Passporting: Does Trouble in Europe Spell Trouble for Fintech?

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Hello fintech friends,

We are well into Summer, one of the two traditional slow down periods in the industry, the other being Christmas.

In the UK, ice cream vans up and down the country are pumping out Mr Whippy on top of hyper-synthetic ice cream cones and tree-bark-like chocolate flakes. Simultaneously we are seeing an offer of collaboration between the UK’s two right-wing parties, Reform and Restore, the founders of which have an acrimonious history. Across the rest of Western Europe things are no less turbulent, with record wildfires (although interestingly Eastern Europe shows no such issue). We have the continuing war in Ukraine and, most recently, a seemingly organised assault on Ceuta, sovereign Spanish territory on the North African coast just across the Strait of Gibraltar. This last issue was considered so serious that the Prime Minister of Italy, Giorgia Meloni, deemed it necessary to take the drastic action of suspending the Schengen free movement regime between the two countries. This is no small news as the EU has been (despite its critics) one of the driving forces of Europe's peace and prosperity in the post-WW2 world order. It helped to rebuild the prosperity of its constituent nations and encourage peace through trade and integration. One of the most important factors in EU integration was this concept of freedom of movement, and it’s this subject I would like to discuss today,.a s it has huge relevance in Fintech across the UK and EU: the concept of Passporting.

What is it and how did we get there?

Passporting is the method by which fintechs can deliver highly regulated services into a market that has an established regulator, without having to apply for a licence from said regulator. It is, in effect, a kind of legislative hack enabled by the EU to deliver a “federal-like” system to a region that had deep and fundamental differences in identity and culture and, to a lesser extent, religion and values.

Passporting allows a regulated entity in one region to operate in another European member state and serve businesses and individuals in that state, whilst not having to accommodate new rules, regulations and reporting. But how did we get there? Why is it important? And is it under threat?

Step 0.1 — In a bid to build a stronger, more integrated Europe after WW2, national leaders agreed to adhere to a series of principles and laws that would allow for freer trade across the continent and later the UK. In my opinion, the EU started taking shape in earnest with the Treaty of Rome in 1957. It promised to provide freedom of establishment, freedom to provide services and free(r) movement of capital. Not exactly a silver bullet but it was the first step in the right direction.

Step 0.5 — This underpinned later legislation such as (The EU never was one for catchy names like the GENIUS Act) the “Council Directive 73/183/EEC.” This removed discriminatory barriers from banking institutions setting up in other member states. Basically a removal of the “no foreigners” signs. (I would argue that even today in 2026, this still hasn’t been fully achieved, as we see remnants of institutional discrimination in this sense — just google IBAN discrimination).

Step 1 — Four years later in 1977 came the First Banking Directive. This was basically the introduction of a set of standards required to be adopted across member states. It helped to give confidence to expanding enterprises (think Coca Cola and BP)  that their capital would be as safe, accessible and functional in a new state as it was at home, and as a result helped trade to occur safely in previously hostile or challenging territory.

Step 2 — Where the First Directive created common minimal rules, the Second Banking Directive allowed an institution to get a single licence and, crucially, Home State supervision. This in effect made passporting legally real, but there were some legislative supply chain issues that meant this was not as effective as it would later become. (Namely, no single market.) An important note here was that this became a kind of functional workaround to achieve a ‘US-like’ system. Crucially it meant that operating a bank in multiple geos wouldn’t create unmanageable regulatory overhead, as now banks operating in multiple member states (whilst adhering to EU standards) only had to report to their ‘home state’ regulator. This was a huge unlock.

Step 3 — This is where things really get going. In the 1980s the (European) Commission pushed the Single European Act 1986. This basically lit a fire under everyone’s arse by setting a legal deadline to implement the single market, the major missing piece in cross-border trade in the region.

Step 4 — Then, as of the first of January 1993, the…Single Market finally came into force. It loosened voting rules so harmonising rules could actually pass, and paved the way for the final piece of the puzzle for EU (and UK) passporting to come into force. The single market created a unified space where goods, services, capital and people could move freely. Effectively the EU’s answer to the federated market access of the New World. (USA! USA! USA!)

