PSD2, FinTechs and Brexit: The Wider Implications

Tue 19 Apr 2016

UK Banks are already gearing up for the introduction of the revised Payment Services Directive (PSD2) that comes into force in January 2018. By providing clear guidelines and regulations, the Directive essentially removes the barriers to new players and opens the doors to FinTechs bringing new products and services to the electronic payments market. While PSD2’s arrival is expected to further accelerate disruption to the traditional banking model, Liam McKenna Partner, Consulting Services, Mazars, Ireland talks through the implications if the UK votes to leave the EU in June 2016.

Firstly, it’s important to remember that PSD2 applies to the European Economic Association (EEA) not to the European Union (EU). The reality is that if the UK remains part of the EEA then EU regulations still apply for goods, services, labour and capital, but you don’t get any further input into shaping the regulations. So from a trade perspective for banking it will mainly be business as usual, but decisions will be made by others and UK banks will have to comply.

While there is no suggestion at present that the UK would leave the EEA, a ‘no’ vote would require the UK having to renegotiate some sort of relationship with the EU in order to continue to trade. In terms of not being part of the EEA then it would mean not having to comply with PSD2, or any EU Directives for that matter, but there are wider implications to take into account that go far beyond the obvious.

Understandably these implications have focused on banks currently using the UK as their European headquarters who may consider leaving the UK on a Brexit vote to keep strategic, compliance and cost factors in check, as well as the economic implications of job losses. Yet there are more subtle implications and questions to be asked, particularly for the UK financial services sector.

For example, without a direct line in to the European market for financial services, will financial institutions, particularly banks, become more insular? There’s an argument for saying that though burdensome, the adoption of current EU regulations generally drives banks to compete more aggressively and through doing so they become fitter and healthier institutions. PSD2 is a case in point. Although uncomfortable for many banks to deal with, it forces banks to think more carefully and innovatively about what banking can look like in the future. So without the ability to shape the regulatory landscape or, indeed, the small likelihood of not having to comply, will British banks get sluggish and fall behind in their ability to compete not just in Europe, but on a global scale?

A reduction in European competitive oxygen is also likely to send ripples throughout the UK’s pool of ground breaking innovation companies. In terms of start-up and FinTechs who are making strong progress in the payment services market, the UK currently dominates Europe with many using London as their headquarters. Would the UK be such a popular destination for FinTechs if the EU’s export market was curtailed or cut off, or if talent dried up?

Of course, until decisions are made it’s hard to say what the actual consequences – good or bad – will be. But careful thought on the wider implications of a vote either way should form part of current decisions being made today.