Initial Perspective on Brexit and Payments
British voters’ decision to leave the European Union on June 23 shocked markets around the world. It might also have significant implications on the development of the payments marketplace and its participants. European payments stakeholders are now searching for guidance on what ‘Brexit’ entails for strategic and operational planning. Acknowledging that a great deal of uncertainty remains on how Brexit will unfold, this article outlines potential implications of Brexit in payments and identifies potential signposts on the development of these implications.
More Hype than Reality
Let’s be clear that there is virtually no certainty as to how Brexit will unfold and how it will impact the payments market. It is entirely possible that the Brexit process itself will be prolonged – the Bank of England has publicly suggested that 2018 is likely the earliest the UK could formally leave. And then there are a range of Brexit scenarios in which the impact on the payments marketplace could be relatively modest. For example, the UK could ultimately downgrade to a lesser status, perhaps through European Economic Area (EEA) membership, and not fully exit the European community. Or, the UK could effectively replicate its current status with a series of bilateral agreements similar to Switzerland. In either case, much of current situation regarding payments harmonization could remain intact. Thus, one possible impact scenario is relatively minor, with gradual changes playing out over many years (albeit years of uncertainty).
Loss of Market Access, Elimination of Passport Rights
Considering a more substantial break, first among the key impacts of Brexit is that UK-regulated payment institutions could lose access to European markets. Today, requirements for obtaining a license to conduct payment services are harmonized across the Union, and it is relatively easy to passport such a license from one EU country to another. This enables payment institutions with a UK license to access all of Europe. Eliminating this right would restrict UK-licensed payment institutions from pursuing business elsewhere in Europe without securing separate licenses. Examples of those that would be negatively impacted include UK-based cross-border acquirers; multi-national merchants using UK acquirers for pan-EU acquiring; and UK-based providers of e-money services, such as wallet providers.
In particular, loss of market access would damage the bourgeoning UK FinTech startup community that has been thriving of late and for which London often acts as a beachhead into broader European or global ambitions.
Regulation and Standardization
The UK is currently part of a (mostly) harmonized regulatory regime for payments within Europe today. Regulatory frameworks such as Single Euro Payments Area (SEPA) and Payment Service Directive (PSD) establish standardization and market norms for payment services and competition within the payments marketplace. As a result of Brexit, the UK might become separated from this regime. This separation could be broad or narrow, and market participants will debate if this is in fact a bad or good thing.
One of the key elements of the ‘Leave’ pitch behind Brexit was to escape overbearing regulation and to allow British companies to compete more effectively and efficiently. This premise is hard to defend within payments, as the UK domestic regulators are aggressive advocates for consumer protection (as seen via the Payment Protection Insurance (PPI) enforcement and regulations related to current account switching). Data protection is one area where UK market participants could benefit from lighter domestic regulation, as the UK has generally been more permissive to commercial use of personal data than countries such as Germany.
It is possible that even post-Brexit, the UK will continue to pursue European standardization in accordance with PSD2 on the basis that its underlying principles are sound and that interoperability with Europe is still a good idea for UK consumers and businesses. UK banks and regulators were front-runners in the move to establish open bank APIs, and thus immediate shifts in the pace of these areas of PSD2 adoption will act as a guidepost on Brexit’s payments industry impact.
While there is much uncertainty regarding the UK’s regulatory environment post-Brexit, what is certain is that the UK will lose its powerful voice in the establishment of European regulations— and this cannot be positive for global banks using the UK as their gateway to Europe.
Card Schemes Unwinding the UK from the European Region
The UK is part of Europe as defined by the card schemes, a designation which has important operational and commercial implications on transaction switching, interchange rates and scheme fees. As a result of Brexit, the UK could feasibly be re-classified by Visa and MasterCard as non-European (i.e., it would no longer have intra-EU status which today includes not only EU countries but also EEA countries as well as Switzerland, which is more loosely defined as part of the single market). Losing intra-regional status would have significant consequences for the four-party model participants, for example:
- The card schemes could classify transactions between the EU and the UK as inter-regional with higher scheme fees (a benefit for card schemes) and potentially slower settlement.
- Interchange would not necessarily be capped as designated by European regulation, and thus issuers might actually benefit, assuming interchange upsides outweigh the scheme fee downsides and absent UK caps (although UK regulators could maintain the caps irrespective of Brexit).
- As a result of 1 and 2, and also because acquirers and issuers would likely take advantage of the situation, cardholders and merchants could be subject to higher fees on European transactions.
Relocation and Loss of Jobs
Brexit most certainly challenges the UK as a location of choice for multi-national corporations that often use London as a beachhead for competing across Europe. Loss of market access, loss of employee portability, loss of taxation regimes, and other restrictions could lead companies to look elsewhere to countries such as Ireland or The Netherlands that have also demonstrated success in attracting multi-national companies. Even if the impact of Brexit is ultimately light, prolonged uncertainty could create a vicious cycle impacting the UK’s positioning for company domicile.
Avalanche of Change, Likely Not in Payments
Brexit could trigger a domino effect encouraging other countries to leave the union. It could also trigger significant changes to the European Union’s role in government and the breadth of responsibilities of bodies such as the European Commission (the body responsible for establishment of regulation). While there is clearly angst that must be resolved among EU members and citizens, we expect that payments is not a catalyst for such angst. Our view is that there is a broad consensus around the general objectives of payments harmonization within Europe and we expect that regardless of the chaos in the broader governmental establishment, European payments standardization and harmonization within the region will continue forward.
Strategic Signposts: Anticipating What’s Next
While an initial consensus around the potential implications of Brexit is beginning to take shape, leading indicators provided by signposts should offer further clarity as to Brexit’s ultimate impact (see Figure 2). Among those signposts will likely be the establishment of Brexit dates, reactions by UK regulators and card schemes, and statements from other key actors, such as the large London-headquartered banks, which will provide indications as to the severity of the effect Brexit could have on payments.
Figure 2: Potential Strategic Signposts
Monitoring the signposts and the potential scenarios, we will continue to assess the course of events and implications for European payments stakeholders.
For more information, please contact Joel VanArsdale, Partner, firstname.lastname@example.org, specializing in Merchant Acquiring and Europe Initiatives; or Tom Skomba, Consultant, email@example.com, specializing in Financial Institutions.