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What Brexit means for card payments

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On 31 October 2019 the UK could leave the EU without a withdrawal agreement. This could have serious economic consequence and could also affect card payments between EU countries and the UK. We have compiled a few possible scenarios for how card payments might be impacted by a no-deal Brexit.

On 31 March this year, the UK planned to leave the EU. But after Theresa May failed to get her Brexit deal through parliament the EU decided to set a new deadline: 31 October.

Now, we are closing in on the new deadline and the situation looks about the same as it did in March. The big difference is that this time the new prime minister, Boris Johnson, has promised that the UK will leave the EU on 31 October, with or without a deal. With that in mind, a no-deal Brexit could become a reality by the end of this month, with big consequences for both the UK and the EU.

The impact on card payments
Since 2007, the EU has had a single payments market, with common rules and limits on card fees. Therefore, it is hard to know what rules would actually apply to card transactions between the UK and the European Economic Area (EEA) in the case of a no-deal or “hard” Brexit.

Perhaps the biggest issue is how this would impact the fees that card schemes and card issuers can charge for transactions between the UK and the EU countries. Today, those fees are capped by the EU, but without a withdrawal agreement both card schemes and issuers would now be free to increase the fees on card transactions between the EEA and the UK.

When it comes to the card schemes, however, there is nothing to indicate any sudden price hikes. Both Visa and Mastercard usually communicate fee adjustments well in advance, and they have yet to announce that there would be any increase if the UK leaves the EU at the end of October. But if the card schemes were to increase their fees that increase could be significant. Today, transactions with merchants outside the EEA can have scheme fees that are up to ten times higher than they are for transactions within the EEA.

The situation is also unclear when it comes to the interchange fees levied by British card issuers. After a withdrawal, those banks would no longer be under the EU’s regulation and would be able to freely decide on new fees. There is, however, reason to believe that we would not see a significant increase in interchange fees either. The UK has historically had very low interchange fees, even before they were capped by the EU, and these fees also need to be agreed upon with the card schemes.

Two possible models
Because of this, we don’t expect overnight increases in card fees in the event of a no-deal Brexit. In time, however, the relationship with the EEA countries will need to be formalized and here the other European countries that aren't part of the EU can work as benchmarks.

Norway, for example, has signed a bilateral agreement with the EU that effectively makes it a part of the EEA, with all the same regulations and fees as the EU countries. Switzerland, on the other hand, has not signed any such deal and is, therefore, not a part of the EEA.

Because Switzerland is not a part of the EEA, card fees are substantially higher for transactions between the EEA and Switzerland than they are within the EEA. This is especially true when it comes to the interchange fees that card issuers charge on these "intra-regional" transactions. For instore transactions these fees can be twice as high as they are inside the EEA and for e-commerce they can be almost three times as high. So, if the UK were to choose the Swiss approach that could result in transactions between the EEA and the UK becoming significantly more expensive. If, on the other hand, the UK were to go the Norwegian route there would be no significant changes.

How acquirers are impacted
Another area that would be impacted by a no-deal Brexit is acquiring. Acquirers, like Bambora, have an acquiring license which allows us to help merchants get paid throughout the EEA. But with a no-deal Brexit that license would no longer apply to the UK and we would need a specific UK license to keep accepting payments there.

To prepare for this eventuality and handle a transition period, Bambora has already applied for the so-called temporary permission regime. As a result, we are fully prepared to keep working as an acquirer in the UK even in the case of a “hard” Brexit on 31 October and the temporary permission regime grants Bambora some additional time to apply for any new licenses needed.

At the same time, there is still a possibility that the EU and the UK could reach an agreement or simply decide on a new deadline and initiate new negotiations. For that reason it is hard to predict what will actually happen on 31 October and important to keep watching to see how Brexit will actually affect card payments.