Brexit Brings Boom to Bankenviertel as Tech Firms Eye Frankfurt

Datacenter operator Equinix announced in June 2017 that it would be opening a new “flagship” facility in the German city, adding to its extensive presence there already. In April, Chinese internet giant Tencent also announced that it would be opening four more datacenters to support its Tencent Cloud business, located in Mumbai, Seoul, Moscow, and Frankfurt.

Even further back, at the beginning of 2017, Microsoft and consultancy KPMG unveiled their joint “blockchain nodes”—a term used to describe innovation centers—in two locations: Singapore and Frankfurt. Further expansion to New York is planned for a later date.

The inward investment agency of the region, FrankfurtRheinMain, also sponsored a delegation of business leaders and politicians—including the mayors of Frankfurt and nearby Offenbach—to New York on June 26, which discussed options after Brexit and the region’s desire to attract fintech companies.

One of the most recent announcements to focus on Frankfurt is the launch of managed hosting, co-location and connectivity services from Transaction Network Services (TNS). The company announced that it would be hosting the service in Equinix’s FR2 datacenter.

“Frankfurt has always been an important market center with both the Xetra and Eurex markets being based there,” says Alex Walker, executive vice president and managing director of TNS’ financial services division. “The growth in the equity derivatives and interest rate markets, combined with the adoption of electronic trading to improve efficiencies, means trading firms are increasingly seeking cost-effective ways of accessing those markets as well as managing risk.”

Walker says that while Brexit was not an “influencing factor” in its decision to launch in FR2, the company is now “in a very good position to offer our clients managed infrastructure services if they decide to choose Frankfurt as their European base.”

Regardless of motive, the decision to set up in Frankfurt may prove to be prescient. Consultancy Oliver Wyman published a report at the end of July estimating that the bill for financial firms relocating from London may reach up to $1 billion across the industry, as firms are forced to duplicate infrastructure, expand headcounts and mirror existing technology in their new homes. Managed services may see renewed interest from such firms—Walker estimates that cost savings for banks using such services rather than building out their own infrastructure are typically in the region of 25 to 40 percent, although he stresses that each case is unique.

City of Banks
One of the primary reasons for financial firms relocating to the Eurozone is that the UK is widely expected to lose so-called “passporting” rights once it withdraws from the European Union (EU), which allow UK-based firms to export their services throughout the EU.

Moves toward Frankfurt, which has long played second fiddle to London as Europe’s financial center, are hardly Damascene conversions for US banking institutions and their vendors. The city is an obvious alternative to London given the presence of major EU institutions, including the European Central Bank (ECB), along with exchange giant Deutsche Börse, which has its headquarters in the Frankfurt suburb of Eschborn.

Deutsche Bank, Commerzbank, Deutsche Bundesbank and DZ Bank are other major players that have headquarters in the Bankenviertel—Frankfurt’s central business district.

“Frankfurt is a key contender, boasting proximity to the ECB and a long history of financial competence,” said RBC Investor and Treasury analysts in research published on June 1. “With euro-denominated trading already well-established, and a booming fintech scene emerging, Germany’s City of Banks may bolster its status as a world-leading financial hub.”

There was some debate after the UK voted to leave the EU as to whether Dublin, Paris or other European cities would end up benefiting more from the move than Frankfurt. Indeed, JPMorgan and Bank of America, which have existing offices in Dublin, are understood to be favoring the Irish capital, as are large buy-side firms, owing to the city’s pre-eminence in fund administration and asset servicing.

However, more firms appear to be picking sites on the banks of the river Main, rather than the Liffey. Media reports and comments by senior executives have all suggested that banks such as Citi, Goldman Sachs, UBS, Morgan Stanley and Daiwa Securities Group will either open Frankfurt-based subsidiaries or expand their existing headcounts there in the months to come.

Similar figures for the vendor community—which is largely privately held, with some major exceptions—are difficult to come by. However one London-based headhunter told WatersTechnology that she is already seeing increased inbound queries from clients in this space regarding the German employment environment.

“Ultimately, these companies go where the customer is,” she says. “That will depend on the sector—software companies that have a heavy sell-side client base are already looking at Frankfurt, while those with wealth clients, or other buy sides, tend to be looking at Dublin, Luxembourg and other places. Most of the questions we’ve had are exploratory in nature, but there’s no doubt we’ve had exponentially more since the [Brexit] vote last year, and it’s rising as winners emerge and banks announce expansions.”

This isn’t just from companies, she adds, but also from “senior executives” at some of these firms, who want to know about education systems, property markets and immigration laws governing whether or not spouses and children are able to work. This, she suggests, indicates there is a cohort of technology specialists who may have been told to begin preparations to relocate and lead offices or manage teams in Germany or elsewhere.

What appears to be emerging, regardless of whether banks, buy-side firms, and vendors choose Dublin or Frankfurt, however, is that London is set to lose out in the long term. The Oliver Wyman report estimated that while most banks are only moving small numbers at present, London could lose up to 40,000 jobs in wholesale banking over the long term to European rivals—roughly half its current headcount for investment banking, sales and trading and related areas.