U.K.'s COVID surge, imminent Brexit put fintech crisis plans to the test

Rapidly spreading coronavirus and an unclear Brexit outcome are bearing down on the U.K., leaving the fate of London as a technology and finance hub in the air as 2020 draws to a close.

Even if there's a trade deal before the Brexit Dec. 31 deadline, fintechs and companies that process international payments involving the U.K. must make adjustments to endure a pandemic and global economic crisis.

Negotiations on a post-Brexit trade deal are still in flux, leaving open the possibility of a "no deal" Brexit with no obvious regulatory roadmap. At the same time, the U.K. is shutting down large parts of its economy in an attempt to curb a coronavirus variant that's believed to spread 70% faster than the prevailing strain. International travel bans are part of the virus response, isolating the U.K. in a way that may provide a preview of what would happen if the U.K. leaves the EU without a clear trade deal.

"Even with so little time remaining, there is still a lot of uncertainty around the trade deal," said Zilvinas Bareisis, head of Celent's retail banking practice, who's based in London.

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Even the "better case" scenario of a trade deal creates uncertainty for payments and financial services. The trade deal being negotiated covers mainly goods and not services, Bareisis said.

For payment and financial companies, that means a reliance on "equivalence" rules that would allow financial institutions located and licensed in countries with similar regulations to access both the U.K. and EU. Equivalence is up to interpretation and is not a substitute for a formal agreement, but for continuity it's better than nothing. "A 'no deal' outcome would still be bad for financial services, given the expected disruption and negative sentiment around the economy," Bareisis said.

Brexit and the coronavirus are not new challenges for fintechs. Companies globally have had to adjust to the pandemic for most of the past year, while Brexit has given rise to workarounds such as an expansion of open development tools to create flexibility.

The two crises have combined for some fintechs, which applied the Brexit-inspired movement toward APIs and digital cross-border payment processing to enable a faster move to e-commerce for merchants.

Payment companies have also gotten creative with licensing to ensure operations in both the U.K. and the EU agnostic to the outcome of negotiations. That presented opportunities for countries such as Ireland, Lithuania and the Netherlands to build fintech bases to lure U.K.-based fintechs and payment firms.

One of those companies, Payoneer, has obtained licenses in Ireland and Gibraltar, which should cover both the EU and the U.K. after Dec. 31.

“It's been clear for some time that e-money and payment providers had to have completed all Brexit preparations needed to ensure continuity of service for their customers," said Patrick de Courcy, CEO of Payoneer Europe. "For us, it was a two-year-plus project."

Any gap in payment rules and standards between the EU and U.K. may result in a delay or rejection of certain payments, and transactions may need to include more details, according to Gareth Lodge, a senior analyst at Celent.

"In most cases that is fine, your bank knows the details," Lodge said. "It's likely to be more tricky where the relationship is held with a third party. For example, for direct debit the biller has those details."

European efforts to protect data and streamline payment processing could also face uncertainty. SEPA, or the Single Euro Payment Area, has been instrumental in pushing faster payment processing in the EU as e-commerce has grown.

SEPA played a role during the pandemic in helping liquidity at small businesses by moving cross-border payments faster. It's not certain SEPA will remain static after Brexit, though there are already non-EU countries in SEPA and there's economic incentive for the status quo. Celent's Lodge is hopeful there won't be too many complications regarding SEPA, given the U.K. played a role in its creation.

PSD2, which enables data sharing between banks and third parties such as payment apps, will become more complicated after the U.K. leaves the EU, particularly if Brexit results in changes in the relationship between the Financial Conduct Authority and EU regulators.

These changes could be subtle but create headaches for payment processing. Writing for PaymentsSource, Arvid Vermote, CISO of GlobalSign, said "there is a big risk of disruption, as payment service providers will be forced to make technical changes which have not yet been specified."

The U.K. has said it will support GDPR, the data protection regulation, after the Brexit transition, according to the National Law Review, which adds there will still be adjustments.

The challenges for fintechs, such as the expense of multi-licensing, could threaten London's status as a fintech hub, which has been a concern since the original Brexit referendum. London far outpaces other European technology hubs for fintech investment, though the lack of passporting or equivalent measure in Brexit could create a disincentive given the complications of operating in two different jurisdictions.

London fintech Revolut has warned the U.K. government about a "talent drain" because of Brexit and the U.K.'s fintech industry has been concerned about an exodus since the referendum.

But London's momentum as a long-term hub should protect it from a severe loss of fintech status, said Eric Grover, a principal at Intrepid Ventures.

"I may be a contrarian here. I think deal or no deal London will continue to be the most attractive city in Europe and arguably globally for most payments fintechs because of its critical mass of talent, legal and regulatory regime, and cosmopolitanism," Grover said. "London fintechs are by their nature potentially global. Paris- and Frankfurt-based fintechs generally aren't."