UK Initiates Brexit Process – Implications for Consumer Finance

On Wednesday, 29 March 2017, Prime Minister Theresa May formally initiated the process of extricating the United Kingdom from the European Union (better known as Brexit). This move, brought on as a consequence of a June 2016 referendum, will have wide-reaching impacts across global markets as the UK enters into the negotiating phase which will determine its future relationship with the EU. For players in the consumer finance sphere, this process will be an ongoing source of volatility and uncertainty, raising questions about the future of regulations, exchange rates, and financial opportunities in both the UK and the EU.

Payments in Western Europe and the United Kingdom (Billions USD)

consumer payments in us dollars by transaction type in western europe compared to the united kingdom

Potential Brexit consequences for payments

The volatility introduced by the Brexit process could have an impact on consumer credit opportunities. The possibility of central bank rate increases makes consumer loans and credit cards a less attractive proposition for some consumers. Should APRs increase, cards featuring 0% introductory rates are likely to see a boost, while higher mortgage rates would put some pressure on the domestic housing market. Additionally, market uncertainty in the UK as well as credit downgrades tighten credit access and make it more challenging for consumers to take out loans.

Currency effects have also made a major dent in the UK economy as the pound sterling fell precipitously following the vote and is not expected to recover in the immediate future. This development has hindered cross border spend as UK residents who decide to travel abroad face higher costs due to exchange rates, in some cases choosing more modest activities and accommodations.

Regulations – interchange and otherwise

Once the UK has completed the Brexit process, financial regulation will become a new question. London serves as one of the capitals of global finance, housing the headquarters and processing facilities for many of the world’s largest financial entities. A number of these companies use the UK market as a gateway to the rest of the European Economy Area – a practice known as “passporting.” Many companies will have to determine whether London’s unknown financial relationship with the European mainland will continue to serve their purposes. The results of the negotiating process are to be determined, however, the uncertainty surrounding regulatory requirements such as privacy laws, processing requirements, and trade agreements may push companies to reevaluate their UK presence.

Removed from EU requirements, the UK would be free to reassess its approach to initiatives such as Payments Service Directive 2 (PSD2) – which opens financial institutions to third-parties through the use of APIs – and also to interchange regulations. Interchange regulations in particular are likely to receive lobbying attention in the UK, where the country’s considerable credit card uptake relative to the average Western European market could play a role in revaluating the interchange caps imposed in the EU.

The Scottish Wildcard

Adding to the confusion of the Brexit process is the renewed effort by Scottish officials to initiate a referendum on Scottish independence. The Scottish Parliament voted this week to request an independence referendum before the UK finished the Brexit process – a development that the Prime Minister would like to delay. Scottish citizens overwhelmingly voted to remain in the European Union during the Brexit referendum in 2016. Should the country successfully vie for independence, it would almost certainly seek to remain in the European Union, a development which would only further complicate the payments landscape.