Following Britain’s momentous decision to leave the European Union our thoughts must inevitably turn to the potential impact on UK consumer payments.
In this blog we provide some early thoughts on how the UK market may be affected, beginning with recent European regulation which will have to be untangled.
First, let us look at how the two Payment Services Directives may be approached by the UK government. Will the PSD1 remain on the statute book, and the PSD2 implemented as planned? The answer at this stage is probably. Many aspects of European legislation related to consumer protection are likely to remain because they did not fundamentally change existing UK rights. The UK government’s approach to account access is generally more progressive than that embodied in the PSD2, so this will probably be superseded by UK Open Data Initiative.
The biggest change will be in the area of licensing and passporting. The FCA has established a good reputation with innovative European payments businesses for its regulatory regime. These eMoney and Payment Institutions will probably to move their headquarters to other European markets, and we will be poorer for it both commercially and from an innovations perspective. Changing the approach to passporting will affect the UK’s cross border acquirers the most. Many UK acquirers rely on passporting FCA regulatory licenses to support their local acquiring offers across the EU. Unless they already have licenses in other EU markets, acquirers will need to seek new EU regulatory approval to operate across the continent, and to sign new merchant contracts.
Second, interchange regulation. The UK CMA has always taken a close interest in the payments market, and many issuers expected interchange to decline in the medium term. It therefore seems unlikely that credit interchange will suddenly return to its previous levels. It may be that debit migrates back to the historical fixed price approach. This is particularly important within the context of the announced move to a basic 0.2% (removing the 50p cap and 1p fee) expected for Visa Debit in September. We can therefore expect modest change in the interchange arena.
The European Banking Authority will almost certainly move, possibly to Paris to balance the ECB in Frankfurt. However, may have little impact on the UK consumer payments market as they have played a relatively modest role to date.
How may the international card schemes react? Both have substantial presence in the UK, particularly Visa. It seems likely that Visa Inc. will increase its presence in Continental Europe as part of a wider restructure as other roles are migrated to the US. MasterCard may also to shift its emphasis to Waterloo away from Canary Wharf. Both schemes will need to adapt their licensing approaches, but these are already flexible enough to accommodate the inclusion of non-EU markets. Such moves by the card schemes may be to the detriment of London and the UK, but the impact will probably be modest.
The impact on data processing and data security remains unclear. Will the UK be treated as an off-shore location for card and payment processing? This will be a matter for the lawyers to resolve, but could affect Visa’s UK processing hub, or MasterCard’s rumoured purchase of VocaLink. New payments processors arriving in Europe from the US or Asia are also much less likely to locate their business in the UK.
Will there be a substantial change in the structure of issuers and acquirers of consumer payments (either cards, credit transfers or direct debits)? We have already highlighted the impact on cross border acquiring, and both regulators and schemes will need to adapt accordingly. On the issuing side markets are unlikely to change their activities as they are either domestically focussed, or already manage operations both inside and outside the EU.
Now let’s look at users of payments. Will consumer spend day to day be affected? Again, probably not. Consumers in the UK do not use SEPA Direct Debits or SEPA Credit Transfers domestically. They will continue their preference for cards in store, and online. The growth in online payments will continue, alongside the growth in contactless in-store. Similarly it seems unlikely that there will be a substantial change in the merchant landscape. The UK will remain a vibrant market where retailers online and offline will fight for consumer spend. It seems less likely that our exit from the EU will impact this to any great degree.
We have suggested that there may be some potential downsides particularly in the area of acquiring and processing. Will there be any upsides? At this stage we struggle to see any, which is a great disappointment. Perhaps benefits will emerge from the current maelstrom by 2017.
So, in conclusion, impacts on the UK consumer retail payments market will most probably be concentrated in areas such as licensing, cross border acquiring and processing. However, in the long term we are optimistic that the UK consumer payments market is likely to remain innovative and forward looking and get past these issues.
Finextra (2016) Brexit: Possible impacts on the UK payments market. Available at: https://www.finextra.com/blogposting/12770/brexit-possible-impacts-on-the-uk-payments-market (Accessed: 27 June 2016).