Viewpoint: Accessing Europe: The World’s Largest Single Market
As the world’s largest single market with one license providing access to more than 500 million consumers, it’s understandable why Europe is a natural starting point for U.S. firms looking to expand internationally. But many U.S. firms thinking about Europe aren’t aware of significant differences with regulatory approaches of Europe and the U.S., and without local knowledge are likely to take potentially costly wrong turns in their European expansion.
Passporting: One License for All Europe
First, yes, you do need a license to do business in Europe. For most prepaid businesses looking to conduct business here, that license is the e-money license. And, yes, just one license issued by one EU country is required to do business in the whole of Europe, not just the Eurozone. Firms notify the regulator of their home state (i.e., where they received their e-money license) when they intend to do business in different EU countries. Their home state regulator then notifies the appropriate regulators abroad. This notification can be done alongside the licensing process or at a later date and is known as passporting.
Unlike other regions in the world, in Europe you don’t need a lawyer to obtain a license. Most firms use a consultancy specializing in e-money and payments licensing and compliance, which is far less costly and focuses on what the regulator needs to see. Regulators in Europe look at the structure, operations and ability of a firm to identify potential risks to consumers and the market and, therefore, to the regulator. They basically want to see a well-structured, well-run business that’s aware of the potential risks of its business model and has taken the appropriate steps to manage them. There are some basic requirements, such as capital requirements and personnel, as well.[i]
Home Base: London Calling
More than 75 percent of e-money issuers and payments institutions operating in Europe are based in the U.K. and licensed by the Financial Conduct Authority (FCA) in London. Many countries in Europe have no e-money firms licensed directly in their countries; all those operating there have used passporting rights from another EU country, primarily the U.K.
The popularity of the U.K. isn’t only due to language. In fact, many firms that get licensed in the U.K. aren’t originally from English-speaking countries. The major reason is that the U.K. aims to encourage innovation and competition, particularly in payments, and its approach to implementing European legislation is highly collaborative with the industry. The FCA is very experienced in dealing with innovative business models that may challenge current regulatory thinking. It recently launched an innovation hub to help innovative businesses in the U.K., and, in my experience, it historically has been encouraging to these businesses and open to looking at the principles of regulation and how these should be applied in unique cases. What’s more, the FCA is quite pragmatic in its approach and doesn’t want regulation to be an unnecessary barrier to genuine innovations that will benefit the industry and consumers.
Time scales and red tape are also an important consideration to most firms, and the U.K. government attempts to make it easy for businesses to set up here. In the U.K., it takes, on average, 13 days to set up a company; a new company can be registered in just 24 hours. The process of authorization for a payments or e-money firm with the FCA is, on average, the fastest in Europe. We have helped several businesses become fully operational in less than three months and are seeing a six-month average across most of our clients.
The FCA has statutory requirements for responding to applications within 12 months and, because the volume of applications is high, the FCA has developed a much more defined review process compared with other European regulators. Most applications usually are processed within six months; many have been authorized in less than 20 weeks, with one payments license processed within just five weeks. Overall we are seeing the time table from submission to decision steadily dropping. The FCA also is keen to act if businesses are finding themselves in a Catch-22 situation between the regulator and a third party, for example, in cases where FCA authorization is required prior to entering into a relationship with a third party, but due to the necessity of the third-party relationship to the applicant’s business model, FCA policies would prevent authorization being given until the relationship with the third party has been established. The FCA wants to ensure that these sorts of situations are resolved don’t prevent a firm from entering the market. Similarly, the FCA has been known to step in if delays (for example, company registrations) within government departments could negatively affect an application—an approach you don’t often see from regulators.
Many businesses that look to set up in countries other than the U.K. often do so on the basis of taxation. Obviously, for advice on taxation you need to talk to an accountant, but, in my experience, most of the firms that start elsewhere eventually set up in the U.K. The U.K. has a competitive tax regime and although European countries known for low taxation tend to be very welcoming to large firms (such as Amazon—where it’s worth regulators building a one-to-one relationships), regulators aren’t necessarily set up to welcome large numbers of midsize businesses that require e-money or payments licenses and ongoing supervision. What’s more, if regulators will consider an application at all, there may not be a set procedure and the process typically will take far longer than in the U.K.
Another thing to consider when choosing the country in which to base your EU business—a factor many businesses overlook initially—is the fee structure of the regulator. Regulators in Europe charge an authorization fee and then ongoing fees to authorized firms to cover the cost of supervision. The amounts and structure of these fees vary, and some payments businesses find the regulatory fee structures in some countries aren’t compatible with their business model, causing problems with cash flow and profitability. This is another reason the U.K. is so popular, with some European businesses in other member states moving to the U.K.
