I sat down with the marketing team at Anthemis to discuss the opportunities and geopolitical challenges of open finance. This is the fourth part in a series of five articles. You can find part one on premium APIs here, part two on PSD2 here, part three on the geopolitical motivations of European Open Banking here.
Hi John, so remind us, PSD2?
Hi guys, PSD2 is updated European payments legislation focused on making European payments cheaper and more competitive. It’s also has an ulterior motive of trying to rejuvenate the European economy by creating a fertile environment for the creation of global digital goods and services companies in Europe.
Gotcha. In a previous chat, you mentioned that PSD2 has Brexit implications. To kick things off, can you clarify if PSD2 will come into effect in the U.K. post brexit?
Great question. Yes it will, for a couple of very big reasons. First, PSD2 relates to the European Economic Area (E.E.A) not just the E.U. The ambiguity over the U.K’s future status means that most banks are planning for some form of E.E.A relationship with Europe rather than an isolationist role on the continent. Second, compliance with PSD2 will be necessary to interact and thrive with broader European payments and finance. It would decimate the UK’s finance industry if it became interoperable with the rest of Europe. Thirdly, financial incumbents understand that progress will necessitate an evolution of finance generally and opting out of engaging with it just because it’s difficult means that someone else will instead. Fourthly, the UK FS sector is keen to ensure that British financial innovation keeps pace with the region. So whilst there has been no formal announcement about how and when the UK plan to implement PSD2 it seems clear that the UK will look to do so in parallel with the rest of Europe regardless of political disposition.
PSD2 was developed prior to Brexit referendum. Presumably it was done so with the UK in mind. How is that likely to affect rollout?
Yeah, it’s like creating a strategy for a team, predominantly around your star player, only for that player not to turn up for the game. One of the ironic things about Brexit and PSD2 is that no country would have benefited more from PSD2 than the U.K. As the financial and fintech centre of Europe it’s likely that it would have become the central hub of global financial innovation and open finance. Whilst the UK will still look to enact PSD2 locally, the benefit will be degraded through companies opting not to launch in the UK, expand UK operations or in some cases leave altogether. Keep in mind that an objective of PSD2 is to empower global European digital companies. The UK would have been the obvious birthplace of many of those companies. Accordingly, Europe will now have to look to somewhere else, potentially a number of places, as hubs for European digital and financial innovation moving forward. In part, this will be determined by where UK firms relocate to, or increase their presence in.
Are banks really going to leave the UK because of Brexit?
Of course. But not in the way public commentary might have you think. Existing operations will likely remain as they are but future strategic expansion decisions will be curtailed or repositioned as a result of Brexit. There is broad acceptance that new investment will be spread across a number of European locations in accordance with specialty skills etc. There is a narrower public understanding of how London will no longer be seen as a European destination for new Euro-focused financial FDI. The real loss is not the companies that move now but the ones that will never come in the future.
Does PSD2 have any impact on where existing companies or new European entrants are likely to settle?
Yes, PSD2 actually deals specifically but ambiguously with home country shopping. Traditionally, payment institutions were required to abide by some basic criteria to register a head office in an E.U. country. PSD2 specifies that they must also carry out at least part of their payments business there, i.e. a payments institution must have operational payments capacity in the country of their head office. This will mean that countries with domestic demand for services may be more attractive than countries that are well equipped for rapid home country licensing but may not have the market or infrastructure for domestic offerings. Nadja van der Veer has a great blog on the impact to Luxembourg, which caters for 75% of the EU’s new e-money licenses but only drives about 0.7% of EU Direct Debit transactions (Here).
What are the regional implications of the change?
Well, it certainly seems like home country registration will be slowed by the new conditions mandating local supply although clarity is required as to what “part of its payments service business” actually means. It may be something as simple as settlement processes but that doesn’t seem to be the intent. If it’s accepted that it means local operations of the payments businesses that will almost certainly rule certain countries out of the running for PSP headquarters. What seems apparent is that 1) new companies expanding into Europe, 2) British businesses looking for access to the EU and 3) British based businesses leaving the UK to move to the EU will need to base their home office in a location where they can deploy domestic services as easily as possible. The country most likely to benefit seems to be Ireland. Ireland is in an advantaged position in the case of all three examples above due to market and cultural similarity, language commonality, domestic demand, FDI support, existing capabilities, regulatory competence, economic growth, but hey, I might be biased.
