Viewpoint: What Does Brexit Mean for Payments?
By Tomas Likar, Hyperwallet
For decades, London has enjoyed the undeniable position of European financial capital. Financial institutions—and, more recently, fintech startups—have used London as their base to access the European Union’s common market of 500+ million people. Whenever I was asked to advise companies on their European go-to-market strategies, we sooner or later came to the same conclusion: “We have to open an office in London.”
Things changed on June 24 when the referendum results were announced. Though we all knew Brexit was a possibility, we weren’t prepared for the new reality that it now threatens to bring about. The impact on the U.K.’s citizens already have been well-debated: volatile currency, higher interest rates, impacted real estate valuations. But what will be the impact of Brexit on U.K.’s payments/fintech industry? Let’s take a look at some of the most important factors we should pay attention to in the coming months.
No. 1: Regulatory Complications
The chief impact of Brexit on all payments companies will be licensing. The Financial Conduct Authority (FCA), Britain’s regulatory body, has been known to be friendly to global payments companies and new fintech business models. As a result, most global financial technology companies established their European headquarters in London, applied for the FCA eMoney license, and subsequently “passported” this license to all other European countries. With the U.K. voting to exit the EU, these companies may very well have to apply for the license with a different regulator, such as German BaFin or Swedish FI. At that point, companies will need to decide whether to keep multiple European offices or close their London offices and move operations to the new country entirely.
In line with this point, Brexit likely will cause issues for major processors and cross-border acquirers for whom London has been a key European and cross-border processing hub. European privacy and data security laws require these processing centers to be based in the EU. It’s still unclear what the U.K.’s position will be in this regard, but if it were treated as an off-shore country (which seems a logical outcome), payments processing operations of hundreds of companies could be forced to relocate to the continent.
No. 2: Restricted Market Access
Secondly, U.K.-based financial institutions likely will face obstacles when accessing the European financial services market. Switzerland’s banking sector still doesn’t have full access to the EU’s internal banking market despite the close bilateral relationships between the two. Ironically, Swiss banks typically used “passporting” from the U.K. to operate in other EU countries—a practice that they will have to quickly reconsider. It will be also interesting to observe what this does to the competitive positioning of some large U.K. banks that have been the “go-to bank partners” for most fintech startups. You can bet that their French, German and other EU counterparts already are preparing the pitches to take over that business.
No. 3: Reduced Talent Pool
Finally, the reason so many financial technology companies decided to establish a global or European headquarters in London is its incredible talent pool with deep knowledge of—among other things—cross-border payments. While I generally agree with CurrencyCloud’s CEO Mike Laven, who wrote that “these factors don’t disappear with a cross on a ballot paper,” I think there is reason for concern in the long-term. A CityUK survey conducted before the referendum estimated that 37 percent of financial services companies are “very likely or fairly likely to relocate staff if the U.K. left the EU.” Similarly, CEOs of London-based fintech companies admitted that they were considering different relocation scenarios. Combined with the U.K.’s stricter work visa policies, the reduced attractiveness of British schools for European students and a weakened pound, I believe we could see a gradual outflow of some of the U.K.’s prime human capital.
What Comes Next?
How will this all play out? No one can say for sure. Europe has never faced such a situation, and it will be up to EU officials to decide the U.K.’s future position with regard to the common market (ironically, the exact kind of situation U.K. “Leave” voters hoped to escape). But one thing is certain: Payments companies quickly will move from drawing theoretical exit scenarios to making tough business decisions. Unfortunately, I struggle to see anything but downsides for the U.K.’s financial services economy even if it takes two years for the dust to settle.
Tomas Likar is the vice president of strategy and business development at Hyperwallet, a global payouts provider to millions of independent workers. Likar joined Hyperwallet after six years with McKinsey & Company, a globally recognized provider of management consulting services, where he advised payments firms in emerging markets strategy, mobile payments, corporate strategy and M&A. He can be reached at [email protected]
In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.