Why Brexit may be the game changer for European fintech

In this Brexit series, professionals discuss how the business community should navigate the UK's departure from the EU. See the stories here, then write your own (use #Article50 in the body of the piece). 

Is Brexit the final nail in Europe’s coffin? Chris Skinner says that, while the region has certainly been having a bad time of late, its future is full of new opportunities.

Hit by the global financial crisis (GFC) in 2008, and then a double-whammy in 2011 when the sovereign debt crisis (SDC) hit, European states have been severely challenged. Portugal, Italy, Greece and Spain have been forced to remain within European rules for interest and monetary supply, but their debt levels have been increasing dramatically and unsustainably. Add to this the British decision to exit the European Union, colloquially known as Brexit, and you have a melting pot of pain.

The end result is a European banking sector which has been suffering from a prolonged period of low interest rates, rising levels of non-performing loans, increasing regulatory demands and costs, weak balance sheets and capital ratios, difficulties in selling non-strategic assets and more. This has led to a crisis in confidence in European banking. For example, we saw the collapse of Commerzbank and RBS in 2008, then many of the smaller banks in Spain failed, culminating in the major disaster of Bankia, a bank formed from seven regional savings banks that had to be bailed out by the government in 2012.

As a result, the Single Resolution Fund was implemented in January 2016 to ensure that member states no longer bailed out their domestic banks, as Spain had with Bankia. Instead, all European countries pay an insurance as such, into a central fund that could bail out failing banks if the European Central Bank believed it was right to do so.

This was a good idea in principle but, in practice, is not operational. For example, Italy had a terrible year in 2016 and had several banks teetering on the edge. The year ended with the potential failure of the worlds’ oldest bank, Monte Paschi di Siena (MPS). The bank needed billions to survive and those billions came from the Italian government in December 2016, when other investors decided not to join. The Italian governments’ €20 billion bailout of MPS breaks the EU Single Supervisory Mechanism rules, but the alternative is that the country fails.

This crisis is not limited to the poorer EU member states. During 2016, the pandemic of under-capitalised banks spread to France and Germany. France has €300 billion of exposures to Italy, and Germany has one of its biggest banks teetering towards failure: Deutsche Bank. The bank lost three-quarters of its value between summer 2015 and autumn 2016, at one point being valued at just over US$15 billion. A bank in serious trouble, and yet one that we all viewed as the most important and stable European bank through most of this crisis.

Then we add the final nail in Europe’s coffin: Brexit. Brexit was the shock vote of June 23, 2016, when the British public voted to leave the European Union. No one believed this would happen and it has led to huge soul searching in Britain, a new Prime Minister and a raft of questions over what this means to the European integration plan. To be honest, the Brexit vote today has had zero impact on the future as no one knows what it means. No one knows if Brexit will be soft – most of the current trade continues as it did before – or hard – Britain loses all rights of access to the Single Market and has to create bilateral trade deals from scratch. No one knows if it will take two years – the UK Government view – or ten years – the unofficial view of British diplomats in Europe. All we know is that it sent a seismic shock throughout the European system and changes the game fundamentally.

What is that game? That game is the EU Financial Services Action Plan (FSAP). The FSAP was agreed by European politicians in Lisbon in 2000. It has resulted in a multiplicity of new regulations and directives from the Payment Services Directive (PSD) to the Markets in Financial Instruments Directive (MiFID), and a further forty directives in between. The fact that the markets have been working on these regulations for over 15 years, and suddenly finds that there are several spanners in the works makes for a bleak landscape.

With all this in mind, are there any bright spots in Europe? Well yes, there are at least two: London and Berlin. London has seen a huge breakout of creativity through fintech since the crisis hit. Over the past eight years, more than US$7 billion has been invested in London fintech start-ups, more than any other nation. The result is not only many new companies that stand out, such as Zopa and Nutmeg, but a raft of neobanks startups from well-funded heavyweights such as Atom and Starling, to many new niche banks such as Tide, Civilised and Clearbank.

Berlin is also a European fintech breakout centre, nurturing new firms from N26 and Solaris to Fidor and Wirecard. Other European countries are also showing major digital innovations, particularly in the Netherlands (Bunq and Knab) and Poland (Idea Bank, mBank and more).

In other words, the traditional structures of European banking may be stressed to the hilt but, in times of crisis, there is always opportunity. These opportunities are supported by the regulators with the UK Financial Conduct Authority (FCA)’s Regulatory Sandbox. The Regulatory Sandbox is exactly that – a place where startups can engage with the regulator to play out their ideas and see if they will get licenced.

All in all, 2017 will be a continuation of the crisis for the major countries of Europe. As Brexit plays out its strange path, it may damage the region further or it might even save it. We have yet to see what Brexit does, but the mixture of innovation and regulation is making an interesting year for all.

Chris Skinner is a bestselling author, commentator at TheFinanser.com and chair of The Financial Services Club