from-home staff. Indeed, we have already seen some banks publicly announce that due to the success of people working from home during the pandemic, there is no real reason to hire staff who live in only certain geographical areas. The entire concept of office may fade in relevance over the coming years.
In the meantime, established, world-leading fintech companies need to keep speaking openly about what is in the best interests of clients. Highly skilled professionals are crucial to spark innovation in our industry and foster an ecosystem that will, in turn, continue to attract top talent and venture capital.
Reaching higher heights
Despite the uncertainty, there is sustained investment in the British financial-services sectors as banks look to modernise their infrastructure. Fintech companies attracted almost double the amount in global investment in 2019 compared to that of 2018, with 88 percent accounted for by FIS’s acquisition of digital-payments provider Worldpay.
Both fintechs and legacy institutions have performed impressively during this crisis. At FIS, we managed to provide 98 percent work-from-home coverage to our clients, despite seeing trading volumes increase threefold during this period. We also saw 90 percent of our professional services being delivered remotely.
Nothing about the pandemic or the “leave” vote changed the underlying market reality. They should serve as compelling catalysts for a broader global reality check: Are banks as up to speed and nimble as their potential competitors in the products and services they are offering? In a recent survey of fund managers conducted with Longitude Research, we found that 89 percent anticipate continuing to invest in new technologies through 2020.
The underlying reason for this is simple: Companies need to stay ahead in the hunt for business by being able to provide products, such as multi-asset servicing, to hedge funds, private equity, institutional and retail investors as a one-stop-shop, especially as investors demand evermore unified output, accuracy and frequency of information.
The longer-term market trends that are set to have the biggest impact on capital markets are not driven by Brexit or coronavirus. The main pressures are to deliver transparency and real-time data, provide deeper risk insights and reduce costs in low-margin activities to release capital for more profitable activities. Fintech must adopt new tools, technologies, business models and working practices that facilitate the reallocation of resources.
Big innovations often emerge from a time of crisis. At the beginning of the year, few imagined the speed of the migration to at-home work. Now it is a reality. The mix of financial traditions and innovations, a positive and stable regulatory environment, a great supporting infrastructure and the borderless nature of fintech will ensure that the UK stays ahead of the game. The financial-technology business is a change-maker by nature and, as such, welcomes disruption. There is a unique opportunity for fintechs to gaze into the future and make sure that their institutions are ready to meet clients’ ever-changing demands.
References
[i] https://www.lexology.com/library/detail.aspx?g=cfa221ee-88b0-430c-9553-6fffc8bbf42a
[ii] https://www.cipd.co.uk/news-views/brexit-hub/workforce-trends