Brexit Shakes Up Payment Processing For High-Risk Merchants
May 23, 2019 5-MINUTE READ
As Brexit looms in the air, an increasing number of Europe-based companies are worried about the financial effects of the United Kingdom’s “divorce” from the European Union. As of now, the UK is due to leave the European Union (EU) on 31 October 2019. The EU is an economic and political partnership of 28 European countries. The UK has struggled to reach a withdrawal agreement by the deadline (29th March). Consequently, the EU offered an extension in the hopes of reaching a final agreement with the lawmakers within the next couple of months.
What does this impending separation mean for merchant acquiring in the region? Well, there is a lot of uncertainty about what policies and regulations will be established. And, this will undoubtedly have an impact on high-risk merchants. Particularly, those that rely on UK-based payment processing services to accept cross-border transactions in Europe.
EEA, Brexit and what this means for high-risk merchants
Until now, businesses registered in the European Economic Area (EEA) could procure the services of acquiring banks and other payment providers in the same region without hassle. This trade privilege included the UK. That will ultimately change, as the UK will automatically cease to be a part this region (unless they negotiate a separate agreement).
The EEA is an agreement between all EU Member States and three of the EFTA States (Norway, Liechtenstein, and Iceland) that essentially extends the EU single market to the three EFTA countries. Consequently, member states have tariff-free access to this single market. They also comply with the EU’s regulations on competition, intellectual property, state aid and public procurement. One big advantage of the EEA is that, under current EU rules, British banks and financial intuitions can operate with a domestic banking license.
How would a “divorce” from Europe affect online merchants, banking and payments?
Online merchants with businesses registered in the UK and EU are increasingly concerned about the effects of the impending “divorce” from Europe. The Brexit effect on the sterling, the currency fluctuations, and spending behaviors have all been cited as issues. Also, shipping, overseas returns, cross-border tax compliance and more are of concern to sellers.
Following the Brexit referendum, the British pound witnessed a staggering drop. Currently, it’s one of the worst performing currencies in the world,. It plunged to a 31-year low against the US dollar in October last year. What this means for online sellers is that British goods are now cheaper for European shoppers. This has led to a change in spending habits, and experts suggest that for some EU-based businesses this could actually produce an increase in e-commerce sales.
Brexit may be insignificant to EU-based retailers that don’t export or import goods from the UK. One exception could be a projected increase in customers that could avoid shopping at UK stores online. The absence of British competitor brands could potentially also lead to an indirect uptick in sales even for merchants who don’t have direct relations with the UK. It can have the reverse effect on British merchants by shrinking their market if tariffs and increased processing fees are incurred for sales to EU customers.
Does your payment provider have a license?
British financial institutions have begun reviewing their solutions across payment processing, cash management services (particularly virtual accounts), liquidity and Euro-denominated products. Until recently, British banks could operate throughout the EEA area with a domestic banking licence. Now they may require separate licenses in EU countries to maintain their operation post Brexit. Some financial institutions – like the London-based TransferWise – have already applied for a money transfer license in Brussels, citing Brexit as the primary reason. Prominent names and pillars of the British financial system, like RBS and Lloyd’s have already obtained their licenses in a number of EU countries.
Banks that once accepted high-risk business models (like forex, cryptocurrency exchanges, nutraceutical and business opportunities) may alter their policies and refuse to honour merchant agreements. Merchant account approvals from acquiring banks could also be delayed.
The additional licenses are likely to incur more charges on financial institutions. Following Brexit, payment providers in the UK may present their clients with new agreements. Banks in the EU may make it mandatory for merchants to sign new contracts and abide by new rules. Changes will likely not happen overnight but as the UK exits the EU – and EEA by extension – they are inevitable.
Merchants and digital payments may also fall victims to extra charges. Up until now, payments with debit or credit card within the EU did not incur an extra fee or surcharge. This applies only to card payments made in one’s home country or another EU country. The impact on consumer behaviour cannot be predicted. However, some EU-merchants may actually enjoy a surge of customers, unwilling to purchase from online UK stores.
What to do in the wake of Brexit?
If you are a high-risk merchant at the mercy of Brexit, it is impossible to correctly predict the exact effects the decision may have on your business. Operating an online store and selling in the EU could require applying for both merchant and bank accounts in the region well ahead of the deadline (end of October with the EU’s extension). Opening accounts in both the UK and Europe with a provider that supports multi-currency trading is an inconvenience. As the UK leaves the EEA, issues such as tariffs on trade will also occur. Therefore, it’s wise to prepare for a hit in sales and change your product pricing accordingly.
Planning is of the essence and risk analysis can be key for the survival of your business in the aftermath of Brexit. Naturally, planning for uncertainty is easier said than done. Brexit’s affect on banking (in addition to the UK being nowhere near closing an agreement with the EU) makes it difficult to fathom how the divorce will influence consumer behaviour and trade in general.
Brexit is around the corner: what are the next steps?
As you can see a lot of potential changes lie ahead for high-risk merchants when the UK leaves the EU. The extent and how they change will depend mostly on the form of departure. DirectPayNet always stays abreast of these changes. No one can predict the aftermath of Brexit, but we can help you be ready to navigate the upcoming changes. What are your payment processing concerns surrounding Brexit?