Brexit: breaking the bank?
As Europe’s biggest e-commerce market, the UK’s e-money and payment services industries are thriving. But with the EU referendum right around the corner, are things likely to change? Craig James, founder and CEO of Neopay, explores the potential of a Brexit-shaped disruption.
On 23rd June 2016, the UK public will take to the polls for the second time this year. Only this time round, they’ll be answering a question which could go onto change the course of British history, for better or worse.
The question, or referendum as its official term, will ask “Should the United Kingdom remain a member of the European Union?” and debate has roared on for months about the potential impact of a “Brexit” on trade and the wider UK economy.
For those rallying behind the Leave campaign, issues of immigration and the cost of remaining in the EU is their reasoning for wanting to step out from under the perceived tyranny of the EU. They feel the UK economy will be stronger and trade unaffected.
While for those fighting for the Stay campaign, a Brexit will likely create economic instability – jeopardising the UK’s recovering economy and cutting off access to trade as well as a wealth of financial and social advantages.
However, there is one common theme between the two battling sides – the focus on trade, or in other words, the movement of commodities. It would appear, then, that little thought has been given to the disruption a Brexit could cause to one of the UK’s fastest growing sectors – it’s e-money and payments market.
How do e-money and payments operate across the EU at present?
Currently, all UK authorised organisations have free access to EU markets and can work across other European Economic Areas (EEA). This is on the premise that they meet both the local and European regulations applicable to the type of business they’re conducting.
Under the EU’s passporting single market directive, authorised organisations can operate on a single licence on the provision the regulator is notified on their plans to “passport” between EU states. Such organisations include insurers, investment firms, banks, payment service providers and e-money firms.
And, with most EU countries lacking licensed providers in their own jurisdictions, the UK is making its mark on the industry – currently home to over three-quarters of e-money and payments firms operating in Europe.
It’s also important to remember that there are countries who are currently outside of the EU but are still fall within the EEA, such as Iceland, Lichtenstein and Norway. These countries can still avail of the EU passporting arrangement. Switzerland, however, is not within the EEA and is therefore exempt from the ability to passport but still has bilateral agreements in place with countries for particular financial products.
This gives some indication as to what might happen if a Brexit was the outcome on 23rd June.
Businesses’ Brexit trepidations
The EU encompasses 28 countries with a base of 500 million potential customers. Cutting ourselves off from a marketplace that sizeable is a daunting concept for any business trading internationally. Should the UK decide at the ballot box to leave the EU, will there be a Brexit-induced disruption to trading? And will the UK be forced from the EEA, losing access to the single market?
The UK government is pressing for the country to remain in the EU and citing the ‘Digital Single Market’, which could generate of up to £375 billion a year for the EU economy, as reason enough. The British government along with the IMF have warned that a Brexit could lead to a stock market and housing price crash, while the Bank of England have similarly said a Brexit could do “serious harm” to the UK economy.
The Leave campaign instead believe that the EU is a drain on the UK economy and argue the UK is sending around £350 million a week to the EU. Other than this, they have had little else to say about their plans for the UK’s financial services market should they get the outcome they want. This has sparked speculation and fears that their long-term vision is to pull out of the EEA and seek full control over financial regulations. If this was to happen, we would no longer be able to “passport” and would as such, be “going it alone” – a scary concept for islands isolated and separate from the European mainland.
Fears are also mounting on account of the fact that trade could become more difficult for businesses. If the UK were to leave, exports and imports could end up costing more time and money than before. Even from the outset, it could take considerable time for new directives to be written up and enacted through the European Council in order to allow a newly independent UK to import and export with member countries.
Not only commodities, but the movement of monies could also be affected. Will a Brexit disrupt the typically quick and smooth nature of e-commerce transactions? Will these businesses, the vast majority of which are based in the UK, need to apply for new licences in order to operate? Will they need to set up a new business and apply for a licence in a different EU state? This will, again, cost a lot of money and a lot of time.
Questions are also being asked about the impact of a Brexit on the UK market itself. Those financial firms setting up base in the UK are, at the moment, gaining access to the largest single market in the world. Should the UK no longer be included in the EU passporting arrangement and have regulations which differ from those in Europe, will it still be as attractive a base to e-payments and money firms?
Other fears include lessened competition within the UK market, which would mean less choice for consumers and fewer regulated firms leading to a potential stagnation in an otherwise growing industry.
In the wake of a Brexit, what is most likely to happen?
Whether the UK decides to remain in the EU or to leave, we are almost certain about one thing – the e-money and payment services industry should remain largely unaffected.
In the case of a Brexit, it’s likely that it will be delivered in one of two frameworks. Either, similar to Norway and Lichtenstein, the UK will continue to have access to the single market and the passporting arrangement, losing only its ability to vote on financial services legislation. If, however, we follow the Swiss model and end up outside of the EEA, we will have limited market access and “third country status”. There is the risk we will lose our passporting rights and will need alternative agreements drawn up.
While we can’t fully predict, one way or another, the complete extent of the impact a Brexit would cause, there are certain things we can make an educated guess about.
Firstly, we think it’s pretty much a given that a trade agreement will be introduced should the UK leave. It would make little sense for Europe’s biggest exporter of financial services to be cut off from the market. It makes more sense for the firms based in the UK to continue to work on a cross-border basis.
Secondly, given the cost and timescales needed to enact legislative change, it’s unlikely the UK and the EU will make changes to law unless an absolute necessity.
It’s in everyone’s best interests that regardless of the outcome come 23rd June, things should stay much the same where possible.
The last thing anyone wants is a Brexit-shaped disruption that disrupts financial services, stagnates the UK’s booming e-commerce scene and goes in any way to break the bank!