Brexit: what it could mean for the payments industry

London has long been seen as the gateway to Europe, from a financial and trade perspective. Financial institutions – and, more recently, fintech startups – have used London as their base to reach the European Union’s population of more than 500 million people. If you asked any financial services company – until recently – about the first step in a European go-to-market strategy you would hear a simple answer: Open an office in London.

If Brexit does go through and the United Kingdom leaves the European Union, this will effectively close London’s doors as a gateway to the rest of Europe.

Brexit’s impact on the United Kingdom’s citizens has been widely discussed and could lead to a variety of implications, including currency volatility, higher interest rates, and an adverse impact on real estate valuations. But what does Brexit mean for the payments and fintech industries? I have pulled together some key considerations both industries should follow in the coming months.

Regulatory complications

When it comes to Brexit’s impact on payments and fintech, one thing most financial experts are talking about is licensing. The Financial Conduct Authority (FCA), Britain’s regulatory body, has become known as a friendly partner to global payments companies and new fintech business models. Because of this, most global financial technology companies seeking a European presence opened offices in London and applied for the FCA eMoney license. This licence could then be “passported” to all other European countries. If the UK does end up exiting the EU, any companies with FCA eMoney license will have to apply for the license with a different regulator, such as German BaFin or Swedish FI – or take the even more complicated step of applying for licenses in individual European countries. This will also leave payments and fintech clients questioning whether to keep multiple European offices or close their London office and move operations.

Along with licensing, Brexit has the potential to complicate major processors and cross-border acquirers that have turned to London as a key hub. This is because European privacy and data security laws require these processing centers to be based in the EU. It is still up in the air what the UK’s position will be if Brexit does go through, but if it’s treated as an offshore country, hundreds of companies will have no choice but to relocate their payments processing operations to a country within the EU.

Venture capital uncertainty

Though many experts predict Brexit will not put a significant dent in day-to-day operations of payments companies, it will certainly lead to market uncertainty that has the potential to last several years. And one segment in particular that does not respond well to market uncertainty is venture capital investors. While most venture capitalists have expressed commitment to their existing portfolio companies, the market uncertainty is bad news for new fintech companies looking to raise seed rounds. Prevailing political and regulatory risk means new London-based fintech startups will either have to rationalize their valuations or consider moving operations to a European city.

Several bidders are already interested in taking over London’s position in fintech. Berlin is already the most important entrepreneurship hub in Europe. According to Ernst & Young, Berlin attracted the most VC capital of all cities in Europe in 2015 (EUR 2.2B vs. London’s 1.8B). Nonetheless, Berlin does have a very small footprint when it comes to fintech. If Brexit does go through, we might see a reversal in this trend as soon as this year. Besides Berlin, other serious contenders to take over the fintech scene in Europe include Frankfurt, Dublin and possibly Barcelona.

These are just a few of the many ways Brexit could potentially disrupt the UK payments and fintech scene. However, nobody can yet say for certain how everything will play out if the UK does exit the EU, as this is an unprecedented movement. EU officials will have to decide the UK’s future position with regards to the common market. Either way, in the event of a UK exit, payments and fintech companies will face a long list of tough business decisions.

About Tomas Likar

Tomas Likar is the Vice President of Strategy and Business Development at Hyperwallet, a global payouts provider to millions of independent workers. Likar joined Hyperwallet after six years with McKinsey & Company, a globally-recognized provider of management consulting services, where he advised payments firms in emerging markets strategy, mobile payments, corporate strategy, and M&A.

About Hyperwallet

Hyperwallet is a purpose-built payout platform that provides growing organizations with a frictionless, transparent, and reliable way to manage payments and enhance the payee’s experience anywhere in the world. Trusted by enterprise, ecommerce, and on-demand platforms, Hyperwallet’s advanced payment architecture unifies fragmented financial infrastructure in a singular environment, putting payees in control of their earnings. Hyperwallet has offices in San Francisco, Austin, and Vancouver.