Brexit. Eventually. Possibly.

Brexit. Eventually. Possibly.

What did Britain say to its trade partners?

See EU later.

It’s been a funny week or two to say the least, so it seemed apposite to start with a joke (and we’re not talking about the England vs Iceland result! – the Icelandic commentator is worth a 30sec listen.)

The UK woke up to find that it was leaving Europe. Given the legendary British reserve, stiff upper lip, etc., it is quite incredible just how divided the country has become, and how everyone has an opinion. As a result, there has been a lot said before, during and after the campaign that needs to be sifted very carefully. This is a genuine attempt at a factual look at quite what this means as many of the facts are very definitely not facts.

What's actually going to happen? Frankly, the short answer is nobody actually knows. No country has ever left before. Greenland did but is both smaller and was leaving for other reasons. Nor did they invoke Article 50 (more of which in a second) which has never been used. Whilst there are some legal guidelines and processes, given that the European Union is an economic union governed by politicians, it’s fair to say that the process will be very political in nature. Particularly as Article 50 is not very precise.

The first step is for the UK to activate Article 50 which effectively formally starts the process. The UK has two years from informing the European Parliament that it intends to leave and actually signing article 50. Given other European elections, and despite some public calls from Europe to get on with it, some believe that it is likely to be later rather than sooner.

Until Article 50 is signed, the UK is still in Europe, and everything continues as they do today. What is less clear is when Article 50 is signed, what happens next, and how long the process will take. UK Government analyst suggests 5 years, yet others say at least a decade.

Nor is it yet clear what the UK will choose to negotiate on. For example, it may choose, voluntarily to adopt regulation such as PSD2. We (or, to be clear, Gareth) believe that the UK will push ahead with the PSD2, as many of the rules are either in place in the UK already, or reflect the way the Government is thinking e.g. the Open Data Initiative arguably is far wider reaching that the Access to Accounts element of the PSD2.

It’s not clear quite what is or isn’t the European Union necessarily. For example, passporting, the rule that allows financial services firms to be licenced in one country and operate in another, is actually (according to the Bank of England website at leastother reputable sites even disagree on this!), an European Economic Area (EEA) initiative, and even countries outside of the EEA, such as Switzerland, have negotiated deals. This is particularly key for card acquirers, many of whom use their UK licence to negate the need for local ones across Europe.

So, as they saying goes, the devil will be in the detail. And that’s going to take time to unravel, and to negotiate even on the things that need negotiating.

Over the coming months, banks will need to scenario plan on multiple dimensions. They will need to identify key regulations that impact their business, how that might be regulated, and how long it would take the bank to respond. Yet many, if not most banks, will have done some of this risk profiling before the vote took place.

Until there is clarity, the reality is that it’s the political fall-out is going to have the most impact in the short-term, itself creating a degree of additional economic turmoil.

Which Way for Debit in Europe?

Which Way for Debit in Europe?
I recently published a report titled “In Search of a Third European Card Scheme: Time to Move On,” in which I claimed that most of the initiatives aimed at establishing an alternative to Visa and MasterCard were unlikely to deliver a viable solution any time soon. I also said that the arguments for having such a scheme in the first place are simply no longer there. Some arguments never really stacked-up to begin with, and others are being destroyed by the emergence of new technologies (e.g. mobile) which provide stiff competition to the card schemes in a different way. The report seemed to strike a chord with many, as it generated a lot of interest from clients, press and others in the industry. It was interesting to see vindication of these ideas at a conference I attended in Barcelona last week, Cards and Payments 2012, organised by the Axiom Grouppe. I chaired Day 1 and also presented on payments innovation. We also heard from Visa Europe on the progress of its V Pay product and a very interesting case study from Luxembourg, one of the latest examples of a trend of banks in a given European market deciding to shut down their local debit scheme and migrate their debit portfolio to a different product. Banks in Luxembourg did exactly that during 2011 – decided to stop supporting bankomat, their local debit scheme, and migrate to V Pay instead. They said they did a thorough investigation of various available options and found that none of the potential contenders for an alternative scheme could deliver on their requirements. Conferences such as this are also a great reminder (if one was needed) of the diversity of Europe. For example, V Pay is based entirely on chip and PIN with no magstripe compatibility. In other words, it doesn’t work at non-EMV POS terminals or ATM’s. Personally, I would be mortified if I couldn’t use my debit card to withdraw cash in the US or anywhere else in the world, as I would be charged an arm and a leg by my credit card issuer if I made a cash advance on a credit card. Many Europeans pay annual fees for their credit cards, but get different services, such as cash withdrawal allowances as part of the package. They are quite happy to know that they have a very secure debit card for their day-to-day needs across Europe and rely on credit cards elsewhere. V Pay has been designed to be a debit product exclusively for Europe right from the outset. However, it’s relatively modest progress (16.6m cards issued, 68.9m cards committed almost 5 years since launch) only serves to higlight the difficult, and often political, decisions banks have to make when determining the future of debit for their market.

