The UK’s fintech sector has undergone significant transformation over the past five years, driven by technological advancements, evolving consumer expectations, and regulatory changes. Despite facing challenges like Covid-19 and Brexit, the industry has shown remarkable resilience. Co-founders of a British fintech company provide insights into the sector’s evolution.
Covid-19 accelerated the digital transformation of the financial sector. As businesses and consumers shifted online, fintech companies experienced a surge in demand for innovative solutions. Traditional banks, burdened by legacy systems and physical branches, struggled to adapt quickly. The pandemic highlighted the advantages of a digital-first approach in financial services.
Consumers now trust fintech brands and neobanks more, driven by the rise of online services. Fintechs have developed excellent apps integrating all necessary services for the B2C and B2B markets, expanding the use of Open Banking technology. Users appreciate convenient interfaces, fast transactions, and low fees, often preferring fintechs over traditional banks. Fintech companies are evolving to meet these growing needs, offering comprehensive solutions for businesses and consumers.
The growth of online services has increased cyber-crime, prompting fintech companies to bolster their cyber-security measures. Investments in advanced security technologies like machine learning, AI, and multi-factor authentication have enhanced user security. Data encryption, regular breach monitoring, and stringent security policies ensure sensitive information remains secure. Partnerships with cyber-security firms help fintech companies stay ahead of cyber-threats. The UK government has also implemented measures to enhance national data security through new laws mandating stricter security standards.
Brexit has significantly impacted licensing processes and market access for UK-based fintech companies. They now need to obtain European licences and comply with EU regulatory requirements, introducing additional costs and complexities. These changes have created new barriers and altered cost structures, negatively impacting businesses. The UK government has introduced initiatives to support the sector, including expanding public funding, offering R&D tax credits, and providing tax incentives for investors through schemes like the Enterprise Investment Scheme and Venture Capital Trusts to foster innovation and growth within the fintech industry.
Unfavourable changes have affected venture capital investment trends in fintech. With significant fluctuations in global investment levels, leaders of the UK’s financial technology industry are urging the government to increase tax incentives to attract more investments. The Mansion House Compact, introduced by Chancellor Jeremy Hunt in July 2023, is an agreement for pension funds to channel greater investment into privately held companies. However, more transparency in where pension funds plan to invest is needed.
Despite competitive pressure from fintech hubs in the US and EU, the UK offers unique advantages to fintech startups, including early-stage support through initiatives like the Global Talent Visa and tax incentives for early-stage investors. However, there remains a funding gap for UK startups at the growth stage.
New technologies are continuously driving fintech growth. We are witnessing a technological surge, particularly with the practical application of AI in the sector. According to reports, the value of the sector is projected to reach between $11 to $17 trillion by 2030. Data combined with AI and other technologies is set to revolutionise industries and transform the technological landscape. Fintech companies will see revenue growth driven by factors like automation of business processes and implementation of niche products addressing specific customer pain points.
Despite considerable challenges, the prospects for the UK fintech market remain promising. With continuous technological advancements and supportive governmental measures, the sector is poised for further growth and innovation.