How to navigate shifting EU legislation in the cross-border payments landscape

In the gap between PSD2 and PSD3, evolving payment legislation leaves electronic money institutions in uncertain territory. Yet, strategic navigation of regulatory guidance may unlock safeguarding opportunities

With businesses increasingly looking for lower cost payment services, the number of electronic money institutions (EMIs) and authorised payment institutions (APIs) across Europe has surged. There are now close to 600 EMIs in Europe and the UK, according to Celent research – a number that has accelerated since 2015. 

Evolving payment regulations in Europe are, however, creating uncertainty for some payment institutions, particularly in the wake of Brexit. 

“One of the key challenges that EMIs and APIs are facing is the opacity of legislation,” says Robert Turner-Kerr, senior relationship manager at iFast Global Bank. “Sometimes the legislation is guidance and sometimes it’s an EU directive and must be passed into national law. This means there is often significant variation across the single market.”

This uncertainty makes it challenging for European payment firms to operate across borders if domestic regulations appear to restrict where they can safeguard customer funds. Post-Brexit, for example, existing PSD2 (Payment Services Directive) regulation technically meant the UK became a ‘third country’. Yet, the UK was the first country to sign PSD2 into national law. So, can EEA/EU Payment institutions continue to safeguard funds in the UK? Do local regulators have a precise view on this? 

As a result, it can be problematic for regulated firms that have customers doing business in the UK requiring access to GBP accounts or local clearing schemes. 

“This effectively means two things: the client base the payment institution can attract may be more limited, and the currencies and payment rails (especially GBP), on offer, are reduced or limited in scope,” says Turner-Kerr. 

“Where local safeguarding guidance hasn’t been updated with specific reference to the UK, EU EMIs and APIs may be uncertain what the position is regarding safeguarding in the UK until PSD3 regulation is introduced,” says Turner-Kerr. 

“What we’ve seen recently is some EU payment institutions notifying their local regulator that they intend to safeguard in the UK,” he says. “We’ve seen this in at least two EU markets where there has been no objection and anecdotal evidence that the UK is considered a competitive and equivalent environment to safeguard funds in, with a wider choice of providers.”

This information gap means European EMIs and APIs are potentially missing an opportunity to safeguard customer funds in the UK, simply because they are not aware local guidance may allow them to. They may also be reluctant to challenge their own internal reading of guidance from central banks, which can be outdated.

That matters if these firms have customers with UK currency needs. It means they may have to safeguard GBP in Euro, creating exchange rate risk, reducing competitiveness and increasing costs.

“Not all European banks are willing to provide competitive credit interest on safeguarded funds,” says Turner-Kerr, another potential downside. Therefore, there is a potential missed opportunity if they can safeguard in the UK.

“iFast Global Bank can provide these solutions to EEA-based non-bank financial institutions offering credit interest in seven currencies. iFast will also provide indirect access to faster payments and CHAPS, says Mark Garrity, general manager at iFast Global Bank. We will enable firms to take control of their payments with the bank using dedicated IBANs,” he says.

“All of which is underpinned by iFast’s three corporate pillars of innovation, integrity and transparency coupled with our newest bank pillar, customer centricity.”

Being part of a large fintech group – Singapore-listed iFast Corporation (XSES: AIY) – also means the bank can develop new products and services quickly and effectively.

European firms, therefore, may have an opportunity to benefit from enhanced solutions whilst also safeguarding funds in the UK, an option they might not have thought possible post-Brexit.

“Regulated EU firms that simply assume they can’t safeguard in the UK may be incorrect,” says Turner-Kerr. “Therefore, if you have a business requirement for GBP and want to enhance your credit interest across seven currencies with iFast Global Bank, then it’s worth doing some research. Explain to stakeholders why it is important for your business competitiveness and an advantage to your customers.

Discuss with your peers the opportunities that may exist. PSD3 will, undoubtedly, change where and how EU firms operate, by which point iFast Global Bank will have established our European Banking Subsidiary, providing continuity for our clients in any eventuality.”

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