This article introduces the event “Brexit, the Irish Economy and the Future of European Fintech” that will be hosted by the Brexit Institute at Maldron Hotel Dublin Airport on Monday, 16 September 2019. The event features a keynote speech given by Paschal Donohoe (Minister of Finance of Ireland).
Brexit and the future of Fintech
Pierangelo Rosati (Dublin City University)
The clock is ticking, once again, for the UK government to deliver Brexit. Despite the long negotiations between the EU and UK, the Withdrawal Agreement is still unlikely to be passed in the House of Commons by the end of October so it is time for companies to brace themselves for the impact of what is likely to be a hard Brexit. And here we come to the first major challenge Brexit poses for businesses: uncertainty.
After more than three years of negotiations and multiple extensions, it is still unclear under which conditions the UK will leave the EU. Capital markets do not like uncertainty and this is reflected in the value of the British pound which has recently plummeted to a 34-year low. Uncertainty has also incentivised companies to sit on their cash instead of making investments to support growth, or to divert part of their investments to other EU countries to create a backup plan in case of a hard Brexit.
This has been a common trend across all industries, but the future of the UK financial sector is of particular concern due to its weight on the overall UK economy. In 2018, approximately 1.1 million people were employed in financial services in the UK contributing to more £130 billion to the UK economy (6.9% of total economic output). Can Brexit undermine the role of London as a financial services hub? Maybe yes but most probably not. London is in fact a global, not only a UK or EU, financial services centre. Its role has been built over many decades creating a favourable ecosystem for financial services and this advantage will not disappear overnight. However, Brexit creates opportunities for other cities in the EU to attract at least part of this business. Cities like Dublin, Paris and Frankfurt have been competing to attract both established financial players and fintech start-ups. But if London is not going to lose its role of global financial hub, why are many financial companies moving their operations to other EU countries? The truth is that Brexit may undermine the competitive position of the UK companies and make it harder for both established financial companies and fintech start-ups to deliver their services to EU countries. Most of the current debate focuses on three main areas:
Talent: Most innovative financial companies build their competitive advantage on the use of advanced digital technologies such as artificial intelligence, machine learning, blockchain and others. A well-known challenge for companies in this space is recruiting and retaining talent due to a general shortage worldwide, increasing demand and competition. A hard Brexit may substantially impact talented people’s mobility and therefore make it even harder for UK companies to recruit them. This may significantly undermine their competitive position and growth opportunity, a risk that smaller companies in particular cannot bear.
Passporting: A key part of the UK financial ecosystem has been the right for financial companies authorised in the UK to trade freely in any other EU country. This will not be possible anymore post-Brexit, so many financial companies have decided to move (at least part of) their operations to other EU countries to keep benefitting from the EU passporting system and avoid the regulatory burden of filling in multiple applications.
Investments: Limited access to the EU market may reduce growth opportunities for UK financial companies which may ultimately impact their evaluation and their capacity of attracting external capital. This is mostly a concern for fintech start-ups who need venture capital to finance their growth.
What opportunities are there for Ireland? Ireland is in a very good position to benefit from the exodus of financial companies from UK for a number of reasons. First of all, Ireland will be the only English-speaking country (except for Malta) with a common-law legal system in the EU. This allows UK companies to migrate their operations to Ireland with little adaptations. Furthermore, Ireland has historically been the entry point to the EU for US companies, and has developed a unique ecosystem of technology companies which would be perfect partners for fintech companies. Finally, the Irish financial regulator has demonstrated over time a significant interest and openness towards the use of technology to increase the efficiency of the overall system but always with caution. In fact, unlike other regulators, the Central Bank of Ireland has retained the decision to grant UK companies the authorisation to relocate. This in order to seek high quality applications and to ensure the sustainability of the overall financial system.
A number of financial companies have chosen Ireland as their new EU home already and many more are likely to come, but the final value-added to Irish economy is hard to forecast. This will ultimately depend on a number of factors, first and foremost the final deal (or no deal) which will set the terms for the UK’s departure from, and new relationship with, the EU.
Pierangelo Rosati is Assistant Professor in Business Analytics at DCU Business School and Director of Industry Engagement at the Irish Institute of Digital Business. He has been visiting professor at the Universidad de las Américas Puebla (Mexico) and at Católica Porto Business School (Portugal).