At the time of writing, we are in the home stretch of the UK’s transition period with the European Union, with new rules for UK businesses that deal with Europe set to come into force on 1 January 2021.

Given that the much-hyped “Brexodus” of companies from the UK has not materialised during the grace period, what are the real short term and long term effects of leaving the common market, without a deal, for the payments industry?

Which firms will suffer the most?

Deal or no deal, the impact of Brexit will be most acutely felt by those businesses that are licensed by the Financial Conduct Authority (FCA), and which either indirectly support EU businesses or directly transact within the EU. 

The European Banking Authority (EBA) is currently not allowing UK-based financial institutions to continue to passport their FCA license into 2021, effectively cutting off any cross-border operations with the EU as of next year.

As a result, the sector has gone into preparation mode over the last two years. Many UK firms have set up separate businesses, hired new people and re-licensed in the EU to continue to operate outside of the UK from January. This, combined with navigating the fallout of the pandemic and ensuing recession, has been no mean feat.

The impact on financial services so far

While major UK brands may not have relocated to Europe in the droves speculated last year, many financial services firms have decided to move their staff and operations to other locations in recent months.

According to EY’s Brexit Tracker, more than 7,500 financial services employees have now been relocated to European financial hubs, such as Paris, Dublin and Frankfurt, since the referendum result - including 400 employees in the last few weeks of Q3 alone.

The FCA has given businesses licensed in the EU, like ours, an additional three years to continue operating in the UK. But, while we have more time to adapt to the new status quo, it's a looming challenge and one which we'll need to tackle in the near term.

 A barrier to growth for smaller firms

The additional headcount and paperwork required by the payments sector to keep operating exactly the way we are today is already proving to be a real headache. And a no-deal Brexit will only serve to exacerbate the problem. 

The timing of the UK’s exit from the common market, and the additional red tape it’s created for the financial services sector, couldn’t be worse. In 2020, the coronavirus crisis has accelerated the shift toward frictionless and cross-border payments, supercharging growth for many UK payments, and fintech start-ups. 

But the expansion plans of these businesses and their access to key growth markets are now at risk as they struggle to grapple with new regulations and operate in a more complex trading environment.

Overcoming adversity

Nevertheless, 2020 has shown just how resilient the fintech industry is in the face of hardship, and the UK remains a global hub of innovation. 

If businesses manage to take control of these changes, the long-term impact should be minimal, and the sector will be able to take advantage of new opportunities more quickly.

If we don't, or if there are further unforeseen obstacles to overcome, then innovation within the payments sector could be stunted for years to come.