With the implementation of the single market, the Second Banking Directive effectively allowed for member states to allow most of their regulated industries to operate freely across borders. All that was required was that said regulated entity needed to notify the regulator in each territory it sought to operate in. But this was a courtesy notification rather than a request for permission. And it allowed the EU to prosper and grow into the titan it is today. (Yes, yes, I know it’s still a  regulatory minefield — but credit where credit’s due.)

This allowed the territory to become effectively the single biggest trading bloc in the world, and set the stage for London to become the financial powerhouse of the world.

It allowed London to become the European gateway for global firms, but especially US companies. London became the global markets engine for all non-domestic activity and became THE international flagship destination for nearly all big banks’ overseas operations — everyone from Bank of America to Deutsche Bank to Macquarie Bank. Having a licence in London meant deep capital pools, the most mature insurance and finance markets and crucially a licence to operate across the entire EU. Passporting was a crucial part in this.

(Post-Global Financial Crisis this began to take a serious hit, but we won’t get into that here. Brexit also had an impact and we absolutely will get into that here.)

Passporting’s ultimate objective was to reduce the barriers to trade and thus reduce the cost of it. When things are cheap enough there is very little incentive to steal! And when nations steal, it’s typically called war.

By the early 2010s, our European project was beginning to feel its first serious strains. The Celtic Tiger was failing. Ireland, to their credit, took their medicine and had recovered by 2013/14, but cracks were beginning to show.

Next came the potential Greek exit from the EU, “Grexit.” While in Ireland it was a banking crisis impacting the Irish public, in Greece the issue was one of sovereign debt. Greek retirement ages at the time were called into question as a significant portion of the labour force could retire by 55! This all began to cause fractures in the Single Market idea as richer nations saw themselves become the financiers of poorer nations’ irresponsibility.

This culminated in the first rupture of the European Union: Brexit. And this had a huge impact on fintechs and nations alike.

Firstly, any licenced UK fintech now needed to spend untold effort and money on simply working out how to continue servicing its European customers post-Brexit. Having been a founder of an EMI during that time, I can tell you it’s not fun. Spending months flying and meeting regulators from Malta to Luxembourg to Germany (just kidding, nobody was dumb enough to get regulated in Germany)  to the Netherlands and more.

Quick sidenote: when I launched my first-ever fintech, www.settlego.com (now part of the OpenPayd Group), we were (obviously) licenced in the UK. The FCA notified each regulator across the EU member states of our intent to serve in those markets. All markets were fine except ze Germans. Shortly thereafter we received a letter from BaFin (ze German regulator) saying they did not recognise these permissions and we were not allowed to operate there. On contacting the UK FCA to see what the matter was, we were promptly told to ignore the letter and continue on as we were. Separately, the German regulator was perhaps understandably reticent to issue new licences given the absolute disaster that would unfold with Wirecard in the months and years that followed.

Rather than investing energy in expanding our product range, we were spending time and money on lawyers. Rather than travelling to meet suppliers and work out how we could improve our supply chain, we were flying to meet regulators to see how we could just keep our product alive in market.

Moreover, every European fintech — including Ireland, whose enterprises were naturally very dependent on access to the UK market — was going through the same trials and tribulations. The end effect for fintech and its players was that we were all running to stand still. And post-Brexit, every single player now has a forever-inflated opex: two offices, two sets of expensive ExCos, two compliance functions, two regulators, and two sets of reporting and audits to handle. It has effectively impaired the marginal value of every single fintech going and made launching more costly for all. It also makes the TAM of any startup either 70 million people smaller if you are in the EU or 450 million people smaller if you are in the UK. This is not a political newsletter — but the undoing of Passporting has had an untold impact on the success rate of new entrants to the market, and in some ways has gone on to entrench the success of the bigger players already in the market.

