03 Feb 2023

London payments firm moves $1 billion a month despite ‘red flags’

Insights, Publications

Jon Wedge, BKL’s Head of Financial Services and Fintech, has contributed to a Bloomberg News article on Transactive Systems. It holds a UK electronic payments (EMI) license and became a powerhouse specialising in higher risk customers, but regulators in Lithuania have suspended many of its operations there.

‘Transactive applied for a UK payments license in 2017, at an auspicious moment for EMIs [electronic money institutions]. Customers were carrying out out more and more transactions online. Cryptocurrency companies were also springing up and looking for regulated firms to process their payments. 

The FCA has doled out more than 200 EMI licenses in recent years. But if the UK — like other countries — hoped for a sector full of disrupting fintech unicorns, it got something else instead, according to Jon Wedge, who works in the sector for Berg Kaprow Lewis LLP in London. EMIs often do business with companies that banks tend to avoid such as those from gambling and online gaming, and they are processing volumes of payments that are probably greater than what regulators expected, he said.

The regulator says it considers the “fitness and propriety” of an EMI’s managers, including whether they have been convicted or investigated for criminal activities, according to its 290-page handbook for the sector. Applicants are also supposed to be subject to particular scrutiny if its managers have been part of “any adverse finding or any settlement” in civil proceedings, especially when they relate to financial and payments businesses, fraud or money laundering.

After an EMI has received its UK license, it is free to seek out customers and move payments through the financial system. The FCA is supposed to keep tabs on its operations after that and has broad enforcement powers when it suspects possible wrongdoing, including conducting raids and suspending or revoking licenses.

A spokesperson for the FCA, while declining to comment on Transactive, said the regulator has recently clamped down on payment companies,  approving just 8% of applications in the past year.

“We are taking action to raise standards in the payments and e-money sector,” the FCA spokesperson said.

The FCA approved Transactive’s license application in 2018. That same year, Transactive received an electronic-money license from Lithuania as well.’

The article is available here on the Bloomberg website.

Jon adds:

‘As the payment volumes and value of flows passing through EMIs increase under innovative business models, evolution of the EMI regulations by the Financial Conduct Authority will be required.

The tricky bit will be getting the balance right between introducing appropriate tighter regulation without stifling innovation and growth in the UK’s fintech sector.’

Our 2021 report on the Future of EMIs is available here. You can watch our related panel discussion below.