What Brexit Could Mean For the Payments Industry
2016 has been a year of surprises. On this side of the Atlantic, Brexit – Britain’s referendum vote to leave the EU – shocked many in the business community.
The vast majority of business owners did not support leaving the EU. Single market access, the free movement of trade, capital and people all thrive in a united Europe. As a result of Brexit, everyone, from fund managers to SME owners are starting to adjust to increased uncertainty and slower growth over the next few years.
British Prime Minister Theresa May was prepared to invoke Article 50, to formally initiate negotiations to leave the EU, in March 2017. Until the High Court ruled that Parliament must vote on Article 50, forcing the government to take the case to the Supreme Court. A panel of 11 judges will hear the case on 7 December; an outcome in favour of the government is uncertain.
Where Does Brexit Leave Businesses?
Right now, nothing has changed. The UK is still an EU-member state. Still in the free market. EU laws still bind us. At present, this leaves businesses and the payments industry facing three possible scenarios:
- The government prevails in the Supreme Court, triggering Article 50 in March 2017, with two years of negotiations to determine our new relationship with Europe.
- The government wins the Supreme Court case, taking it to a vote in parliament, which it loses, most likely forcing a general election. At which point, the outcome is unlikely and unforeseeable. It would put every issue back on the table.
- A Supreme Court win leads to a vote in parliament, which the government also wins, triggering Article 50 in 2017.
Although the number of scenarios whereby the UK leaves the EU has reduced, we would be foolish to ignore the possibility. Too many incorrect assumptions were made before the referendum. Too much faith was put in polling data and statistical models, only for the shock to wipe billions off the stock market and damage the Pound on currency markets.
What An EU-Exit Could Mean For The Payments Industry?
- Higher card scheme fees. One of the many unresolved questions, is whether card transactions between the EU and UK would be classed as inter-regional, resulting in higher scheme fees and a slower settlement process? It would depress trade and force smaller businesses to focus on other regions.
- The UK could negotiate a new interchange cap with the card schemes, which could benefit cardholders and merchants, although it would likely result in higher fees on European transactions.
- Regulatory uncertainty. The UK is an active member of two harmonised regulatory frameworks, the Single Euro Payments Area (SEPA) and Payment Service Directive (PSD). Brexit negotiations in the payment industry would need to weigh the pros and cons of how broad or narrow our separation is from this payment regime.
- Within the EU, payments and finance companies can easily “passport” a license to operate across national borders. One of the key unsolved questions is whether this would continue, since eliminating this right would restrict UK-payment institutions from conducting business in Europe. This could force the industry to establish and maintain separate licenses for each country, or limit themselves to only a handful of markets.
- Data protection complications. European privacy and data security laws could classify UK processing centres as offshore, thereby forcing payment providers to move operations to Europe.
Brexit has brought about unprecedented uncertainty across the UK and Europe. For merchants, uncertainty can create opportunities, which is something we have seen from the establishment of London as a hub for Fintech startups. However, in the wake of Brexit – assuming the government prevails – the payment industry needs to make some hard decisions, to limit risk and surprises in the future.