Is London still king in post-Brexit banking?

Will it be a hap­py new year for the UK bank­ing sec­tor? When the tran­si­tion peri­od of Britain’s exit from the Euro­pean Union ends on Jan­u­ary 1, busi­ness lead­ers and bankers alike will tip­toe into a post-Brex­it real­i­ty. Enmeshed by con­fus­ing and in some cas­es yet-to-be-deter­mined rules, they will be enter­ing a new glob­al bank­ing land­scape.

But giv­en that finan­cial insti­tu­tions inside and out­side Europe have been prepar­ing for this day since the EU ref­er­en­dum on June 23, 2016, will things be marked­ly dif­fer­ent?

What­ev­er hap­pens, British banks and their Euro­pean coun­ter­parts have had enough time to ready them­selves for post-Brex­it life. Admit­ted­ly, some details still need to be finalised, though Bank of Eng­land gov­er­nor Andrew Bai­ley has been warn­ing the largest UK lenders to plan for a no-deal Brex­it since June.

Legal­ly, there will be changes, if only slight to begin with, on a glob­al scale. “As of Jan­u­ary 1, banks locat­ed in the EU and the UK will have to oper­ate in two sep­a­rate reg­u­la­to­ry and super­vi­so­ry envi­ron­ments,” says Yves Mer­sch, a mem­ber of the Euro­pean Cen­tral Bank’s exec­u­tive board. “Providers of finan­cial ser­vices between the EU and the UK will no longer enjoy the ben­e­fits of the sin­gle mar­ket.

“Many euro-area banks doing busi­ness across the Chan­nel, as well as UK banks oper­at­ing in the euro area, have made con­sid­er­able progress in view of this event.” Mersh adds that most are “on track to fin­ish their prepa­ra­tions” this year, but oth­ers “have much work to do”.

For the lat­ter, the coro­n­avirus fall­out has dis­rupt­ed post-Brex­it plans. “Broad­ly speak­ing, the main pri­or­i­ty for banks over the past few months has been tack­ling the mul­ti-faceted con­se­quences of the pan­dem­ic,” he says.

No excuse for banks to be unprepared

Indeed, the “C” word has obscured the “B” word since March, and although COVID-19 may pro­vide a rea­son for the slug­gish progress of Brex­it nego­ti­a­tions, it is not a just excuse for banks to be ill-equipped. Many big play­ers lined up their moves long ago.

EY cal­cu­lates that banks and fund man­agers have com­mit­ted to mov­ing £1 tril­lion of assets out of the UK and into the EU because of Brex­it. US lender JPMor­gan Chase & Co., for

instance, is expect­ed to shift around £180 mil­lion in assets to Ger­many. Fur­ther, it has ordered 200 staff to move out of Lon­don to oth­er Euro­pean cities includ­ing Paris, Milan, Madrid and Frank­furt, in the expec­ta­tion that the UK and the EU will not firm up an agree­ment on finan­cial ser­vices.

The UK has always been, and con­tin­ues to be at least for now, a world leader in finan­cial ser­vices

Con­sid­er­ing the UK exports more than £26 bil­lion in finan­cial ser­vices to the EU, accord­ing to the Office for Nation­al Sta­tis­tics, per­haps the glob­al post-Brex­it bank­ing land­scape may trans­form quick­er if no deal is reached.

How­ev­er, James But­land, vice pres­i­dent of glob­al bank­ing at cross-bor­der fin­tech Air­wallex, argues the “mass exo­dus” from Lon­don “has not hap­pened to the extent so many were sure it would”. He says: “Lon­don remains an attrac­tive place where peo­ple want to live and work. Equal­ly, the ecosys­tem in Lon­don is tru­ly glob­al, like New York or Hong Kong, and has always been regard­ed as a cru­cial finan­cial hub.

“The UK has always been, and con­tin­ues to be at least for now, a world leader in finan­cial ser­vices, eclips­ing many of its EU rivals across the sec­tor. And despite uncer­tain­ty around Brex­it, one thing is clear: Europe will remain a leader with­in the glob­al bank­ing indus­try, main­ly due to the strength of the euro as a cur­ren­cy.”