PSD: Payment Services Directive or Payment Services Distress?

PSD: Payment Services Directive or Payment Services Distress?
I have recently attended a European conference on the Payment Services Directive (PSD), the legal foundation for the creation of an EU-wide single market for payments. As stated on the European Commission’s site, the PSD “aims at establishing a modern and comprehensive set of rules applicable to all payment services in the European Union. The target is to make cross-border payments as easy, efficient and secure as ‘national’ payments within a Member State”. Impressions from the conference Although all the major European PSD experts were in the room, there still was plenty of uncertainty, confusion, and open items I supposed were to be already resolved. The PSD has principally focused on consumer protection. For this market sector it is not too problematic for banks to adapt their rules to the Directive’s mandatory guidelines. Different story is when it comes to corporations. The PSD does not provide clear provisions and guidelines on how to deal with issues that have emerged since the Directive principles have been brought to the public. Bank representatives have argued about the difficulty of implementing some provisions into local legislation. In all response I heard, more than once, legislators saying that “the law is the law, and cannot be changed”. Looks like regulators and banks have for all this time worked in parallel without sharing views and without committing themselves to find the right compromise. This impression was further on validated after I heard regulators in the room lament they were “surprised” of the negative comments they heard from banks. Would banks have “raised the issue before, things could have been worked out”. Bottom line Although all parties claim this not to be the case, the Payment Services Directive is still perceived as a compliance exercise. The European Commission is completely missing the point of providing a clear business case for adoption. On their side, banks are still in a guilty “wait-and-see” mode. In either case, distress seems to be the right sentiment that surrounds the PSD program.

Promising Future of Islamic Banking

Promising Future of Islamic Banking

Islamic banking has become a major global industry with a growth of 10% to 15% per year over the last decade, to reach between USD 700 and 750 billion of assets worldwide nowadays. Currently, Islamic Banking is particularly developed in the Middle East, is definitively on the rise in the Asia-Pacific region, and is currently in an infancy stage in North Africa and in Europe.

North Africa represents a large and still untapped market of nearly 200 million people, with 95% Muslims, except in Sudan where Muslims represent 70% of the population. Furthermore, with an average GDP per capita of US$2,334 in 2007, the North African region is richer than the African average (US$1,137). Islamic banking is still a niche market in North Africa. This could be explained by the fact that North African consumers are traditionally less conservative than Middle East consumers and are used to conventional banking products and services. Furthermore, governments have not particularly encouraged Islamic banking development in their countries. However, things have recently begun to change with:

– New Islamic banks entering these markets; for instance, the UAE Noor Islamic bank which opened an office in Tunisia in June 2008

– Governments creating new regulations; for instance, in 2007, the Moroccan Central Bank decided to authorize certain kinds of Islamic financial products, called alternative financial products, in response to consumers’ demand.

The demand for Islamic Banking product exists in North Africa but also in Europe, where Muslims population is estimated at nearly 15 million people, and is particularly significant in France, the Netherlands, Germany, Belgium, Sweden, and UK. UK has taken the European leadership in Islamic Banking since 2004, when the FSA authorized the Islamic Bank of Britain, the first Shariah compliant retail bank in Europe. In 2006, the European Islamic Investment Bank, the EIIB, also obtained a license from the FSA. In France, the government recently expressed its wish to change the regulation to allow Islamic banking, and the first Islamic banks should appear in 2009. In the meantime, two Islamic banking products have already been launched in 2008 in a French overseas department, La Réunion, by BFCOI, a subsidiary of Société Générale.

In addition to the large and untapped Muslim population, Islamic banking is currently beginning to attract non-Muslim customers, who are interested in this alternative way of banking. Indeed, a growing number of non-Muslims are turning to Islamic banking as customers, spooked by turmoil in the Western banking system increasingly see the sector as safe and more connected to the real economy. In my opinion, Islamic banking will benefit from this new consumers’ interest and grow even more quickly than it recently did.