Boom, boom, crash! Will a Brexit lull the UK’s e-money boom?

By Craig James | 22 June 2016

The UK’s e-money and payments sector is booming and now more of these businesses than ever are deciding to set up base here. With the UK’s looming EU referendum, I look to the future and discuss the impact of a potential Brexit on the industry.

Tomorrow the UK holds a referendum on whether to stay within the EU or leave - and campaigns on both sides are stepping up.

Much of the debate has focused on trade and immigration, with questions being raised about the impact of a Brexit on the EU’s freedom of movement directive – pertaining to both commodities and people. Those campaigning to leave argue that if the UK was no longer answerable to the EU, its economy would strengthen and it could exercise greater control on immigration. Those wanting to stay instead believe it would leave Britain out in the cold and create economic instability.

However, with all this focus on the movement of commodities, little consideration is being given to what a Brexit could mean for the movement of monies. With the UK’s e-money and payments sector enjoying a healthy period of growth, is it likely a Brexit could cause an industry stagnation?

How do e-money and payments operate across the EU?

Over 75 per cent of e-money and payment firms operating in Europe are based in the UK. This is largely down to the fact many EU countries do not have licensed providers within their own borders. As such, a reliance on the UK has developed over the past number of years.

Currently firms based in the UK can work across other European Economic Areas (EEA) and have free access to EU markets. This is on the basis they meet the local and European regulatory requirements relating to the work they do.

Firms can do this on a single licence, under the condition they notify the regulator of their intent to “passport” the licence into other EU states.

There are countries which are outside of the EU but are still included in the EEA. These countries, such as Iceland and Liechtenstein, can be ‘passported’ to as well. For Switzerland, which is not within the EEA and therefore outside the scope of the passporting arrangement, there is a bilateral agreement in place for certain financial products.

In the event of the UK leaving the EU in June, one can expect that something similar may happen – the UK drawing up their own bilateral agreements with other countries.

What are businesses fearing a Brexit will lead to?

While little has been mentioned by the Leave Campaign about what will happen to the UK’s thriving financial services market, fears are growing amongst the business community about whether leaving the EU will also force us out of the EEA. If we do leave the EEA and set our own regulations, we will no longer be entitled to passport across borders.

Leaving the EU means that new directives and regulations will need to pass through the European Council. A timely process, this could lead to trade becoming over-complicated between the UK and remaining EU states. And questions are being asked about how disruptive this will be to imports and exports – just what impact will this have on trade?

Moving the conversation on from the movement of commodities and onto the movement of money, questions now need to be asked about what a Brexit will spell for the growing e-money and payment sectors. Will these businesses need to apply for new licences to carry on operations? Will they need to set up a business in another EU state in order to gain a new licence?

And what will happen to the UK market itself? In the case of a Brexit and the loss of ability to passport, will the UK market still be as attractive and valuable for payment and e-money firms?

Businesses deciding to set up in the UK currently enjoy access to the largest single market in the world. If this is no longer remains the case then it’s worth weighing up whether the cost of setting up frameworks, procedures and licensing to meet UK requirements will be worth the risk.

In the case of a Brexit, what do we think will actually happen?

At this point in time, all we can do is speculate and surmise about the potential fall-out of a Brexit. We believe though that no matter the outcome tomorrow, things will not be dramatically different.

Should the UK leave the EU, we predict the Brexit will be delivered in one of two frameworks – either UK-regulated institutions will be granted “third country status” and have restricted market access or they will have continued EU market access but lose the ability to vote.

With the Swiss and Norwegian models in mind, it seems plausible that an arrangement to continue our access to the single market will be agreed. But the question is – under what terms? If we follow the Swiss model, we may no longer be able to passport and yet if we follow Norway, it will probably continue as ‘business as usual’.

While we can’t predict the future there are some things we are pretty confident about. For instance, we are certain there will be a trade agreement in place should the UK leave – with such a dependency on the UK’s financial services, it would be in everyone’s best interests to allow UK financial firms to continue to work on a cross-border basis. Also, the likelihood of the EU and UK making changes to legislation unless absolute necessary is slim. The timescale and ultimate cost would make this overcomplicated exercise even more expensive and time-consuming than it already is and needs to be.

The result of the UK’s EU referendum is imminent and despite the media frenzy, we predict not very much will change in reality. It is in everyone’s best interests that things stay the same as both the UK and the EU depend so heavily on each other.

We’re expecting there to be little or no felt changes should a Brexit be the result come tomorrow on the UK and wider European e-money and payment services market.

By Craig James, CEO, Neopay.

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