London has critical role to play

But But­land says ”a new leader needs to take London’s crown” with­in the region. He con­tin­ues: “The Euro­pean bank­ing com­mu­ni­ty may start to face geo­graph­i­cal frag­men­ta­tion, as the posi­tion to become the epi­cen­tre of the euro­zone opens up. The race to become the finan­cial cap­i­tal of the EU seems to be between Paris, Frank­furt, Brus­sels and Ams­ter­dam, with no win­ner yet in sight. Wher­ev­er this loca­tion may be, it should look to Lon­don to con­tin­ue Europe’s lega­cy as a leader with­in the glob­al bank­ing econ­o­my.”

Alas­tair Holt, finan­cial reg­u­la­tions part­ner at glob­al law firm Lin­klaters, agrees. “Oth­er Euro­pean cities will not be as influ­en­tial as Lon­don, at least in the short to medi­um term,” he adds. “Lon­don can play a crit­i­cal role in bridg­ing the East and the West, par­tic­u­lar­ly giv­en the increas­ing ten­sions we have seen between the world super­pow­ers in those regions.

“The UK will still be a lead­ing glob­al finan­cial cen­tre, boost­ed by its lan­guage, time zone, the legal sys­tem, and the pre-exist­ing ecosys­tem of finan­cial insti­tu­tions and sup­pli­ers, the vast major­i­ty of which will remain in the UK.”

Pro­fes­sor Bri­an Scott-Quinn, direc­tor of bank­ing pro­grammes at Hen­ley Busi­ness School, is more cau­tious and believes the glob­al bank­ing land­scape has been frag­ment­ed since the 2008 finan­cial crash.

“Just as trad­ing rela­tion­ships between the major blocs – the Unit­ed States, Europe and Chi­na – have been dam­aged in recent years, as well as the rela­tion­ship between the UK and the rest of Europe, so glob­al­i­sa­tion of bank­ing and finance has been in low gear now since the finan­cial cri­sis,” he says. “Most UK banks that had plans for inter­na­tion­al­i­sa­tion or for build­ing up their invest­ment bank­ing capa­bil­i­ties have since aban­doned such plans.”

Contingency plans needed for uncertain year

Regard­less, Holt argues that coro­n­avirus is more of a threat to the bank­ing sector’s future. “COVID-19 is clear­ly a wor­ry, more so than Brex­it,” he says.

Chris Gan­je, chief exec­u­tive and co-founder of Cardiff-based fin­tech AMPLYFI, which focus­es on devel­op­ing arti­fi­cial intel­li­gence for bank­ing, expands upon this theme. “The bank­ing sec­tor should have already dealt with Brex­it over the past two years with robust mod­els in place to move on,” he says. “The fall­out of COVID-19 is a major unknown. For exam­ple, any FCA Sec­tion 166 notice into how a bank han­dled cri­sis-relat­ed loan appli­ca­tions could cost it tens of mil­lions of pounds to review.”

Addi­tion­al­ly, Alessan­dro Hata­mi, co-author of Rein­vent­ing Bank­ing and Finance, says it is hard to quan­ti­fy the effect of Brex­it at the moment. And he points out: “The impact of leav­ing the EU finan­cial pass­port­ing scheme, mak­ing it hard­er for UK fin­techs to serve Euro­pean cus­tomers from the UK, is also not clear and won’t be until the final deal is nego­ti­at­ed.”

But­land at Air­wallex con­curs that 2021 will be piv­otal in shap­ing the glob­al bank­ing land­scape. “The next 12 months will cer­tain­ly be inter­est­ing, as both the pan­dem­ic con­tin­ues and the reper­cus­sions of a poten­tial Brex­it deal loom ahead,” he con­cludes.

“What­ev­er hap­pens over the com­ing year, dis­rup­tion lies ahead. Finan­cial insti­tu­tions will be mak­ing con­tin­gency plans for every pos­si­ble even­tu­al­i­ty.”

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Brexit and COVID-10 accelerate move to digital

The Unit­ed King­dom Euro­pean Union mem­ber­ship ref­er­en­dum was inevitable when David Cameron won the 2015 gen­er­al elec­tion, hav­ing promised such a vote dur­ing his cam­paign. Coin­ci­den­tal­ly, 2015 was when branch­less chal­lenger banks Mon­zo and Rev­o­lut were found­ed, with Star­ling launch­ing a year ear­li­er. 

While the direc­tion of trav­el was estab­lished five years ago, the com­bi­na­tion of Brex­it and now COVID-19 has quick­ened the dri­ve for old­er finan­cial insti­tu­tions to trans­form their busi­ness and oper­at­ing mod­els, because it’s clear: the future is dig­i­tal.