However — it’s not all losers. There were some undoubted winners from the end of passporting post-Brexit. Lithuania is perhaps the best example. In my opinion the success story of European fintech is actually a UK fintech that was forced by Brexit to set up an EU regulatory hub: Revolut. Lithuania (post-Brexit) made a strategic choice to become a fintech hub. It offered fast licensing and a proactive regulator and took full advantage of UK firms seeking quick outcomes on licensing just to be able to continue to serve and grow in a market they were already operating in. Lithuania also had the foresight to marry licence and bank access as part of a single process. You see, in the UK at the time, getting a financial licence would often have the adverse effect of creating an allergic reaction in any bank you wanted to work with. Established banks hated working with regulated entities and it often became a grey market where fintechs would simply have to do anything to get the necessary revenues to be able to attract a bank in the first place. Getting a licence was totally devoid of value in actually getting a bank relationship and ultimately resulted in the formation of banks like ClearBank (The UK’s largest BaaS Provider) to serve that precise market. Side note — ClearBank took seven years to get an EU licence after its initial UK launch, meaning something that was table stakes in the early 2010s has now become a labour of gargantuan proportions for market participants today. Anyway, back to Lithuania. As UK fintechs were forced to rush through obstacles to get a licence lest they lose a large part of their client base, Lithuania quickly grew (from a cold start) to become a regional hub for fintechs. And by sweetening the deal letting these fintechs open accounts directly with the central bank, the Bank of Lithuania they could also circumvent “computer says no” banks and take entire ownership of their risk appetite (within reason).

Brexit in my opinion delivered a lost year for UK fintechs. And, except in a few unique markets, it left a permanent mark on the viability of fintechs. Fintechs can of course still succeed, but no matter how well a fintech performs, it would ALWAYS have been healthier pre-Brexit.

It has also had an impact on how fintechs have shaped EU regulation. One of the key ambiguities that fintechs took advantage of when relicensing in Lithuania was that of safeguarding. Where central bank access was closely guarded in most territories, Lithuania had made it open season for fintechs in its jurisdiction. That meant even BRAND NEW fintechs with no trading experience could suddenly access central bank systems for cash movement. Despite the obvious checks, these fintechs were able to circumvent by not passing payments through established clearing banks, the bigger issue was and is safeguarding. Many fintechs successfully argued “what could be safer than central bank money?” It is in theory safer than holding your funds in a small credit union or a regional bank in southern Italy, for example. And so many established fintechs began to hold larger and larger client money deposits in central bank accounts. Needless to say, banks were not happy. The concern isn’t safeguarding itself. It’s deposit risk. Many banks (rightly) identified that the BoL wouldn’t be able to effectively monitor it. PSD2 basically said it’s up to each central bank. PSD3 (after seeing the enormous amount of capital on deposit at the BoL) decided to shut this down. The insinuation was that, as a result of passporting, a relatively small country - Lithuania was becoming a systemic risk to much, much larger countries’ customer bases, especially with Revolut now claiming over 70 million customers (many of whom are in the UK and Europe).

So, Passporting is a vital ingredient for the success of fintechs and the health of a single market. But it’s only as strong as the number of markets that allow it. And with Brexit, both UK and EU fintechs suffered. Europe also became a less attractive market for foreign investment, as the capex for new ventures rose significantly because of the regulatory overhead doubling. And so fintechs (as well as adjacent industries) suffer to this day.

But for me, it’s about a lot more than just fintech. Fintechs (and banks) are the aortas and arteries, veins and capillaries, that carry economic prosperity through the region. And regulations are the pressure systems and valves that make it easier or harder to flow. As Passporting becomes more difficult, the pressure the system is under grows, and industry needs to work harder for the same equilibrium to exist. As regulations begin to become overburdensome, as countries deem it too risky to allow freedom of movement with each other, freedom of trade becomes more difficult. And that high-water mark of economic trust Passporting.  And maybe, just maybe, something more unpleasant altogether.

Word of the Week: Countercyclical: When the economy goes up, a countercyclical thing goes down. When the economy goes down into a slump or recession, a countercyclical thing goes up or increases. (Think tire sales during a recession)

Thanks for reading!