European Economic Area Opportunity
When non-EU payment companies choose an expansion strategy, the European Economic Area (EEA) market, which has almost 450 million people in 30 countries with a unified regulatory system, is among the first markets to consider. Through “passporting” rights, payment institutions authorized in one EEA state can offer services throughout the entire EEA territory. This eliminates the need for separate licenses in each country, thereby reducing bureaucratic overhead and facilitating easier and broader market access.
Choosing the correct EU country to establish an operational base and obtain a payment services license poses a unique challenge for fintech entrepreneurs. It’s a decision that requires careful evaluation and balancing of priorities, as there are many factors to consider.
In addition to regulatory fees and licensing approval speed, fintech companies must consider a range of factors when setting up their regulated EU hub. Supervisory approaches, banking relations, tax implications, hiring alternatives, and the broader operating environment of potential host countries must be carefully considered.
To assist fintech companies in choosing the most suitable EU country as an entry point to the EEA, we decided to leverage the crowd’s wisdom by analyzing the trends in decisions made by other non-EU payment companies in recent years and trying to understand the reasons for their decisions.
First European payment hubs
Historically, a few key countries have been popular destinations for payment companies seeking a payment services license to operate across the EEA:
The United Kingdom – Before Brexit, the UK was one of the most sought-after jurisdictions for payment licenses due to its fintech-friendly ecosystem and status as a leading financial hub. However, after Brexit, payment firms can no longer use a UK license to passport into other EEA countries.
Lithuania – Early on, Lithuania emerged as a fintech and payments licensing hub. The Bank of Lithuania has proactively promoted the country as a fintech-friendly jurisdiction, streamlining licensing procedures. Companies have been drawn by low regulatory costs, sandboxes, innovation support, and a modern, digitized licensing process.
Malta – To establish itself as a fintech hub, the Maltese government actively supported the fintech sector with favorable legislation, regulatory sandboxes, investment incentives, and a dedicated agency, Finance Malta.
Initially, the smaller EU members emerged as the competition’s winners, serving as the gateway for non-EU financial companies entering the EEA. However, in addition to attracting high-quality payment companies, the relatively lax regulatory requirements have brought some rotten apples. As holding licenses from these countries became a reputational risk, the countries introduced stronger regulatory supervision, which hurt the reason for coming to these countries in the first place and sent potential license seekers to look for regulators with a more rigid and conservative approach.
Post-Brexit Trends (2020-2023)
The UK’s Brexit served as a catalyst for change. Due to the need to find a new EEA home base, many UK FCA-licensed companies needed to reevaluate their licensing strategy. As the transition period for payment companies to switch to EEA licenses after Brexit ended in December 2020, the last three years marked the beginning of a new era after the market found the post-Brexit equilibrium point.
European Banking Authority (EBA) licensing data from 2020 to 2023 reveal a dynamic shift in the number of entities authorized across the EEA. Notably, Lithuania, which led the authorization counts in the initial post-Brexit year, has since seen a reduction, descending to the sixth position by 2023. This suggests a substantial shift in the regulatory approach within the country, with the Netherlands, France, Cyprus, Sweden, and Ireland taking the lead by overperforming the EEA average when it comes to the number of licenses granted in the post-Brexit years. The Netherlands has shown remarkable consistency, with an upward trend peaking in 2023. After a slight decline post-Brexit, France has rebounded strongly, highlighting its resilience and appeal as a financial center. On the other hand, Cyprus experienced fluctuations but remains on an overall positive trajectory since 2020, suggesting an adaptive and competitive marketplace. Ireland’s growth in authorizations is also notable, reflecting its emerging prominence in the financial services sector. Conversely, Sweden has seen a downward trend in the same period, possibly pointing to a strategic consolidation or a shift in focus within their financial sectors.
Non-EU Fintech-friendly countries
To find out which countries in the EEA are favored by non-EU payment companies, it’s not enough to look at which countries issue the most licenses. Larger countries with larger populations tend to have more local players, so it is important to look at the percentage of non-EU companies compared to locals in each country.
The Netherland’s post-Brexit authorizations dropped but recovered, peaking in mid-2022 before a slight retraction. The market is foreign-dominated, with 27 foreign companies (60%) versus 18 local (40%).
With a peak in 2020, Lithuania’s market saw a fall in authorizations, with numbers not reaching their peak by 2023. The country is still a popular choice by non-EU companies, while the sector is almost evenly split, with 24 local companies (54.55%) and 20 foreign companies (45.45%).
Ireland’s growth trend marks a steep rise from 2 in 2021 to nearly 10 by 2023. The market also leans heavily towards foreign companies, with 14 (70%) against 6 local companies (30%).
Sweden’s sector recovered from an early 2020 low, peaking through 2021-2 and heading back to 7 authorizations in 2023. The market favors local entities, with 23 local companies (67.65%) against 11 foreign companies (32.35%).
Reaching 8 in 2021, France’s authorizations dipped but rebounded towards initial levels by 2023. A strong local presence is evident among 16 domestic companies (66.67%) compared to 8 foreign companies (33.33%).
As payment companies continue to evaluate EU hubs, factors like the ability to communicate with the regulator in English, digital-forward regulators, fintech talent pools, and evolving tax regimes are shaping the preferred jurisdictions.
Our analysis involved extracting data from the European Banking Authority for the last three years regarding authorizations for new Payment Institutions (PI) and Electronic Money Institutions (EMI) by EEA member countries over the previous three years, separating the information into local companies and companies headquartered outside of the EU.
In the wake of Brexit, the EU’s financial landscape is undergoing a significant transformation as the union navigates towards emerging financial hubs and embraces a surge in financial services activity. The Netherlands, with its sophisticated financial infrastructure and favorable corporate environment, attracted many foreign companies. Ireland’s advantageous tax regime and English-speaking workforce make it a prime location for firms looking to retain access to the EU market in a post-Brexit world. These countries have demonstrated their potential as financial powerhouses by offering compelling advantages to businesses seeking new bases of operation within the EU.
Sweden and Cyprus have also emerged as key contenders in the race to become the next financial hubs. Sweden’s robust commitment to technological innovation in finance positions it as a leader in the digital financial services space, while Cyprus, benefiting from its geostrategic position and attractive tax policies, is at the forefront of this shift.
For non-EU companies aiming to tap into the European payment services market, obtaining a license under the EU’s PSD2 offers a pathway to a large and integrated market characterized by regulatory stability, consumer trust, and a supportive environment for innovation. While the choice of country will depend on specific business needs, factors such as processing speed, language, and existing financial ecosystems play a crucial role in this decision. As the digital payments landscape evolves, the strategic importance of such licensing will only grow, highlighting the need for careful planning and local expertise.
Companies must assess whether a regulator’s philosophy matches their risk appetite and business model. Ultimately, there is no one-size-fits-all perfect EU licensing destination. Payment companies must conduct their own comprehensive analysis, understanding their specific priorities and trade-offs to identify the EEA member state that provides the best-balanced environment for establishing and growing their European-regulated activities.
