The recent years have been challenging for the United Kingdom in terms of geopolitics and economics: global economic slowdown, pound crash and change of three prime ministers within a few months, and of course, the negative impact of Brexit on the British businesses.
However, the fintech scene in the United Kingdom is full of remarkable innovators who combine finance and technology and are ready to tackle various challenges. In particular, we discussed with representatives of the British fintech company Payrow the issues with payments between the UK and the European Union arising from Brexit, and how technology-enabled financial companies are helping businesses to address these problems.
How Brexit affected payment processing
The EU has spent the last decade harmonising how money is transferred to create a single, competitive payments market for Europe. This was spearheaded by the Second Payment Services Directive (PSD2), which treated payments between the UK and the EEA as ‘domestic’ and resulted in less onerous payment data requirements. However, after Brexit, the UK no longer has access to this market, causing issues for UK companies doing business in the EU and vice versa.
On January 31st, 2022, the Brexit withdrawal period ended, and the UK officially left the EU, causing significant disruption. The UK payments industry has undergone several reforms in recent months, specifically related to cross-border payments regulations due to Brexit.
To comply with these changes, most firms had to make large-scale adjustments to their payment management, acceptance, processing, and reconciliation systems, as these are all directly linked to revenue. Additionally, firms must ensure that customers’ diverse payment preferences are seamlessly and securely processed in their native currency, while still adhering to new cross-border payment restrictions and maintaining customer satisfaction.
However, not all businesses have been able to keep up with these changes, as payment preferences vary by region, and firms need to use the appropriate technical tools and strategies to increase authorisation rates, customer satisfaction, and revenue. This is leading to increased costs and slower transfers, making it difficult to pay international suppliers on time.
Changes on cross-border transactions after Brexit
At the onset of the departure process, the financial sector prepared for the reality of Brexit by anticipating the eventual position of the European Banking Authority. As a result, financial institutions located in the UK were unable to pass their regulatory licenses and authorisations, effectively halting cross-border business with the European Economic Area.
Treasury and payment professionals had to adapt to new legislation and a more complex European payments environment while still managing liquidity, ensuring business continuity, and optimising working capital.
Payrow spoke to our team about what exact problems businesses are facing and how fintech can help avoid such issues.
— Additional Third-Party Bank Charges
Due to the UK’s departure from the EU and EEA, payments between the UK and EEA countries no longer fall under the PSD2 definition of intra-EEA payments. As a result, the principal amount on affected wire payments is no longer protected from deductions or claim backs.
Certain European banks now consider SEPA credit transfers and direct debit transactions between the UK and Europe as cross-border, leading to additional bank charges. While opinions and interpretations on this issue vary within the industry, complaints have been made to industry bodies and national banking communities to highlight the increased costs.
According to Payrow, this issue is a solvable one. For example, when making payments through FPS and SEPA using the Payrow service, there are no issues with extra commissions between the UK and EU countries. With these payment types, no intermediary banks or additional fees are involved. The customer pays only a commission fee according to their tariff plan.
Moreover, as noted by the company, the Swift documentation specifies that the SHA commission type is always used. This type requires the sender of the payment to bear their own expenses, while the recipient of the payment is also responsible for their own expenses.
— Additional data requirements
Transferring money between the UK and EU now requires additional information under the Funds Transfer Regulation of the European Union. While the payer and payee’s names and account numbers were always required, the regulation now demands their addresses, official personal document numbers, customer identification numbers, or dates and places of birth. Failure to provide this data may result in the payment being rejected by the payment service provider (PSP), which makes cross-border payments more complex and burdensome.
Although providing additional information may seem burdensome for customers, modern financial services aim to simplify customer interaction by reducing the time required to gather necessary information and complete registration procedures.
However, it is important to understand that these processes are necessary to prevent payment errors and minimise the number of returned payments. According to Payrow, the processes for collecting and filling out information must adapt and evolve while striking a balance between safety and speed. Payrow achieves this through the use of modern technologies and a professional team capable of quickly understanding these issues.
— IBAN discrimination
International Bank Account Numbers (IBANs) are used to identify bank accounts from around the world and start with a two-character country code to indicate the account’s location. Despite the UK’s continued participation in the EU’s SEPA market, there have been reports of European companies rejecting SEPA payments and direct debits from “GB” IBANs.
This is known as IBAN discrimination and violates EPC SEPA regulations (Eu No 260/2012), resulting in significant fines for those responsible. However, this issue remains a real risk and can cause additional complications for cross-border payments after Brexit.
According to Payrow, the service has not yet encountered such a problem when processing customer payments. If a Payrow user does experience such a problem, the company’s customer support service will promptly resolve the issue.
How to mitigate the post-Brexit impact on cross-border payments
While regulatory bodies attempt to mitigate the impact of Brexit on cross-border payments at the state level, fintech companies are taking steps to mitigate the effects on the business level.
The current major innovation trend is service integration, which goes beyond fragmented technologies with limited payment capabilities and additional services. This is especially important for cross-border payments, where businesses should seek providers that offer more than just payment facilitation.
Rather than relying on traditional payment methods such as plastic cards or NFC touchpoints, businesses should consider utilising technologies that enable customers to complete transactions within an app. This provides users with an enhanced experience before, during, and after making a payment.
The aftermath of Brexit has further demonstrated that businesses must continue to innovate and turn to leading contractors to navigate difficulties in times of uncertainty and economic turmoil. Only those with digital agility will be able to compete and remain relevant in today’s digital marketplace.