Viewpoint: What’s the Best Route to Market in Europe?
By Craig James, Neopay
Let’s start by getting one thing straight—there’s no right or wrong way to enter Europe. There are several different routes to market and each has its own advantages and disadvantages. Europe is the largest single market in the world and an attractive proposition for most payments businesses looking to expand, but you do need to look at the different options available and determine the best route to market for your own firm. To begin this process, it usually is a good idea to think about the differences between operating in the European Union (EU) and the U.S. and what impact this could or should have on your plans.
Things to Consider
The cultural differences across different EU countries are just as great (some would argue greater) as you will find across different U.S. states. A marketing campaign that’s extremely successful in the U.K. could well fall flat on its face in Germany. The popularity of different products and the needs of consumers also differ widely across countries as do the ease of electronic verification, the numbers of immigrant workers wanting to transfer money back home, the amount of competition in the market or the levels of the unbanked population.
Although there are similarities with the EU and the U.S., i.e., EU directive/federal law and country law/state law, unlike the U.S., the EU is not one big country, but many different countries that work together to agree on law that all will abide by—but may interpret differently. Because the EU is many countries cooperating together, within these laws there always needs to be the ability for each country to tailor the details to meet their own specific requirements and risks. Although all countries follow the same overarching European directives (think federal), each country still will have differences in the specific implementation of these, so similar to state law where it may well be legal in California but that doesn’t mean South Dakota is going to be on board. The good news is that you can operate across the EU with one e-money or payments institution license, but you need to allow for slight differences in procedures for different member states.
You also need to be aware that not all the countries in Europe belong to the EU. There are 28 countries in the EU, so one license will allow you to operate across all these member states. Other countries such as Switzerland, Norway, Iceland and Liechtenstein are not members of the EU. You need to consider where these non-EU countries fit into your plans, as their licensing requirements differ.
|“Acquisition should not be seen as a shortcut to obtaining a license. Instead, it is a shortcut to is obtaining a client base and a brand presence.”|
Because of all these differences, most firms identify specific countries that they want to tackle first, and generally focus on countries within the EU where they can rely on one license. How many countries and which ones they are depend on the business. Some firms have a very clear idea of exactly which countries they want to expand into, while others just want to dip their toe in the European market and, therefore, want the cheapest and easiest initial route to a limited number of potential customers. Still others look to reducing the overall cost and time of initial expansion to a minimum and therefore want the most efficient route for phase 1 of their plans, which may include several different EU countries. Others prefer to plan even further ahead and want to ensure at the outset that they’ll be able to expand across most EU countries quickly and effectively.
Once you have a feeling for where and how quickly you want to expand, you can start considering the different routes to market.
Dipping Your Toes in European Waters
For firms that just want to dip their toes in European waters, there are alternatives to being fully licensed, although these options also come with significant restrictions and disadvantages over a full license.
The first option is to consider a “small” license, which is effectively a waiver enabling firms that operate within certain restrictions to reduce the cost and time scales of obtaining a license. These small licenses don’t permit you to operate across borders, so you’d be limited to customers in one EU country. There also are restrictions on the amount of business you can do, with a limit of €5 million (US$5.5 million) on e-money outstanding and of €3 million ($US3.3 million) per month average processing volume for payments. You still need to be licensed and supervised by a regulator, and you will need to have appropriate controls and procedures in place, but the level of detail required by the regulator as well as the fees and, under some circumstances, capital requirements are lower than you would expect from a “full” license.
Another option for firms looking to test the market is to partner and become a program manager or agent with an authorized firm. There are several partnership options available, which avoid the need to become directly authorized. However, you’ll still need controls, procedures and frameworks in place to the same standards as an authorized firm and, in some circumstances, the requirements are higher than for those obtaining a license directly. There are also likely to be restrictions on your activities and, of course, you’ll be paying ongoing fees to your authorized partner, which will impact your potential profitability.
