So with this Brexit thing looming heavily on the cards, what is in store for the UK fintech sector, and what exactly would be the repercussions of losing passporting rights? Anna Milne highlights The Emerging Payments Association’s research into the best potential locations for fintechs
The first potential consequence of Brexit is the departure of startup fintech companies.
The Emerging Payments Association has conducted a report identifying the most appealing European locations for payment service providers (PSPs), should passporting rights be lost to them here in the UK.
The loss of passporting rights, which would come into effect should the UK leave the European single market, would leave many payment companies unable to deliver products and services across the EEA.
EPA members believe the loss of passporting rights will have a detrimental impact on fintech, payments and the UK economy. In a survey conducted late in 2016, 94% of EPA members stated that the preservation of passporting rights should be a high or very high priority in Brexit negotiations.
Over 91% of EPA members believe passporting is important or very important to the UK’s fintech sector, and 88% of members stated that passporting rights were important or very important to their current businesses.
The first thing that will happen is that the companies for which it will be impossible to deliver payment services across the EEA from the UK will seek to replace their EU trade with exports to non-EU countries.
This project is endorsed by Boris Johnson, the UK’s Secretary of State for Foreign and Commonwealth Affairs. Secondly, to continue doing business in Europe, these companies will need to become authorised in another EEA country from which they can sell to the remaining 26 countries. This could result in the loss of these companies from UK soil and, hence, a potentially significantly negative impact on the UK economy.
But how feasible is it for these companies to up sticks and relocate like this? The EPA says several countries are “laying out their stalls” already, seeking to attract UK fintech companies to their shores.
The countries considered for the EPA’s report were Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Iceland, Ireland, Italy, Luxembourg, Malta, Netherlands, Romania, Spain and Sweden.
Six countries – Cyprus, Denmark, Ireland, Luxembourg, Malta and Sweden – have suggested timelines of between three and six months from the date of submission of a completed application to obtaining a licence, and therefore comprise the shortlist of potential locations.
In addition, all these countries have a readily available pool of local talent in the e-commerce and payments sectors.
Priorities for PSPs setting up payment institutions (PIs) or electronic money institutions (EMIs)
- Tax rates (both personal and corporate);
- The ease of transferring contracts across borders
- The availability of experienced executives to take the role of registered officers;
Experienced PSPs able to accommodate a degree of risk will put a greater deal of emphasis on the tax rates – both corporate and personal.
Cyprus has a favourable tax rate at 12.5%, with an open and cooperative regulator and UK-derived legal structure.
It is relatively quick, inexpensive and easy to become regulated as an EMI or PI in Cyprus. Despite the country’s low rating on the fiscal rating scale, Cyprus holds appeal in its recent banking challenges and the active presence of Russian money and investors.
There is a lack of local banking support, however – this being the main challenge in Cyprus. However, the law in Cyprus does not preclude an EMI from opening accounts with any other banking institution within the EU, so the lack of local banking support does not really matter.
Cyprus to date has a negative outlook on virtual currencies.
Denmark Denmark has shown a strong desire to attract fintech companies, despite having limited experience in regulating them.
The country has a very high level of use of electronic forms of payment, and the Danish regulator is open to developments in the payments sector.
Denmark shares a similar anti-money laundering (AML) environment to the UK, and the common use of the secure internet login, NemID, in Denmark makes the verification process for companies subject to AML regulation much easier than in most other countries. NemID is used for the verification of identity papers for Danish residents, and is commonly used.
Ireland The Republic of Ireland is one of the most obvious choices for international payments companies. Situated close to the UK, it is attractive for UK businesses. Being English-language speaking and having close ties with North America also makes it appealing.
There is limited experience in Ireland of regulating e-payments companies outside the banking sector; however it is progressive in this regard and the payments regulatory team has recently changed its applications service to process them within six months.
Ireland is showing keen to attract fintech and e-payments companies.
Luxembourg has a good geographical location, and has scored early successes in accommodating e-payments. PayPal’s decision to relocate to the Grand Duchy from London in 2007 means Luxembourg is an attractive destination to set up e-payment shop.
It is very pro-EU, being a founding member, and therefore very unlikely to wish to leave. It also has a very multinational workforce – 72% of workers there are foreign, and business is done in English.
The head of the regulatory payments team has vast experience, and is knowledgeable in macro issues facing payment companies.
Malta has a strong e-commerce history, fuelled in the main by gambling, which is also responsible for impeding its potential as an e-payments hub.
There is a growing finance centre and Malta has experience supporting cross-border-regulated online gaming. Some of the skills involved in this are directly transferable to the e-payments sector, and it shows a willingness to adapt and encourage new business models and legal structures.
Malta is well placed to take advantage of its geographic proximity to Europe, as well as to the Middle East and Africa.
It is pro-EU, and business there is conducted in English. However, opening bank accounts and local application of AML requirements are more convoluted processes than they need to be.
A leader in e-payments, banks and merchants in Sweden have been supporting a move towards becoming a cashless society since the 1990s.
There is significant regulatory experience in dealing with PSPs and the payments sector, and Swedish regulators are open to advancing technologies which will help customers.
Other markets which might usually have been expected to have a place in the shortlist did not make the cut. Reasons for this include excessively harsh regulation, or inclinations towards exiting the EU.
Many would have expected the Netherlands, for example, to be a strong candidate, but according to the good people of the Emerging Payments Association, the country’s regulators are not yet fully supportive of fintech operators.