How Facebook faced Brexit's regulatory cloud
Facebook's introduction of mobile payments in the U.K. and France is accompanied by the complexity of having to adapt as Brexit unwinds the U.K. from the European Union.
Ben Regnard-Weinrabe, a London-based partner in the global banking and payment systems practice at Paul Hastings, is part of the team that consulted with Facebook and managed some compliance issues for the social network's introduction of P-to-P payments in the U.K. and France via Facebook's Messenger app earlier this month. Obtaining a money transfer license was a big part of the job, and Facebook's license in Ireland covers the entire European zone.
"For a U.S. company that does business online, there's a lot to navigate," Regnard-Weinrabe said, adding the work included ensuring Facebook's registration and authentication models met the strict local laws while maintaining Facebook's user experience. "We want to make sure they can do business the 'Facebook way,' rather than the traditional way, such as requiring a passport, utility bills and other info you'd need at a bank to set up an account. It's hard to get that balance right to offer a frictionless product."
But as the U.K. departs the European Union as part of the "Brexit" process, there's the question as to how transferable the license will be, if at all.
The U.K. government triggered Article 50, or the formal move to separate from the European Union, early in 2017—the U.K. is expected to be out of the union by March 2019. There should be a transition period to accommodate any necessary compliance changes that could last into 2021, Regnard-Weinrabe said.
That means Facebook does not need a U.K.-specific license right away, and it's possible it may not need one.
"I know that some U.K.-based fintechs are considering to apply for a second license in an EU member state, to hedge for Brexit," said Ron van Wezel, an Amsterdam-based senior analyst at Aite Group. "It is also true that the U.K. has the best organized process to apply for a banking license, which is one of the reasons we see so much neobank and fintech activity in that market."
The necessity of a distinct U.K. license will depend on "what type" of Brexit results from negotiations and how it is implemented, said Gareth Lodge, a senior analyst at Celent.
"One approach could be no change, another could result in certain items being grandfathered; that is, a separate license will be required for anyone new, but existing ones will effectively be honored," Lodge said. "To that end, no one can tell how it will work."
If Facebook needs additional licensing, it may be possible to save some of the work by duplicating parts of the application process from the European jurisdiction to the U.K. , Regnard-Weinrabe said. The process is similar to the U.S., where different state licenses are required.
"In the U.S. they put a lot of effort into state licenses," said Regnard-Weinrabe. "You start with a state with a harder license process like New York, then you move that work on to other states. Europe is actually easier in that sense. You have a license that works in every country in the zone. Imagine if there was a NAFTA license that covered Mexico, Canada and the U.S."
Having at least some visibility into compliance will be helpful as Facebook plots new financial services in the Eurozone and elsewhere. Facebook did not return requests for comment on its financial services pipeline or whether it has plans to apply for a separate money transfer license in the U.K., but P-to-P transfers are often a gateway to broader services.
Facebook is already facing a challenging European market in which people adopt social network and digital payment technology differently from one country to another. It also faces embedded competition in Europe. Similar to the U.S., where Venmo, Zelle and other apps have a head start over Facebook in P-to-P, there's already a market for transfer apps in Europe—PayPal's market share in the U.K. is larger than in the U.S.
That will likely force Facebook to rely on differentiation, or tying P-to-P to other social media functions or different financial services disbursements. Zelle, for example, is relying on its rails to power insurance claims payouts and government to consumer payments for member banks.
"Facebook is an e-money institution [with the transfer license], and that does allow a lot of flexibility in terms of offering a variety of different financial services off of that license," Regnard-Weinrabe said, adding he could not comment on Facebook's plans beyond P-to-P transfers.