Balkanisation of Europe's Finance Hubs - Great for Fintech, Challenge for the Banks

It will take a while for the penny to drop for many, but despite a concerted rearguard action from London to protect its position as Europe's pre-eminent finance centre, its position in Europe has already changed forever. Much of the speculation in the aftermath of the Brexit vote has been around who might replace London, which in my opinion is the wrong question, since a more likely result will be the development of many centres rather than one. This is an opportunity for the fintech sector, but a major logistical challenge for the banks.

The City of London is gearing up for an almighty effort to try to salvage its position as Europe's most important finance hub. Central to this effort will be a fight to maintain "passporting" rights, to give allow UK-regulated businesses to carry out regulated business in other European jurisdictions without the need to be regulated directly in each country. It is central to many activities in the finance industry and key to protecting London's position. It is precisely for this reason that it is inconceivable that the other 27 EU members will accede to retaining passporting rights without freedom of movement and contribution to the EU budget as a minimum. These two issues are red lines for the Brexiteers, so although there will be much talk of optimism that passporting can be retained, the chances are too low for banks to take a chance, and jobs will move in coming years, regardless of what comes out of trade negotiations, which could take years to even get started, according to the EU Trade Commissioner. Whether its 20-30% of jobs or 40-60% of jobs in the banks that move from the UK will depend on the outcome of the negotiations, but regardless of what happens in the long term, you can be sure that committees are being drawn up in all of the banks, decisions are in process and the biggest realignment of finance companies since the introduction of the single market in 1992, and possibly since Big Bang in 1986 is under way.

This is confirmed, off the record, by a range of banking executives the New York Times spoke to for an article about which finance centre could replace London, but as with all such articles, the conclusion is vague since the answer to where finance will relocate to should really be "all of the above". Allow me to explain.

As the NYT article makes clear, many centres have distinct advantages but all have drawbacks, so these banking committees now tasked with re-allocating human resources to Europe will doubtless come up with a committee-style response. Send the trading floor to somewhere high end, the back office somewhere cheap and the middle office somewhere in between. Bets will be spread, which will both make the development of multiple hubs a certainty, as well a real challenge to manage for the banks. Of course, all of the financial centres will pitch for the high end, high value-added departments, rather than the back office, but the mix that each ends up with will depend on its own pros and cons. In addition, all European banks will be under pressure to pull staff back from London to their home market.

For the fintech community this creates enormous opportunity, since a distributed ecosystem will be dependent on smarter, better ways to do things that creates a natural demand for fintech solutions. In addition, an ecosystem that is more distributed provides opportunities for fintech businesses across Europe, rather than looking solely towards those with a London presence.

In continental Europe there are some really smart, innovative fintech businesses thriving despite more challenging regulatory environments and despite not being in the pre-eminent European finance hub. With the playing field now being levelled London is going to have to wake up to the fact that it has some serious fintech competition.https://www.linkedin.com/pulse/balkanisation-europes-finance-hubs-great-fintech-challenge-miller

Posted on July 05, 2016

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