Fund managers in the City may be rejoicing in the wake of the UK’s decision to leave the EU. After all, uncertainty and market volatility offer the greatest legroom for strong returns. But what about the fintech sector?
Given the uncertainty over whether the UK will keep its passporting rights despite Brexit, many tech giants have vocalised their interest in relocating their European headquarters from our capital. Earlier this week, London-based online money transfer firm Azimo told Reuters it was considering moving its HQ to the continent, fearing Brexit would knock London off its pedestal as a fintech capital.
Fintech produces more billion-dollar-valued startups than any other segment in the UK, and includes digital financial services, from money transfer to peer-to-peer loans.
While the City found its feet in post-recessionary London, fintech companies began to set anchor in the capital, moulded by a perfect storm of tech talent, an adaptive regulatory environment, and the strength of its traditional financial services sector.
Now, as we stare down the barrel of the Brexit vote, is this all set to change?
For John Davies, CEO of The Just Loans Group, the aftershocks of the referendum vote will continue to be felt for a long time as it guarantees the one thing businesses and finance providers really dislike: uncertainty.
“It is perfectly possible that financial stress in the short term funding markets could cause the banks to slow down or delay lending to SMEs – a repeat of what we witnessed following the financial crisis in 2008,” he tells GrowthBusiness.
“At the time, this really impacted SMEs ability to invest and grow but I don’t believe the impact would be as damaging now as we have a thriving alternative finance sector that in 2015 was reported to have grown to be worth £3.2 billion.”
Davies believes this post-Brexit uncertainty presents a two-way challenge. “Alternative lenders, like ourselves, have to make businesses more aware of what they have to offer, and SMEs have to be prepared to look at other (non-bank) options,” he says. A recent survey of UK SMEs carried out by his firm revealed that almost one in three entrepreneurs would shelve investment plans if their traditional bank turned them down for finance, which may be indicative of a slow-to-change bank-first mindset.
The post-Brexit environment may also help thin the herd, according to Nucleus Commercial Finance CEO Chirag Shah. “Any AltFi company struggling for lending volumes will be affected by the EU referendum– they were suffering pre-Brexit; Funding Knight’s near collapse is a clear example of this. Post-Brexit, these platforms will struggle even more to attract capital,” he says.
“Post-Brexit, there is the definite potential for losses to increase for funding platforms with lax underwriting standards. However, there are also lots of opportunities: indeed a medium term lower interest rate environment will entice more investors to platforms. I believe businesses specialising in crowdfunding and property lending will have opportunities for growth.”
For SMEs that have survived the 2008 credit crunch, they may recall how difficult it was to raise funds in the recessionary period. The uncertainty post-Brexit may seem reminiscent of the 2008 scenario, which is why John Atkinson, managing director of Hitachi Capital Invoice Finance believes SMEs should start assessing ways to spread their funding risk.
“Before taking action to protect cash flow, SMEs need to conduct a financial risk assessment of their business model based on a variety of Brexit scenarios. Such risks are not always readily apparent but can have devastating consequences if left unchecked,” he explains.
While he acknowledges that most SMEs may have established relationships with their key suppliers, they may not be aware of potential problems lower down the chain if tier two or three suppliers are heavily reliant on trading links in the EU. Atkinson advises SMEs to identify such issues early to put mitigating strategies in place.
Keep calm and carry on
Several business leaders were dismayed by the results of the vote, but, as Anil Stocker, co-founder and CEO of MarketInvoice sums up, life goes on. The peer-to-peer invoice finance platform closed a £7.2 million investment post-Brexit, led by listed Polish private equity group, MCI.TechVentures Fund of MCI Capital. For Stocker, this investment cements the fact that there is still a real appetite for investment in UK fintech. If anything, the post-Brexit period just makes it more critical for altfi providers to be responsive to the finance needs of SMEs.
“Even if growth slows in the short-term, businesses will still be coming to work, running operations, paying suppliers, covering overheads and even taking advantage of a lower exchange rate to export some more! Cash is always king, in the good times and the bad,” according to Stocker.
