Christoph Tutsch on: What will Brexit mean for the payments industry?
With Brexit discussions in full swing, and no-one really knowing the direction the UK is heading in with a new Conservative Party leader imminent, Christoph Tutsch, CEO at ONPEX, discusses what impact these events could have on businesses on both sides of the Channel, whatever the outcome.
The UK’s future relationship with the EU is still uncertain. The new date for the country’s withdrawal has been set for the 31st October 2019 but, embroiled in a contest for a new Tory leader and Prime Minister, MPs in Westminster are no closer to agreeing a deal than they were two years ago. More worryingly, the possibility that the UK will walk away from the European Union without a deal is still very real and becoming increasingly more plausible, so where does that leave the rest of us?
As Europe patiently awaits the next steps from the British government, both businesses and consumers are becoming increasingly agitated with this ongoing uncertainty.
The impact of Brexit on the payments ecosystem
The banking and payments landscape within the UK stands to change substantially not just in the event of a No Deal Brexit, but even under the former Prime Minister’s withdrawal agreement and the potential introduction of the Labour Party’s customs union. This can have significant ramifications for payment providers and their partners inside the UK, when it comes to cross-border commerce.
Recently, the UK government warned the cost of card payments between the UK and EU will likely increase in a No Deal scenario, and these cross-border payments will no longer be covered by the surcharging ban – which prevents businesses from being able to charge customers for using a specific payment method. Customers may see these charges come into force immediately, with American Express being a key example of an issuer who is already not covered by these EU regulations.
What’s more the cost of processing international euro transactions could also increase in the event of a No Deal Brexit, due to UK financial service firms losing access to existing passporting facilities to the EU market under this scenario. However, to mitigate this threat many UK firms are establishing EU-based subsidiaries. This will ensure these institutions can continue offering services following the UK’s exit from the EU from its dedicated EEA subsidiary.
This is one of the benefits to do business with ONPEX being a Luxembourg-based regulated Payment Institution. We are able to use our license across Europe and are independent on whatever the outcome of the relationship between the UK and EU is. We can therefore still partner with UK-based financial institutions as they can use us a reliable European partner to expand their services to the European market and beyond.
To give you a practical example how the Brexit discussion is impacting the payments ecosystem: We’ve recently partnered with a lot of major UK-based financial institutions (mainly EMIs and PIs) – besides our unique offering and many other factors – perhaps Brexit was also part of their decision making why they’ve approached a European partner.
What does Brexit mean for cross-border payments and the Single Euro Payments Area (SEPA) schemes?
The UK’s participation in SEPA could be affected by Brexit. This scheme is essential to cashless Euro payments made across Europe, as it ensures that making a payment internationally is as easy as making a payment at home with BACS, CHAPS and Faster Payments. Payment providers and their UK partners will no longer benefit from the scheme, when processing payments between the UK and the EU, if the UK is no longer part of it.
However, according to the Cash and Treasury Management file, there are three possible post-Brexit scenarios that will impact the UK’s inclusion in SEPA. These are: remaining in the European Economic Area (EEA); leaving the EEA but having a free trade agreement (FTA) between the EU and UK with a “functional equivalence”; and finally, having no legal alignment.
If the UK remains in the EEA following Brexit, it can continue to participate in SEPA schemes. However, if the UK leaves the EEA or doesn’t agree on an alignment of the relevant legal framework, the European Payments Council (EPC) will have to assess the UK’s eligibility for being part of SEPA, following an application from the UK PSPs’ community.
Alternatively, if the UK leaves the EEA and puts in place an FTA with the EU, thus establishing a ‘functional equivalence’ of the EU legal framework, UK scheme participants will be able to continue trading as normal using SEPA. This is because the UK will then meet the required criteria to participate in SEPA schemes. Still, in this situation, the EPC may have to assess any functional equivalence of the UK’s legal framework with EU law.
Regardless of the outcome, banks and businesses need to ensure they have the financial infrastructure in place to enable customers to pay for goods and services quickly, effectively and securely, from anywhere in the world. Many of the UK’s banks are already striving to find payment solutions which can support them in continuing to operate across borders.
At ONPEX, we’re already prepared for any outcome between the UK and the European Union. Thanks to our flexible Banking*-as-a-Service (BaaS) platform, we can offer multi-currency banking* and cross-border payments regardless of the Brexit result. All of this is possible due to our platform being asset and payment channel agnostic and our Application-Programming-Interface (API)-first philosophy.
Navigating Brexit with API-driven technology
This year, EY found 56 per cent of banks, investment banks, and brokerages are relocating operations to Europe following Brexit turmoil – with £800bn of assets being moved with it. With the uncertainty surrounding UK PSPs’ status in the market, businesses are turning towards their European counterparts to facilitate payments in this transitional period.
However, APIs could be the key to ensuring that business continues, as close to normal as possible, in the UK and Europe. This is because APIs can provide UK-based financial institutions with the facilities needed to make cross-border payments seamlessly by connecting different payment schemes (e.g. SWIFT and SEPA) offered from a European-based financial institution, like ONPEX. Therefore, with cross-border payments and APIs becoming a must to maintain continuity in service, PSPs with these facilities will have the upper hand.
Additionally, API-driven technology provides greater levels of simplicity, transparency and automation. These qualities are particularly important for cross-border payments from the UK to the European mainland and will be key to success. This is due to the fact that customers are facing an unprecedented level of uncertainty in regards to Brexit, and are striving for new levels of knowledge to offer peace of mind going forward.
With ONPEX’ innovative BaaS solution, organisations can create payment services which fit their exact needs, by building solutions using API-based technology. These transparent, automated, and simple solutions easily plug into the organisation’s existing infrastructure. They can easily manage a number of different currencies, allowing for the easy reconciliation of payments. This is particularly essential when accepting or refunding payments which are in multiple currencies.
Additionally, our clients are able to track a payment from either end of the process, from the moment it is made, to when it is received. This provides our clients’ customers with the transparency needed to operate in uncertain times.
What happens next?
No one quite knows what the future will hold if the UK leaves the European Union. Businesses need to future proof themselves now and cross-border payments need to be a key strategic pillar of many business models. Without this, financial institutions will certainly be left behind, particularly those in the UK.
Therefore, organisations need support with payment solutions that can easily facilitate cross-border payments seamlessly and with complete transparency. This is something that is made easy with ONPEX and is enabled via our flexible technology.
Regardless of what lies ahead in terms of payments regulation, technology and methods, ONPEX will continue to provide simplicity, automation and transparency to the payment and banking* industry for years to come.
For more information on how ONPEX’ flexible and automated technology can support your business, visit www.onpex.com.