FinTech and financial services companies are closely monitoring the Brexit situation to understand whether we will lose our EU passporting rights or not.
The progress made in the international payments sector - one of the brightest beacons in the UK’s FinTech sector - could be arrested should the UK fail to secure a passporting system for its financial services industry says Covercy CEO Doron Cohen.
Covercy is one of the new entrants in an already crowded international payments scene in which only the most innovative are likely to succeed going forward.
Cohen started Covercy in 2015 having left his previous career as co-founder and co-CEO of Leverate, a leading forex technology provider.
Covercy was placed in a list of 'ten of the best businesses' at this years London technology week and an emerging competitor to industry giant TransferWise in a piece by Forbes.
The company is licensed by the UK’s Finance Conduct Authority (FCA), enabling the company to passport those services in to Europe.
“During my time at Leverate I saw how expensive the SWIFT international payments network was. I knew that it could be done differently - and Covercy was born. Unlike other competitors we offer guaranteed rates to businesses, in real time, meaning they know exactly how much a transaction will cost at first glance,” says Cohen.
According to McKinsey, 95% of international transfers are still carried out by banks confirming this to be a growth area.
Over recent years the number of currency transfer options have grown notably thanks to the ability to ‘passport’ financial services into the EU.
“There is one precondition that a company that seeks to expand to the EU, beyond just the UK, requires and that is "passporting rights of financial services to other European Economic Area (EEA) countries.
“Unlike the US, where almost every state has its own payments (and some other financial) regulations, and unlike Asia where every country has a completely different legal and financial regulatory framework, the EEA has built something quite unique.”
Now a company with a license from the financial regulator of any EEA Member State can simply "tick a box" effectively and then in a fairly technical process, receive rights to operate in any other EEA Member State within approx. 60 days, normally without cost, and without having to report to any other regulator - except its home regulator.
Mostly, the financial services industry is worried that the ability to passport services will be taken away from them.
If that is the case it could mean individual applications to each EU state’s financial regulator.
Costly, time consuming and extremely worrying for Cohen.
He says, “Like many other FinTech and financial services companies, we are closely monitoring the situation to understand whether we will lose our EU passporting rights or not. But right now all we can do is speculate, to borrow a British phrase, we’re trying to “keep calm and carry on” - business as usual. “
Minimal Risk on Currency Fluctuations
Dealing with international currencies is not without risk, add to the recent decline of the Pound and currency transfers are on rocky ground. But Cohen is confident the company is managing the risk correctly.
“As a company that provides services in 20 different currencies, we run an internal risk management system to hedge our own risk. Our mantra is that businesses should not hold unnecessary exposure to currencies, they should limit their exposure to their business requirements, and anything more is gambling. We follow the same rules.
“So we are affected by large moves, but in a very limited way. For example, prior to the Brexit vote we have reduced our GBP exposure. Not because we had a clue whether the GBP will go up or down, but because no matter what the results would be, we did not want to be exposed to them.”
His cautious approach has been replicated in businesses up and down the UK since the referendum vote in June.
He says, “We've seen UK importers reluctant to buy outside the UK for one or two months immediately after Brexit, since the GBP went dramatically down, increasing their costs, but business now seems to be back on track.”
Waiting for Clarity
As much as UK Plc is currently attractive for investors right now, for firms dealing in transactions that doesn’t necessarily lead to confidence in the Brexit strategy.
Cohen believes that Theresa May's government has a really tough job to do.
For the next two years they will need to execute a risky and previously unthinkable extrication from the EU.
But the lack of information is worrying:
“For me the main problem around Brexit is that the simplification of the situation such as “Brexit means Brexit”, it doesn’t carry much weight. There’s still no clarity at all as to what type of exit the UK will have from the EU, will it be a Norwegian-styled relationship in future?
“Or will it be more like a “hard Brexit” with no freedom of movement and no access to the Single Market? At least if there was an indication, people would know what they're in for and be able to try to plan for whatever Brexit does look like.”
Although the future is far from certain, Covercy still desires to continue their rapid growth.
Whether that will be from the an office in UK remains to be seen.
Cohen says, “The UK is about to leave the World's most prestigious trading club, which is maybe second only to the United States’ 200-year old ‘club’, whereby 50 states joined together. Since the second world war the world has been going towards globalisation, with the UK being one of the leaders of this movement for decades now, I believe that Brexit goes against this flow.”