Over the last five years, the UK fintech sector has undergone significant change, driven by technological advances and regulatory reforms. These developments have collectively driven growth and innovation while presenting new challenges for businesses operating in this environment.
Alexei Glukhov and Yevgeny Mishchenko, co-founders of UK financial technology company Payrowshare their thoughts on these transformative years.
Technological changes support fintech growth
Traditionally, fintech adapts to innovations faster than traditional banks. Significant technological changes have accelerated the growth of fintech.
Open Bank: By securely accessing consumers’ banking data, fintech companies create personalized solutions, leading to more personalized services, greater transparency and increased competition.
Blockchain and smart contracts: These technologies are transforming payments, lending and security, delivering more efficient and transparent systems.
AI generation and big data: Advances in generative AI and big data analytics have improved customer service, fraud detection and risk management, making financial services more accessible and personalized.
Business Process Automation: Automation streamlines operations, reduces costs and improves efficiency across the board.
Niche products: Developing specialized products that address specific customer problems creates unique value propositions and drives growth.
The biggest threats to UK fintech growth
Despite the positive outlook, several threats could hamper the growth of the UK fintech sector.
Regulatory challenges: Overly stringent or slow-moving regulations can stifle innovation. It is essential that regulatory frameworks strike a balance between protecting consumers and fostering an environment conducive to innovation. Stricter regulations on cryptocurrencies may limit opportunities for innovation and the adoption of digital assets within the sector.
Brexit uncertainties: Brexit has introduced complexities in cross-border operations and regulatory alignment, impacting fintech companies operating in both the UK and the EU.
Cybersecurity risks: Fintech companies are faced with managing increasing volumes of sensitive data, increasing the risk of cyberattacks and data breaches. These risks can undermine consumer trust and pose significant challenges to the industry.
Economic instability: Economic slowdowns can affect investment in fintech services and consumer spending, potentially slowing growth.
Venture Capital Market Slowdown: Reduced venture capital investment may limit the ability of fintech startups to obtain the funding needed for growth and innovation.
Lower valuations for startups compared to the United States: The low valuation of startups in the UK can make it difficult for fintech companies to attract significant investment, affecting their growth potential.
Data and regulation issues after Brexit
Brexit has had a significant impact on the licensing process and market access for UK fintech companies. For companies incorporated in the UK that want to do business with customers in Europe, obtaining an EU license has become a critical part of their operations. In addition, these companies must comply with various EU regulations, such as data storage requirements in European countries and meeting customer engagement standards. This has undoubtedly imposed additional hurdles on business operations.
Costs and market opportunities have changed significantly as a result of Brexit. Businesses are facing increased expenses related to licensing and associated processes, including setting up offices, appointing directors, hiring staff and securing capital. These additional costs and regulatory complexities have created challenges for UK fintech companies looking to maintain and expand their presence in the European market.
In addition, the ability of UK fintechs to scale has been weakened by limited access to EU markets, leading to a potential loss of investment as large UK fintechs consider mergers or acquisitions outside the UK. Despite these challenges, the UK government supports the fintech sector through initiatives such as grants, research and development tax credits and investment tax relief schemes such as the Enterprise Investment Scheme (EIS/SEIS) and Venture Capital Trusts (VCT), aimed at fostering innovation and growth within the sector.
Since Brexit, the UK has adopted several legislative measures impacting the fintech sector, including: the Financial Services Act 2021 And the Financial Services and Markets Act 2023These laws aim to adapt the UK’s regulatory environment after Brexit, while preserving its status as a leading financial centre.
Cybersecurity measures in the fintech sector
Over the past five years, cybersecurity measures within the fintech sector have evolved significantly in response to growing cyber threats. Fintech companies, which handle sensitive financial data, have become prime targets for cyberattacks, leading to a shift towards advanced cybersecurity strategies.
According to the research and analysis report “Cybersecurity Sector Analysis 2024,“The UK cyber security sector has demonstrated remarkable resilience and growth over the last year, with a 13% increase in sector revenues, the creation of 2,700 new jobs and strong economic performance.
Regulatory compliance has been strengthened with frameworks such as GDPR and PCI DSS guiding fintechs’ cybersecurity policies. By March 2024, The UK government has discussed changes to the UK GDPRwhich governs the processing of information of Britons. The UK GDPR requires lawful, transparent and purpose-specific data processing. Individuals have the right to access, rectify, erase and restrict their data, giving consumers control over their digital footprint. For businesses, GDPR compliance requires significant efforts, including data protection impact assessments and staff training. The biggest challenge in implementing the GDPR is balancing individual rights, security and business needs.
In April 2024, in response to growing threats in the digital age, the UK introduced the Telecommunications Product Safety and Infrastructure Act, effective April 29, 2024. The law requires smart devices to meet minimum security standards, including banning easily guessable default passwords and requiring manufacturers to provide contact information to report security issues and update times. The legislation aims to strengthen device security and consumer trust by protecting personal data, privacy, and finances from cyber threats.
Apart from the government, fintech companies are also fighting cybercrime using advanced technologies. For example, Payline uses solutions and services that leverage machine learning and AI to detect and prevent cyberattacks, improving security through multi-factor authentication, including one-time passwords. Data encryption is another key focus, ensuring that sensitive customer information is protected.
Payrow also continuously monitors for data breaches and implements strict security policies to maintain a strong defense. Additionally, fintech companies partner with cybersecurity firms and startups to access the latest technologies and specialized knowledge, allowing them to stay ahead of the curve in the fight against cyber threats. These combined efforts significantly strengthen their overall cybersecurity posture.
Venture capital market slowdown and government measures
The UK venture capital market has seen a noticeable slowdownthat affects many fintech companies. UK fintech leaders are urging the UK government to increase tax incentives and attract more investment, warning that a lack of domestic investors is holding the sector back. Innovate Finance’s ‘Unicorn Board’, which includes executives from Monzo, the UK arm of Revolut, and ClearBank, has outlined policy recommendations to help the UK maintain its position as a fintech hub.
In July 2023, the UK government launched the Compact mansion The Chancellor of the Exchequer has said the UK will not force pension funds to invest in high-growth companies. Mr Hirt stressed that while the Mansion House deal had made progress, there needed to be greater transparency about what pension funds were investing in.
The UK government is committed to supporting the fintech sector and last year supported the launch of the Centre for Finance, Innovation and Technology to help remove barriers to growth in the sector and boost job creation.
Despite these efforts, startup valuations are lower than in the US and the conservative approach of venture capitalists is holding back the growth of the fintech sector. These factors indicate the need for a more dynamic and supportive investment environment to ensure the robust development of the fintech sector in the UK.
Payrow is a UK fintech company that offers a comprehensive suite of services designed to automate and streamline the financial management of small and medium-sized businesses (SMBs). With features such as multi-currency accounts, automated invoicing, expense tracking and support for complex ownership structures, Payrow simplifies business financial operations.
Sponsored by Payrow.