Prepare for the Unexpected
There are a few aspects in Europe that generally catch U.S. companies by surprise. By far the biggest unexpected issue for U.S. payments firms is the length of time it can take to open a bank account in Europe. As the payments and e-money markets have grown significantly over the last few years, banks in Europe have become more reticent in servicing the market. Most industry participants see this as a response to increased competition, but the banks claim risk, in particular AML risk, is the reason. The U.K. government has responded to these issues, introducing a new Payment Systems Regulator that’s investigating factors that are a barrier to entry or are causing problems for existing payments and e-money firms, including account access and transparency. The government also has taken steps to increase competition in banking, with more banking licenses being issued and predicted than at any time in the last 100 years. This is gradually increasing account availability and choice for the payments industry as well as other consumers. Companies in the e-money and payments industry can open bank accounts, but they must be prepared for a process that could be frustrating and take several months longer than expected, depending on the specific nature and circumstances of the business.
Another challenge many U.S. firms are often unaware of is a lack of harmonization of regulations and regulatory approaches across different jurisdictions in Europe. These tend to be minor when translated into the actual operations and controls within a business when passporting, but firms do need to be aware that slight adaptations are required between different EU member states. Firms should expect different supervision requirements when passporting into different countries depending, not just on the jurisdiction, but also whether they’re operating on a virtual basis in that jurisdiction or have an actual physical presence there. All countries abide by directives set at a European level, which means that the overarching legal framework is standard across all jurisdictions, but these directives allow scope for each member state to adapt the specifics to fit the requirements of their own jurisdictions. There are also instances where specific terms and points of law are interpreted differently in different countries. Although Europe does focus on harmonization, it also enables countries to adapt laws to reflect their own risks and priorities, so it’s likely that there always will be some difference in the implementation of directives.
A common mistake some businesses make when entering Europe is thinking that regulators in some jurisdictions won’t scrutinize their application as intensely as others. Perhaps they have a few skeletons in the closet and are hoping they won’t be uncovered. No matter where you decide to become licensed, you must be proactive in dealing with any issues you foresee will cause concerns for regulators. During the application process, you have the opportunity to explain any issues, but once you hide problems or mislead the regulator, this becomes an issue in itself. Regulators in Europe are likely to reject an application, some without discussion, if they come across something an applicant appears to be trying to hide. Even if you manage to hide something through the authorization process, your license is likely to be revoked immediately when the regulator discovers the truth, which it always will. Past problems do not mean you’ll have trouble obtaining a license, especially if you’re prepared to have open discussions with the regulator, but hiding issues will always result in serious problems when the regulator finds out it has been misled.
Where to Start
Hopefully I’ve given you an introductory understanding of the European regulatory environment, but I expect you’re still asking yourself where to start. For us, initial conversations with U.S. firms and others looking to become authorized in Europe tend to be focused on providing information. Most firms that approach us have questions and decisions that need to be made in determining whether and how to enter Europe, and many are surprised that instead of a “sales meeting,” we start by giving guidance and discussing the best route to market: whether there are alternatives to authorization that might be suitable, which payments or e-money license would be most appropriate depending on future plans and immediate needs.
Other consultancies may start the process in a different way, but no matter which consultancy you choose, here are a few things to look for from your consultancy. A good consultancy will review your existing operations and documentation along with your proposed European business plan and advise you on any adaptations or potential issues from a European regulatory perspective. If you don’t yet have a European business plan, a consultancy should assist you in defining it and give guidance on what information is required by the regulator. A consultant should make sure you understand the reasons for any adaptations as well and how European regulation applies to your business and operations in practice—this understanding is important in making sure the regulator has confidence in your business during the authorization process. Your consultancy also should help you navigate the application process itself, review documentation before it’s submitted and guide you in your communications with the regulator while your application is being reviewed.
Try to avoid consultancies that use templates or one-size-fits-all solutions, as this is likely to cause problems later on. A good consultancy will interpret the regulation to fit your business by using the principles of regulation to find the best approach for you, rather than forcing unnecessary changes to your business model and operations. As part of this, you should look at both the operational and licensing experience of the consultants you’re considering. Consultants who know how businesses work in practice are far more realistic in their approaches and are better at tailoring their advice to the requirements of your firm. They will deliver the tailored controls and procedures preferred by the regulator as well as ones that benefit your business.
And finally, look at actual time tables and success rates for licenses for past clients. Make sure you know how they’ll respond if issues arise because of their actions (or inactions!). A good consultancy will put these things right without any additional charge.
The best consultancies also provide a range of services, whether you need a little support for an internal project—workshops, guidance and reviews—or full development support where consultants partner with key team members and do the majority of the work.
Expanding into Europe is not a quick or simple proposition, but it can be a smooth process if you choose a partner that knows the environment and has experience working with regulators across jurisdictions. In terms of outlay versus rewards, as the largest single market with a well-developed regulatory system and governments encouraging competition and innovation in payments, in my opinion, Europe really can’t be beaten.
Craig James, CEO of Neopay Ltd., is a specialist in e-money/prepaid AML and financial services compliance with more than 15 years of experience. Neopay has helped more international payments firms set up in Europe than any other specialist consultancy and has a 100 percent success rate in obtaining authorizations. Craig is also chairman and non-executive director of the Prepaid International Forum. He can be reached at firstname.lastname@example.org.
[i] We provide fact sheets covering U.K. requirements at our office or on the members’ area of our Website if you want further details.
In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.