In recent months the media has built a narrative that sees fintech’s fortune rise, while the City has been hit by a string of bad news stories: most notably the lack of a post-Brexit equivalency deal. 

The narrative isn’t just a media spin. Serious players, such as TheCityUK, an industry body representing the financial and professional services sectors, have recently warned London is falling behind rival financial centres like New York and Hong Kong.  

It can seem a stark contrast to the bumper valuations, mega deals, and general excitement surrounding London’s fintech community, but the reality isn’t so simple. London’s fintech sector has also been hit by Brexit, perhaps harder than many acknowledge. The truth is that all of the UK’s financial services – whether traditional or fintech – are in the same boat. They face many of the same challenges, and share many of the same prerequisites for future success.

Brexit hasn’t just hit the City – in some ways it’s been worse for fintech

Brexit has taken a backseat in the news agenda as we’ve all been focused on the pandemic, but it’s returned to the front pages in recent months. For businesses, however, it never went away, and adapting to some its most high-impact changes has cost organisations millions of pounds. 

Countless column inches have been dedicated to Brexit’s impact on the traditional financial world, which contributes hundreds of billions of pounds to the UK economy, around 6.9% of the country’s total economic output in 2019. The City’s contributions have declined from its zenith in 2007, when it topped out at 8.3%, but it remains at the heart of the economy.

Yet the sheer scale of the UK’s traditional financial services sector has also shielded it from some of Brexit's harms. For instance, British firms must now set up a European base if they wish to service the continental market. For established financial players, that’s a nuisance but not a problem. However, if you’re a small to medium-sized fintech, spending millions on a new European base to service a market you were already servicing is a major headache.  

While Brexit hasn’t completely pulled up the drawbridge for early-stage companies, it’s made things a lot harder. And even for those that can afford to operate in the UK and Europe, it’s money that could be spent elsewhere. 

Fintech and finance are in the same boat

Losing this access, more than anything else, this has undone one of London fintech’s biggest advantages over competitors in the US or Asia. Consider this: each US state has a unique set of regulations and taxes that must be complied with at significant cost. For early-stage companies, this can be, and often is, a major hurdle to growth. Businesses in Asia face even more complications – operating across just one of the continent’s multiple regions means suffering an incrementally expensive corporate and regulatory infrastructure at the same time as navigating clashing cultural, financial, and political norms and rules. 

The European single market presented London’s financial services with a land of plenty: access to the world’s largest economy and richest people, unified regulations, and a general political consensus for closer financial integration. That simplicity also acted as an accelerator for early-stage start-ups based in London. 

Both fintechs and the traditional financial services sector will find attracting talent more challenging post-Brexit. Skilled worker visas are costly and time-consuming, and the changes have also added confusion to the recognition of certain professional qualifications. Some believe these issues are having the cumulative effect of dampening interest in living and working in London and, if this becomes a long-term trend, it could result in brain drain.  

The future can still be bright

But let’s not wave the white flag just yet. London remains an exceptional place to do business and English will remain the international business language for the foreseeable future. These are huge strengths.

The UK also holds some enviable geographical advantages. Being situated at the centre of the global work day keeps London relevant even today, perhaps more than any time in the past century, given the rise in China and India’s economic importance. 

The media furore around London’s fintech sector is well-deserved. The capital is a hotbed of innovative companies creating genuinely valuable products and services, often with global appeal. And despite the impact of the pandemic, London’s traditional financial sector has remained secure and stable. 

What the pandemic has done, though, is prove that you don’t need to live in London to work in its fintech sector. This gives flexibility to workers, but it can also help businesses – London-based companies can now hire from every corner of the country or not lose talent that want a different pace of life. 

We’re in it together 

Brexit is a reality and we all have to deal with the consequences. No-one can afford to stick their head in the sand. From traditional players to the fintech world, the situation is much more complex than it was before. From regulatory issues to corporate structure requirements and cultural considerations, doing business outside the UK has become harder and more expensive. 

We should be very wary of hubris when it comes to our ability to make up for this in the form of trade deals with the likes of Australia and Singapore. At least in terms of financial services, those deals will not make up for the loss of EU access. 

The UK’s financial services industry will deal with it – it’s populated by very smart, industrious people. But it certainly faces one of its sternest tests in living memory.