MarketInvoice, like a few others in the space, have a diverse range of professional and institutional investors financing invoices directly through the platform. Prior to their recent fundraise, the majority of the company’s funding came from UK-based investors and includes the government-backed British Business Bank, which essentially leaves MarketInvoice unscathed from Brexit. “All these investors take a long-term view of the asset class and its potential to perform through the cycle. This ensures our platform is sustainable and able to weather any immediate economic disruption,” Stocker adds.
Too soon to tell
While preparing for economic uncertainty may be wise in general, sounding the doom-and-gloom horn post-Brexit may be premature., says Stephen Archer, business analyst and director of Spring Partnerships. He believes there’s still a long way to go for an actual Brexit, so any discussion around the true impact of the vote remains to be seen. “The UK is still in the EU until the end of 2018 at the earliest so it’s way too early to properly assess the impact of an exit. To a large extent we should ignore the markets. They behaved foolishly in the last 48 hours leading up to 10pm on the 23rd June and have not been much more rational since. Some calm is being restored and indexes are not violently off the highs and lows of the year so far. The markets may sweat but a lot of money is being made during the volatility,” he explains.
“The credit rating downgrade is a blip, the BoE is on standby to put out any fires, the global financial infrastructure is not about to implode, banks have liquidity and there will not be the domino effect we saw with major institutions collapsing in 2008.”
Archer believes that the UK the currency depreciation will help exports, although probably not enough to correct the trade deficit, potentially leading to a slight inflation. “Up to 3 per cent would be OK,” he adds.
The weaker Sterling: opportunities abound
Peer-to-peer platforms will be paying much more attention to default risks in certain sectors if our economy does slide into recession, MarketInvoice’s Stocker warns. “However, given the fears of a recession, UK interest rates are likely to now remain low for the foreseeable future which means investing through peer-to-peer platforms will remain attractive relative to other investment opportunities,” he explains. “Investors will move to safer asset classes which are secured (for example, on receivables) and shorter in duration, rather than locking up finance in riskier long-term investments.”
For Chris Hancock, CEO and founder of Crowd2Fund, life after Brexit offers greater opportunities for exporting. “In a global, borderless, digital society, the concept of exporting moves beyond services and goods. With Crowd2Fund, we can export our businesses’ credit needs and even sell equity stakes in businesses to international investors with remarkable ease and speed. A drop in the value of sterling could easily lead to cheaper credit for businesses, and also an increased opportunity to find international investors, due to the lower exchange rate. All point to a lot to be positive about.”
On the topic of exporting the best of British fintech, Stocker sees a potential hiccup in the passporting of different models into European jurisdictions as fintech platforms go international, from an operating as well as compliance standpoint. “We watch this space with interest,” he explains. “It represents a new challenge, but not one that can’t be overcome with proper planning.”
UK regulation takes precedence
EU regulation aside, the FCA launched a regulatory framework for peer-to-peer finance this year, which is a domestic act for British lenders – completely independent of the EU. “The overriding philosophy from the Treasury, FCA and Department for Business and Innovation has been to nurture fintech, and allow models to develop that would challenge the oligopolistic power of the big banks,” Stocker explains. In theory, more competition for financial products like loans, foreign exchange, mortgages, and payments will make consumers and businesses far better off.
The post-Brexit fintech checklist
Veteran tech entrepreneur Rupert Lee-Browne is no stranger to uncertain macroeconomic conditions, having braved the Dot.com bubble of the early noughties and the volatility of the 2008 recession at the helm of CaxtonFX. “Secure your funding,” he advises. “The chances of investors backing early or mid-stage British tech business from here on in is slim.”
Crowdcube co-founder and CEO,Darren Westlake, disagrees, following company’s own recent successful fundraise. “With investment up 18 per cent on Crowdcube after the disappointing out vote, it is clear that investor demand to back great British businesses is unwavering,” he says, adding that the UK’s growing investment crowdfunding market, which was estimated to be worth £245 million in 2015, is only set to grow further.
The sector’s growing prominence aside, the success of fintech firms in the long term depends on the sustainability of its model. As the founder and CEO of one of the first foreign exchange fintech businesses in London, Lee-Browne firmly believes that business success is directly tied to profitability. “Above all the only thing that will keep you in business, is profits. So stop dreaming of unicorn fame and start getting in the lolly,” he adds. He suggests partnering with an incumbent financial services business that already has customers, experience and know-how to buffer against uncertainty.