Both these options may be advantageous to firms thinking of limited expansion or a trial with limited exposure. However, if you continue to expand in Europe, at some point you’re likely to need a full license and you should bear in mind the time scales and cost of obtaining a full license are not reduced significantly by having already undergone either of the options above.
Authorization Versus Acquisition
If you’re not happy with these restrictions or sharing your profit, you’ll need a full license and most U.S. companies entering Europe take this route. This option will give you full access to the EU without restrictions on the levels of business you undertake. You gain a license in one country and notify that regulator of your intention to “passport” the license into other EU states. This can be done when you apply for your license or at a later date.
For some, the question then becomes whether to set up a new firm or acquire an existing one. There’s very little difference in time scales or the regulatory process between the two. Acquisition should not be seen as a shortcut to obtaining a license. Instead, it is a shortcut to is obtaining a client base and a brand presence.
When a licensed business is acquired by another firm, you need to obtain permission from the regulator through a change in control notification. The regulator will require a comprehensive understanding of the business, its risks, structure and management, processes and controls along with details of the new individuals and businesses involved. The regulator will review the application just as it would for a new firm. Unfortunately, there’s no shortcut to regulatory approval.
You also will need to check whether the company you’d like to acquire has the appropriate permissions from the regulator for any activities you undertake that may differ from what they’re already doing.
Excluding the purchase price of the business obviously, the costs between the two options are similar as well. Across the EU, all e-money firms are required to have initial capital of €350,000 (US$385,289) (paid up share capital, reserves or P&L) and ongoing capital of 2 percent of outstanding e-money, if this is greater than the initial requirements. The difference between licensing and change in control notification fees are negligible and the ongoing regulator fees are calculated based on the number of e-money accounts.
So if you have the budget to acquire an existing firm, you should be looking at its products, client base and brand to see if it fits with your business needs rather than the time or money it could save you in the licensing processes because the reality is it will do neither.
What about Brexit?
We’ve reached the point where we can’t discuss expansion into the EU without discussing the possibility of a so-called “Brexit.” The U.K. is due to hold a referendum this summer on whether or not to remain in the EU and in true media style this has become known as Brexit. The main debates in the U.K. surround immigration and freedom of movement along with the costs of belonging to the EU.
Although no one can predict the outcome of the referendum or what changes will take place if the U.K. chooses to leave the EU, there are some things we can be fairly certain about. Even if the U.K. does leave, there will be some sort of trade agreement in place which will mean that, in practice, most businesses will continue as they are. To give an example, Germany’s biggest export is luxury goods and their biggest market in Europe is the U.K. Germany isn’t going to stop selling to the U.K. and the U.K. isn’t going to stop buying. It would be in no one’s interest for these agreements to stop.
The U.K.’s biggest export is financial services. In terms of payment services, more than 75 percent of e-money and payment services firms operating in Europe are based in the U.K. Most EU countries don’t have any licensed providers in their own jurisdictions but rely on U.K.-based firms. What’s more, the regulators of those countries aren’t set up to regulate payments firms. It will be in everyone’s interests to enable U.K. firms to continue to operate on a cross-border basis and so we can be fairly confident that this will not change. We also can’t envisage either the EU or U.K. making more changes to legislation than are absolutely necessary to effect the split—the costs and time scales would be far too great and it would make an already expensive and time-consuming event far too complicated.
My personal opinion is that if Brexit does happen, the U.K. will enter an agreement with respect to trade and financial services that will leave things pretty much as they are. Whatever happens, we’re fairly confident that everyone will find a way to continue to do business together with the minimum of legal and regulatory changes.
Regardless of which countries are in or out of the EU, it’s important to understand the intricacies of the regulatory environment across the EU and its member states as well as the European Economic Area and European countries that aren’t in the EU. For more details on this topic, join me at All Payments Expo in New Orleans on March 22.
Craig James, CEO of Neopay Ltd., is a specialist in e-money/prepaid AML and financial services compliance with more than 20 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 also is chairman and non-executive director of the Prepaid International Forum. He can be reached at firstname.lastname@example.org.