How Brexit Affects UK and EU Transactions
In 2016, the United Kingdom voted to leave the European Union, kicking off the process that has come to be called “Brexit.” The departure became official in early 2020, but many aspects of the process are still being negotiated and figured out. For merchants who sell to UK and EU customers, Brexit’s impact on the payments industry is of particular interest.
Navigating the complex and changing requirements can be challenging, especially for the payment service providers who facilitate transactions in this environment. How is Brexit affecting card payments and other financial transactions in the UK and EU?
The UK was a member of the EU and its earlier incarnations since 1973, but last year it became the first country to leave the union following the results of a 2016 referendum.
While concerns over the EU’s imposition of economic regulations were a major motivating factor for those who voted in favor of Brexit, the UK’s close geographic and economic ties to the rest of Europe has complicated the process of renegotiating the rules for finance, trade, and other activities between the UK and the EU in a post-Brexit world.
This has had huge implications for financial institutions, merchants, and other organizations that transact with these countries.
While we still don’t have the complete picture of Brexit’s long-term impact on the payments industry, we can take a closer look at the PSD2 mandate, passporting, and some of the other ways in which Brexit has already begun to affect transaction processes.
How Is PSD2 Being Handled in the UK?
One of the most significant regulatory changes to hit the payments industry in recent years is the revised Payment Services Directive, or PSD2, which laid out rules for open banking, Strong Customer Authentication, and other guidelines designed to protect privacy and improve interoperability for payment schemes in the European Economic Area.
Upon its departure from the EU the UK ceased to be a member of the EEA as well. However, some of the provisions in the PSD2 are applicable to so-called “one-leg” transactions, where one of the parties involved in the transaction is operating out of the EU and the other is not.
These provisions mostly have to do with transparency, accuracy, and the obligations of payment services providers with respect to the rights held by their customers. Some of the other requirements, such as SCA, do not apply to one-leg transactions.
However, a legal exemption from a PSD2 mandate doesn’t mean there aren’t good practical or economic reasons to comply with it anyway, as other non-EU states such as Iceland have chosen to do. By setting the expectations and standards for the vast EEA market, the EU is creating pressures for countries like the UK to follow suit.
What is Passporting?
Membership within the EU allowed countries a great deal of freedom to conduct business with neighboring states. Now that the UK has left, the European Central Bank is requiring UK businesses to obtain licenses to operate in any EU markets.
The UK can no longer treat EU countries as a single, effectively domestic market, and the process of obtaining licensing to do business in member states is known as “passporting.”
For now, passporting is a one-way street: the UK is allowing EU-based businesses to continue operating as usual until 2024. The ECB, meanwhile, has taken a fairly hard nosed outlook with respect to ensuring the UK complies with the new licensing requirements.
UK companies that are required to maintain a presence in EU countries for licensing purposes are being scrutinized to make sure they have sufficient staff and resources in place and aren’t just doing the bare minimum to create the appearance of compliance. As a result, some UK banks and payment providers have withdrawn their services from EU countries where they don’t have a very large customer base.
At the same time, EU countries that have decided to fast-track the licensing process for UK companies have seen an increase in business—Lithuania, for example, now hosts several times more international payment companies than much larger countries like France.
It’s worth mentioning that despite Brexit, the UK is still a part of the Single Euro Payment Area, a framework for cross-border payments and fund transfers that use Euros. Like other non-EU countries, the UK can participate in SEPA as long as it follows the legal and technical guidelines.
In What Other Ways is Brexit Affecting Transactions?
The new regulatory environment for transactions involving the UK and the EU has led to a number of other changes that affect banks, merchants, and payment processors. Here are a few of the notable ones:
- Higher interchange fees: Interchange fees are paid to card issuers to cover the cost of payment card transactions. The EU regulates the maximum amount of these fees, but only for intra-EEA transactions. Merchants in the EU are likely to end up paying higher interchange fees on transactions from the UK.
- More bank charges: Certain transactions conducted between parties in the UK and the EU, such as wire transfers and sweeps, are no longer covered under PSD2 regulations and may be subject to additional or higher bank fees. Additionally, some EU banks may charge additional fees for SEPA transactions despite the fact that the UK is still a party to that agreement.
- New data requirements for fund transfers: Fund transfers between the UK and the EU must comply with the EU’s Funds Transfer Regulation, which means that the payer’s full address, personal identification document number, place of birth, and other data must be included with the transaction or it may be rejected.
- IBAN discrimination: International Bank Account Numbers include a code that identifies the account’s country of origin. Some EU businesses have stopped accepting transactions from IBANs from the UK, despite the fact that this is against SEPA regulations.
Deciding whether or not to stay in the EU was entirely up to voters in the UK, but the impact of that decision will have ripple effects across the globe for many years to come. For merchants who do business in both the UK and the EU, staying informed about the negotiations, agreements, and new regulations is essential.
By keeping yourself educated about the fallout from Brexit, you can anticipate the effect that new developments might have on your business operations and plan accordingly.