How will Brexit Impact Banks and Fintech in the UK?


It may not have escaped your attention that the British Public voted to leave the EU. Although in the aftermath it’s still unclear quite what that actually means, this morning bank shares have taken a significant hit with Lloyds off 8%, Barclays 10% and RBS down 15% leading the LSE to halt trading in those stocks.

There are a number of theories about what happens next. Are people concerned about retail banking operations, corporate banking, investment banking or all of the above? Here are some ideas.

Theory 1: Rate Cut hits Bank Profits

The devaluation in the sterling and depressed economic activity immediately following Brexit will lead to a rate cut at the BoE. Rate cuts are bad for banks, since their business is predicated on lending against money held in deposit accounts. The higher rate they can lend at, the more money they make, and vice versa. Low interest rates = low profits.

Impact: There’s likely to be a short to medium term sell off of UK bank shares. Monetary policy response will be key, but banks are generally better capitalised than they were in 2008. Liquidity will likely remain strong, but the question now is contagion globally.

Response: Banks will need to weather this storm and look for profit centres away from net interest income.  Banks may also look to promote higher margin products in different geographies / sectors. The need for innovation in banking has never been stronger, especially in business model.

Theory 2: UK No Longer EU Gateway

UK banks position as a gateway to Europe for international banks and corporates will be threatened because they will be removed from various legislations or passporting agreements. This one is a little trickier. London has been a global finance and trade centre for centuries owing to its position in the world (time zone), talent pool and unique position as capital city, financial centre, tech hub with very strong universities (LSE, UCL, ICL). Specific legislations such as MIFID 2 and Basel III are still likely to apply to investment banks being already committed to them. Corporate banks are likely already and will continue to be SEPA compliant.

The question comes with, what happens next? What happens when the EU passes new legislation for which the UK banks had very little lobbying influence and are bad for London? A UK alternative would require a strong and articulate response from UK authorities, and what’s scaring markets is that at the moment there appears to be a vacuum of leadership. If there’s one thing markets hate its uncertainty.

Impact: Banks have a strategic option to consider, do they start hedging now, or do they focus on being compliant with all existing legislation and look at contingencies for staying in the UK. We will likely see a split depending where a bank is Headquartered. A number of global banks have R+D centres in Dublin which as Chris pointed out on CNBC, shares a language and is fully in the Eurozone.

Response: There may be different good answers for different banking divisions. My own view is that I wouldn’t bet against London coming back strong and whilst there is still a strong liklihood Britain negotiates a “Good Brexit” banks should take some time to consider these options.

Theory 3: Bad Loans and Tight Liquidity

Traditional Banking will be impacted as the UK Economy falters in the coming years. Higher unemployment, lower wages and more bad loans is a risk, albeit we will have to see what the impact is on the real economy outside of the banking sector. Some areas appear resilient (Pharma, consumer goods), although the weak pound will impact the UK as a net importer. The impact on small businesses and corporates in the coming quarters may well be reasonably significant. As significant as 2008? By the look of the FTSE and sterling yes, construction appears to be taking a hit but there is a question if this is the Brexit that broke the camels back rather than a direct result of Brexit.

The market may have been in need of a correction, after 8 years of low interest rates most UK corporate and Retail banks have remained strong, whilst the investment banking division has suffered.

Impact: Investors and banks will be looking at their loan books more tightly, with some RWAs no longer looking attractive

Response: It may be hard for banks to avoid tightening on lending, but this is an opportunity for a fintech approach. Identifying bad loans in banks is an exercise in drawing a line on a on a spreadsheet, below which everything is bad and above which everything is good. This is a poor response and will restrict growth in the real economy. Banks should consider how technology can help quickly identify performing loans vs non performing, regardless of rating. There are ways to ingest this data as spreadsheets or from core systems and quickly, rapidly respond to the change in market. An ability to show strength in a loan book will make a significant difference to market sentiment about bank stocks.

Theory 4: Fintech Leaves London

London loses it’s position as global fintech hub because of Brexit. If there’s one thing I think highly unlikely it’s this. There is a concentration of talent based in London that I believe is a mix of tech and former banking talent that chose London for more reasons than it being a good place at a point in time. The access to universities, to policy makers and to the local regulator (FCA) will all continue.

