Fintech, London and Brexit. Is London about to lose its place as the capital of FinTech in Europe?
There is no doubt that the Covid-19 pandemic has set back the establishment and development of Fintech in London even before Brexit. London, a long-time favourite for the establishment of future FinTech unicorns, has suffered most out of European countries. Is the pandemic or absence of any conceivable progress in reaching a comprehensive trade deal with the EU by the end of the transition period on 31 December 2020 is the main problem in the UK’s FinTech sector.
To find out what is really happening, PSP Lab has researched the number of the newly authorised and active payment and electronic money institutions, small APIs, small EMIs, AIS and PIS authorised companies in the EU from August 2017 to August 2020. We used the EUCLID database, published by the European Banking Authority, and found out that in 2017-2018 there were 1,022 newly authorised companies, in 2018-2019 there were 1,108 newly authorised companies, and in 2019-2020 the number dropped to 578, a whopping 43% decline for authorisations of FinTech in Europe.
Overview of the statistics on the authorisations of FinTech companies in the European Union and the UK post and before Brexit
Such a massive decline in new authorisations in 2019-2020 was mainly caused by the Covid-19 pandemic, sharp decline in GDP growth across the EU, and saturation of the payment services market with a large number of new payment and electronic money institution authorised previously in 2017-2019.
Without a doubt, the United Kingdom is the main loser according to these statistics on authorisations of FinTech in Europe. A number of new authorisations in the UK in 2019-2020 has dropped by 54%, while the rest of the EU reduced by 35%. When we looked at the share of new payment and electronic money institutions authorised in 2017-2020 we noticed that the UK share in new authorisations within the EU has dropped from 56% in 2017-2018 to 34% in 2019-2020, and without a doubt, that was not caused by Covid-19.
Once the UK accounted for over 50% of all payment and electronic money (and other types of PSP) institutions authorised in the EU, but as of August 2020, the UK share is only 31.59% out of 3,843 authorised PSPs. There is a clear trend of reduction of UK share in new authorisations of FinTech companies in Europe, and in a matter of 3 years, London’s share has reduced by a massive 39%.
Let’s speak about Brexit and London FinTech!
With the mediocre UK-EU trade negotiations results, off the cliff Brexit becoming more and more realistic with every day and apart from the imminent loss of the cross-border passporting rights, there are other significant factors to consider:
- Although European Payment Counsel has informed its UK participants in spring of 2019 that regardless of the outcome of the Brexit trade agreement negotiations, they can continue participating in Single Euro Payment Area (SEPA), there are still significant concerns that UK credit institutions, payment, and electronic money institutions may lose their participation in SEPA clearing of SCT, SCT Instant and SDD.
- FCA confirmed that the registration window for the EU firms relying on in-bound passports to do business in the UK, the so-called Temporary Permission Regime will reopen on 30 September 2020. However, it remains unclear if a similar Temporary Permission Regime will be adopted by the EU or individual EU countries for the London FinTech firms after Brexit. At the time of writing certain member states (e.g. Poland, Germany, Sweden, France, Italy) have individually adopted legislation on a national level that allows for passporting of certain financial services (mostly wholesale such as derivatives trading) to continue even in the event of off the cliff Brexit.
- One of the key risks is related to the data protection and in a recent case, the Court of Justice of European Union has established that the US data protection standards are not equivalent to the EU and thus prohibited data transfers from the EU to the USA under the EU-US Privacy Shield. UK’s position on this matter after the transition period ends remains unclear and will affect for example an EU firm providing service in the UK under the Temporary Permission Regime, as it will be regulated simultaneously by the home country regulator and the FCA. Many FinTech firms are relying on US tech giants providing information technology services, and in this case which data protection regime (EU, UK, or both) should apply to such company’s UK customers’?
- Will current Strong Customer Authentication and other regulatory technical standards set by EBA continue to apply to the UK authorised firms and EU firms operating in the UK under the Temporary Permission Regime?
- In respect of the trade agreement, the EU is working to avoid any deal needing to be ratified by the national parliaments of member states. It is believed and hoped that an all-encompassing trade agreement could be avoided, which will mean that ratification will be required only by the European Parliament and UK Government. The likely deadline for such an agreement is expected to be the end of October 2020. If this is not achieved, it is unlikely that it could be ratified in time for 31 December 2020. However, in any case, such an agreement will not allow for the passporting for firms that are providing consumer/retail centred financial services. Another option for the financial sector could be the Commission’s case-by-case mechanism under so-called “equivalence regime” (which looks at the intent and effect of the laws of non-member states rather than literal mimicking) allowing for the provision of certain services to the EU from non-EU states and vice versa. However, for the equivalence being relied on, such possibility must be provided within the EU legislation overseeing particular type of services. In this regard, the UK will strive to persuade the EU Parliament to amend certain directives so that they would contain the possibility to rely on equivalence. However, even the last option has its drawbacks as the equivalence decision can be withdrawn at any time and the same as with the trade agreement it is unlikely to apply to the retail payment services.
Implications for the FinTech sector in the EU and the UK
It is evident that large FinTech companies both in the UK and EU have already obtained additional authorisations in either the EU or UK respectively. However, most of the small and medium-size payment and electronic money institutions both in the UK and EU countries have not adequately prepared for the off the cliff Brexit. The timeframe of the trade agreement negotiations appeared unrealistic back in 2017, and looking back today from Covid-19 hardest-hit European country; it seems even more unrealistic today. The UK and EU economies are so integrated and depending on each other, that to dismantle in an orderly fashion, what was built over the course of almost 50 years, looks like an insurmountable task.
Those payment and electronic money institutions both in the UK and EU, looking to remove political uncertainty and regulatory constraints and remain compliant throughout these difficult times for the industry, should obtain necessary regulatory authorisations in either the EU or UK, as an extension of the transition period beyond 31 December 2020 looks very unlikely.
In case you are a FinTech firm wondering how to continue to work in either the EU or the UK (London) after Brexit while remaining compliant with the regulatory obligations, you can book a free initial consultation with PSP Lab experts and get advice on regulatory authorisations in either the EU or UK.