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to brexit or not to panic

How is Brexit Affecting the EU Payments Industry?

Ever since 2016, one of the questions many have been pondering is what does the future hold for the UK. With the invoking of Article 50 in March 2017, the country reaffirmed its decision to abide by the 2016 referendum and leave the EU; with lengthy and extremely troubled negotiations following immediately and with the UK - at the time of the writing of this article - still without a clear exit plan. 

The Hard Drop

One of many seismic effects Brexit has already had was the volatile exchange rate shift that occurred immediately after Article 50 was invoked in 2017. Many are considering this to be just a small preview of the wider impact Brexit will have on both consumers and businesses, including payment service providers.

The words "hard Brexit" are an ongoing cause for concern in the financial sector. In the event of a "hard" Brexit, the UK cuts off all ties to the EU immediately and completely. It would be as if the UK simply stopped existing a second after the deadline. Investors have for some time been encouraged to diversify their portfolios, and companies have been making plans to move headquarters, with Transferwise the first to announce such an intention publicly.

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On the Move

Moving their HQ to the EU is also on the mind of many acquirers since splitting would incur significant overhead because it would require dividing scheme submissions across multiple BINs. Brexit is also expected to force all card machine providers to reclassify machines as international or inter-regional so users can be aware of all the changes while making payments. There are also questions regarding the regulatory position of the UK on interchange caps and card surcharges.

Across the Border Order

Banks have for some time been scrambling to create solutions for operating across the EU - UK border. These issues include liquidity (from cash concentration to notional pooling), cash management (from receivables to virtual accounts), and payments (FX, SCT, SDD, high value payments and more). While the UK will be able to register as part of the European Economic Area, there remain many open questions regarding interchange base cost, which is also expected to significantly affect merchant pricing. 

There is also the issue of UK banks losing direct access to Euro Clearing & Settlement Mechanisms and needing to create solutions for handling affiliates and correspondent banks in the EU. This would inevitably involve indirect memberships, rerouting transactions, reviews of charging models, and establishing Nostro setups among many other procedures. 

Another issue of note is passporting, which will become impossible since the UK will no longer be part of the Single Market. And what about PSD2? While UK banks have spent over 750 million pounds to prepare for its implementation, post-Brexit they are expected to replace it with the UK Open Banking initiative.

Another Shade of RTS

UK is set to introduce its own Regulatory Technical Standard for Strong Customer Authentication in response to concerns raised by the UK leaving the European Union just as SCA is being implemented as part of the final stages of PSD2. The UK RTS would be substantially similar to SCA RTS and would aim to mitigate disruption for all businesses that have in the past several years already invested considerably in the preparation for PSD2's September 2019 deadline. 

The regulation would allow businesses to operate effectively in the UK after it leaves the EU in March 2019 and would also bridge a potential gap in the UK regulatory framework between March and September in the event of a "no-deal" Brexit. The UK RTS is expected to cover all relevant payments issues including SCA requirements, permitted exemptions, confidentiality rules, and open and secure communication.