PSD2 is still likely to apply to UK Financial Services provided the UK stays in the single market (which nearly all indications suggest it will), and fintech continues to exist in a global market.

Impact: Whilst uncertainty looms about new legislation, a potential round of headcount reductions at banks will mean more talent flooding the Fintech market.

Response: I suspect Treasury and HM Govt will look at all policy options to keep Fintech stable in the UK. Whilst fintech broadly has cooled since last year, it’s here to stay and growing. PayPal is now larger than 3 of the big 4 banks in the UK. FX businesses will watch the Euro trading piece closely, and passporting licences will be critical (again, likely possible in the single market). However, Fintech businesses want to be where the buzz is, and for the foreseeable future, that’s London.

Summary: Fintech To The Rescue!

For those of us in Fintech Brexit has been seen as universally horrible, now it appears the task is shoring up the dam and avoiding it breaking. The opportunity for fintech in moments of urgency is often overlooked, but a volcano always lays furtile soil.

There’s a real opportunity to support banks by

  1. Identifying ways to shore up loan books
  2. Identifying new profit centres for banks that can be delivered quickly
  3. Regtech that can arbitrage old and new regulations between UK / Europe

Banks in the UK have a rocky few weeks ahead, but the rank and file within banks and those in the fintech community can start the fight back now. We need a good Brexit, Brexit light and we need to solve the real challenges banks face. Call me an optimist, but I think we can.

At 11:FS we see opportunities for banks and fintech across all three categories above.  Talk to me about how you can do this, we’re here and happy to help.

10 Things You Should Know About Blockchains


Lets dive right in.

1) Peak Blockchain hype was October 2015 when it made the cover of the Economist.  I’ve found there are a good number of people want some blockchain without knowing why.  They’re just wondering what they’re missing.  Wanting some magic beans or a silver bullet isn’t enough.  The good news there are people out there who can make sense of this stuff like Richard Brown, Tim Swanson, Ian Grigg or Pascal Bouvier.  I’d recommend talking to those guys before anyone else!

2) The famous public vs private blockchain debate is a side show.  Some will contest you can’t have blockchain without bitcoin.  Some will tell you Bitcoin is evil but we love blockchain.  They’re both wrong.  As Ian Grigg said “who are you and what do you want to achieve?” is the first question to ask. Consider that lens before listening to anyone about blockchain.

3) Gideon Greenspan’s writing on blockchain is a must read. He talks of a database that is replicated by design, and has per transaction enforceable rule sets.

4) Alex Batlin’s musings on smart contracts are also incredibly insightful. UBS actually built a working prototype of a DVLA data management solution using Ethereum

5) Microsoft offering Ethereum as a service is a sign the tools are maturing, but make no mistake, nobody is saying the tools to build Blockchain’s are complete – not even close

6) This means you can’t have an industrial scale blockchain next quarter for inter bank settlement. Sorry.

7) This doesn’t mean that’s not possible, if anything you *should* be investigating those use cases right now.  Chances are your competitors are.

8) What NASDAQ did with Linq is very interesting. Background: start-ups often don’t document initial share ownership when it is agreed in a pub or coffee shop. Problem: When an investor comes to raise a Seed, things get messy, people fall out. Solution: Store this on a Blockchain at NASDAQ which has perfect time stamps, and digital signatures and no database administrator can edit the record without signatures of the founders. Could you do this with a database? Sure, but you’d lose that audit trail.

9) What Docusign and Visa did is interesting. Get into a car, and rent it using a contract displayed on the car dashboard. You have now signed, and recorded on a blockchain for audit purposes your signature. Better than Bitcoin for tamper resistance? No. Better than current paper processes. YES.

10) A colleague described the 5 stages of Blockchain understanding. Dismissive, Curious, Incredibly excited, Understanding followed by a harsh realisation of how tough the really big changes will be to make.  There is no magic bullet, but there are a collection of genuinely novel ideas here.

In conclusion:

Transformational ROI from blockchain for corporates will take a good number of years. Smaller bits of ROI can be achieved tomorrow if you have the right buy in and strategy and partners.

There are strategies for:

a) Educating a large organisation
b) Delivering quick wins
c) Building a blockchain strategy

But they require understanding it first.

Simon Taylor – Making Innovation Work