Tech­nol­o­gy is enabling fin­techs to enter the bank­ing mar­ket, and thrive. Experts pre­dict tra­di­tion­al banks will have to part­ner with tech organ­i­sa­tions to keep pace with devel­op­ments. 

A study of 200 UK and Euro­pean bank­ing exec­u­tives by Mar­qe­ta – an open-API card issu­ing and pro­cess­ing plat­form that Mas­ter­Card has recent­ly invest­ed in – found that in the wake of the coro­n­avirus pan­dem­ic over three-quar­ters (78 per cent) of banks have been forced to change their future bank­ing strat­e­gy. 

Some 72 per cent of those sur­veyed are plan­ning to grow the num­ber of in-branch dig­i­tal ser­vices, and two-thirds will invest more in dig­i­tal bank­ing and ser­vices. Fur­ther, nine in 10 respon­dents (89 per cent) says the COVID-19 sit­u­a­tion has “dras­ti­cal­ly increased” the speed of change in bank­ing from years to months.

Max Chuard, chief exec­u­tive of Gene­va-based bank­ing soft­ware fin­tech Temenos, says: “Uncer­tain­ty is a cat­a­lyst for inno­va­tion. The 2020s were already set to be the decade for dig­i­tal bank­ing trans­for­ma­tion. But now the coro­n­avirus cri­sis has accel­er­at­ed this process. It has made the need for advanced bank­ing tech­nolo­gies – like arti­fi­cial intel­li­gence, cloud and SaaS – even greater.”

Defining moment for the banking industry

The Temenos CEO points to his organisation’s glob­al sur­vey that shows almost half of the respon­dents (45 per cent) say their strate­gic response to the rapid­ly chang­ing bank­ing land­scape is to build a “true dig­i­tal ecosys­tem”. He adds: “It’s a defin­ing moment for the bank­ing indus­try, and those who can har­ness the poten­tial of dig­i­tal tech­nol­o­gy will shape the future.”

Lee Edwards, vice-pres­i­dent in North­ern Europe, the Mid­dle East and Africa for com­put­er soft­ware giant Adobe, thinks the same. “Banks have to ensure they keep pace with dig­i­tal-first chal­lenger banks, such as Mon­zo or Star­ling, to deliv­er new expe­ri­ences that both enhance and com­ple­ment their bricks-and-mor­tar branch­es,” he says. “This has includ­ed imple­ment­ing new tech­nolo­gies with­in apps and web­sites that enable cus­tomers to per­form tasks pre­vi­ous­ly exclu­sive to the branch, like cash­ing cheques or remote meet­ings with advi­sors.”

This need to evolve bank­ing oper­a­tions pro­vides an oppor­tu­ni­ty to stream­line typ­i­cal­ly time-inten­sive tasks, such as set­ting up an account or apply­ing for a loan, Edwards says. “As an exam­ple, TSB imple­ment­ed dig­i­tal sig­na­ture tech­nolo­gies using Adobe Sign to allow cus­tomers to car­ry out impor­tant process­es from their own home, mov­ing over 15,000 account sign-ups that would nor­mal­ly require a trip to the branch,” he adds.

That con­ve­nience will be cen­tral to win­ning cus­tomers, believes Aaron Archer, chief exec­u­tive and founder of Lon­don-head­quar­tered chal­lenger bank Finndon. “Dig­i­tal banks will see a major increase in their mar­ket share com­pared to high street banks, due to their lack of flex­i­bil­i­ty to adapt to mar­ket con­di­tions, and cus­tomers will be seek­ing greater oppor­tu­ni­ties to save.” 

He wouldn’t be sur­prised if big tech firms, includ­ing Apple and Google, begin to “offer bank­ing prod­ucts to their cus­tomer base to cre­ate a robust ecosys­tem”. Archer adds: “You will see an increase of merg­ers and acqui­si­tions between tech firms and tra­di­tion­al banks look­ing to stay rel­e­vant.” 

Sophia La Vescon­te, a fin­tech lawyer at Lin­klaters, agrees. “With increas­ing dig­i­tal­i­sa­tion, we are like­ly to see a growth in out­sourc­ing arrange­ments between the finan­cial sec­tor and tech­nol­o­gy ser­vice providers.” How­ev­er, she warns: “Reg­u­la­tors across the globe are quite con­cerned about the sec­tor becom­ing over­ly depen­dent on a small num­ber of – unreg­u­lat­ed – tech­nol­o­gy com­pa­nies.”

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