Brexit uncertainty causing some fintechs, challenger banks to put growth plans on hold

The uncertainty surrounding the U.K. political future and Brexit is raising alarm bells in Europe as a second company in the critical financial sector has pulled back in as many days amid questions on a final resolution. 

Funding Circle Holdings Plc, an SME lender, announced that it was slashing its earnings estimates amid reduced loan demand for business loans and that it would hold off on previously announced plans to enter the Canadian market. 

"The uncertain economic environment has reduced demand from small business and led us to proactively tighten lending criteria," Samir Desai, chief executive of Funding Circle, said in a company release. "As a result revenue growth will be impacted.”

Funding Circle is a digital lending platform for the SME market in the U.K., U.S., Germany and the Netherlands. The company said that current loan performance remains in line with previous expectations. The company said investor returns on a net basis are expected to be in line with prior expectations of 4.4% to 8.4% in 2018 and 5.0% to 8.5% in 2019. 

In the U.S., the company has surpassed $2 billion in loans under management and $1 billion in loan originations, according to the release. 

The warning comes a day after Fidor Bank announced plans to close its U.K. business as of Sept. 15 amid uncertainty on the future of Brexit. Fidor Group, based in Germany, plans to keep its German digital bank in full operation. 

The U.K. is still trying to find a political resolution to the crisis, as Prime Minister Theresa May previously announced that she would resign after being unable to get political backing on her Brexit plan. A scramble has emerged to succeed her as head of the U.K. government, and her replacement would face similar difficulties in forging an agreement what would garner enough votes to ensure a stable transition out of the E.U.

"The uncertainty around Brexit does make longer term decision making challenging for challenger banks and fintechs not based in the U.K., given the uncertainty about future passporting arrangements and potential regulatory divergence," Sam Smith, spokesman for Juniper Research, told Mobile Payments Today via email. "However, given the delays to the Brexit process, most fintechs will already have arrived at a solution, either licensing directly with the FCA or using services from another licensed entity.”

The announcement comes less than a week after Fitch Ratings warned that challenger banks in the U.K. would face potential headwinds compared with incumbent banks due to late cycle and Brexit related risks. 

Fitch warned that several of these upstart banks have grown faster than the market and faster than GDP in a relatively benign credit market and had not yet been tested under conditions of an economic downturn, according to a release from Fitch. 

Earlier this year, Prepaid Financial Services Ltd. took proactive measures to protect against Brexit uncertainty by obtaining a money license from the Central Bank of Ireland that would allow it to continue operating in Europe no matter what the negotiations decided. 

"PFS right now is one of only a handful of fintechs that is double regulated,"spokesperson Marie O'Riourdan told Mobile Payments Today. "Regardless of whatever happens with Brexit, we're covered.”

Original author: David Jones