Fintech
Transforming fintech in the UK: regulatory and technology trends
Over the past five years, the UK fintech sector has undergone significant changes driven by technological advances and regulatory reforms. These developments have collectively fostered growth and innovation, while presenting new challenges for companies operating in this environment.
Aleksei Glukhov and Evgeny Mishchenko, co-founders of British fintech company Payrowshare their insights on these years of transformation.
Technological changes supporting fintech growth
Traditionally, fintech adapts to innovations faster than traditional banks. Significant technological changes have accelerated the growth of fintech.
Bank opening: By securely accessing consumers’ banking data, fintech companies create customized solutions, leading to more personalized services, greater transparency and greater competition.
Blockchain and smart contracts: These technologies are transforming payments, lending and security, offering more efficient and transparent systems.
AI generation and big data: Advances in generative artificial intelligence and big data analytics have improved customer service, fraud detection and risk management, making financial services more accessible and personalized.
Business process automation: Automation simplifies operations, reduces costs and improves efficiency at all levels.
Niche products: Developing specialized products that address specific customer pain points creates unique value propositions and drives growth.
The biggest threats to fintech growth in the UK
Despite the positive outlook, several threats could hinder the growth of the UK fintech sector.
Regulatory challenges: Overly stringent or slowly evolving regulations can hinder innovation. It is crucial that regulatory frameworks strike a balance between protecting consumers and promoting an environment conducive to innovation. Stricter cryptocurrency regulations may limit the scope of innovation and adoption of digital assets within the industry.
Uncertainties related to Brexit: Brexit has introduced complexity into cross-border operations and regulatory alignment, impacting fintech companies operating in both the UK and the EU.
Cyber security risks: As fintech companies handle increasing volumes of sensitive data, the risk of cyber attacks and data breaches increases. These risks can undermine consumer confidence and pose significant challenges for the industry.
Economic instability: Economic downturns can affect investment in fintech services and consumer spending, potentially slowing growth.
Slowdown in the venture capital market: Reduced venture capital investment may limit the ability of fintech startups to secure the funding needed for growth and innovation.
Lower valuations for startups compared to the US: Lower startup valuations in the UK may make it difficult for fintech companies to attract significant investment, impacting their growth potential.
Data and regulatory issues post-Brexit
Brexit has had a significant impact on the licensing process and market access for UK fintech companies. For UK-based companies wishing to conduct business with customers in Europe, obtaining a European license has become an essential part of their operations. Additionally, these companies must comply with various EU regulations, such as data storage requirements within European countries and compliance with customer engagement standards. This situation has undeniably imposed additional obstacles to business operations.
The changes in costs and market opportunities post-Brexit have been notable. Companies face increased expenses related to licensing and associated processes, including opening 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 market presence in Europe.
Furthermore, the ability of UK fintech firms to grow has weakened due to limited access to EU markets, leading to a potential loss of investment as large UK fintech firms consider mergers or acquisitions outside the UK . Despite these challenges, the UK Government has supported 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), with the aim of promoting innovation. and growth in the sector.
Post-Brexit, the UK has adopted several legislative measures that have impacted the fintech sector, including the Financial Services Act 2021 AND the Financial Services and Markets Act 2023. These acts aim to adapt the UK’s regulatory environment post-Brexit, maintaining its status as a major financial centre.
Cybersecurity measures in the fintech sector
Over the past five years, cybersecurity measures in the fintech industry have evolved significantly in response to growing cyber threats. Fintech companies, which handle sensitive financial data, have become prime targets of cyberattacks, prompting a shift towards advanced cybersecurity strategies.
According to the research and analysis report “Cyber Security Industry Analysis 2024,“The UK cybersecurity sector has shown remarkable resilience and growth over the past year, with a 13% increase in sector revenue, the creation of 2,700 new jobs and a strong economic performance.
Regulatory compliance has strengthened with frameworks such as GDPR and PCI DSS guiding fintech cybersecurity policies. In March 2024, the UK government has been discussing changes to the UK GDPR, which regulates the processing of information by English people. The UK GDPR requires lawful, transparent and targeted data processing. Individuals have the right to access, rectify, delete and limit their data, allowing consumers to control their digital footprint. For businesses, GDPR compliance requires significant efforts, including data protection impact assessments and staff training. The biggest challenge in implementing GDPR is finding the right balance between individual rights, security and business needs.
In April 2024, in response to growing threats in the digital age, the UK introduced the Product Safety and Telecommunications Infrastructure Act, effective April 29, 2024. This law requires smart devices to meet minimum security standards, including banning easily guessable default passwords and requiring manufacturers to provide contact details and duration of updates to report security issues. This legislation aims to improve device security and consumer confidence by safeguarding personal data, privacy and finances from cyber threats.
Apart from the government, fintech companies are also tackling cybercrime using advanced technologies. For example, Salary uses solutions and services that use machine learning and artificial intelligence to detect and prevent cyber attacks, improving security with multi-factor authentication, including one-time passwords. Data encryption is another key aspect, ensuring the protection of sensitive customer information.
Payrow also continuously monitors for data leaks and implements rigorous security policies to maintain a robust defense. Additionally, fintech companies collaborate with specialized cybersecurity companies and startups to access the latest technologies and expert knowledge, thus ensuring they remain at the forefront of the fight against cyber threats. These combined efforts significantly strengthen their overall cybersecurity posture.
Slowdown in the venture market and government measures
The UK venture market has seen a notable slowdown, affecting many fintech companies. UK fintech industry 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 leaders 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 building direct funds from pension schemes to unlisted companies, with the aim of persuading these schemes to invest in infrastructure and technology. However, the Chancellor said the UK would not force pension funds to invest in high-growth companies. Hirt noted that while the Mansion House deal has made some progress, more transparency is needed about where pension funds plan to invest.
The UK Government is committed to supporting the fintech industry and last year supported the launch of the Center for Finance, Innovation and Technology to help remove barriers to the sector’s growth and stimulate job creation of work.
Despite these efforts, lower startup valuations compared to the US and a conservative approach by venture capital investors are hindering the growth of the fintech sector. These factors point to the need for a more dynamic and enabling investment environment to ensure the robust development of the UK fintech sector.
Payrow is a British fintech company that offers a full suite of services designed to automate and simplify financial management for small and medium-sized businesses (SMEs). With features like multi-currency accounts, automated invoicing, expense tracking, and support for complex ownership structures, Payrow simplifies businesses’ financial operations.
Sponsored by Payrow.