Transforming UK fintech: Regulatory and technological trends

Over the past five years, the UK fintech sector has undergone significant changes driven by technological advancements 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 the British fintech company Payrow, share their insights about these transformative years.

Technological changes supporting fintech growth

Traditionally, fintech adapts to innovations faster than legacy banks. Significant technological changes have accelerated fintech growth.

Open Banking: By securely accessing consumer banking data, fintech companies create customised solutions, leading to more personalised services, greater transparency, and increased competition.

Blockchain and smart contracts: These technologies are transforming payments, lending, and security, offering more efficient and transparent systems.

Gen AI and big data: Advancements in generative AI and big data analytics have improved customer service, fraud detection, and risk management, making financial services more accessible and personalised.

Automation of business processes: Automation streamlines operations, reduces costs and enhances efficiency at all levels.

Niche products: Developing specialised products that address specific customer pain points creates unique value propositions and drives growth.

Biggest threats to UK fintech growth

Despite the positive outlook, several threats could hinder the growth of the British fintech sector.

Regulatory challenges: Overly stringent or slow-evolving regulations may impede innovation. It’s crucial for regulatory frameworks to strike a balance between protecting consumers and fostering an environment conducive to innovation. Stricter regulations on cryptocurrencies can limit the scope for innovation and the adoption of digital assets within the sector.

Brexit-related uncertainties: Brexit has introduced complexities in cross-border operations and regulatory alignment, impacting fintech companies operating in both the UK and EU.

Cybersecurity risks: As fintech companies handle increasing volumes of sensitive data, the risk of cyberattacks and data breaches grows. These risks can undermine consumer trust and pose significant challenges for the sector.

Economic instability: Economic downturns can affect investment in fintech services and consumer spending, potentially slowing growth.

Slowdown in the venture market: Reduced venture capital investment can limit the ability of fintech startups to secure the necessary funding for growth and innovation.

Lower valuations for startups compared to the US: Lower startup valuations in the UK can make it challenging for fintech companies to attract significant investment, affecting their growth potential.

Data and regulation issues post-Brexit

Brexit has significantly impacted the licensing process and market access for UK fintech companies. For UK-incorporated companies wanting to conduct business with clients in Europe, obtaining a European licence 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 adherence to client engagement standards. This situation has undeniably imposed additional barriers to business operations.

The changes in costs and market opportunities following Brexit have been notable. Companies face increased expenses related to licensing and the associated processes, including setting up offices, appointing directors, hiring staff, and securing capital. These added costs and regulatory complexities have created challenges for UK fintech firms looking to maintain and expand their market presence in Europe.

Moreover, British fintech firms’ ability to scale has weakened due to limited access to EU markets, leading to a potential loss of investments as large UK fintech companies consider mergers or acquisitions outside the UK. Despite these challenges, the UK government has been supporting the fintech sector through initiatives like grants, R&D tax credits, and investment tax relief schemes such as the Enterprise Investment Scheme (EIS/SEIS) and Venture Capital Trusts (VCTs), aiming to foster innovation and growth within the industry.

Since Brexit, the UK has enacted several legislative measures impacting 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 leading financial hub.

Cybersecurity measures in the fintech sector

Over the past five years, cybersecurity measures within the fintech sector have significantly evolved in response to growing cyber threats. Fintech companies, which handle sensitive financial data, have become prime targets for cyberattacks, prompting a shift towards advanced cybersecurity strategies.

According to the research and analysis report “Cyber Security Sectoral Analysis 2024,” the UK’s cybersecurity sector has shown remarkable resilience and growth over the last year, with a 13% increase in sector revenue, the creation of 2,700 new jobs, and robust economic performance.

Regulatory compliance has tightened with frameworks like GDPR and PCI DSS guiding fintech cybersecurity policies. In March 2024, the UK government discussed changes to the UK GDPR, which governs the processing of Brits’ information. The UK GDPR mandates lawful, transparent, and purpose-specific data processing. Individuals have the right to access, rectify, erase, and restrict their data, empowering consumers to control their digital footprints. For businesses, GDPR compliance demands significant effort, including data protection impact assessments and staff training. The biggest challenge in implementing GDPR is balancing individual rights, security, and business needs.

In April 2024, in response to escalating threats in the digital age, the UK introduced the Product Security and Telecommunications Infrastructure Act, effective from 29 April 2024. This act mandates that smart devices meet minimum security standards, including banning easily guessable default passwords and requiring manufacturers to provide security issue reporting contact details and update durations. This legislation aims to enhance device security and consumer confidence, safeguarding personal data, privacy, and finances from cyber threats.

Apart from the government, fintech companies are also tackling cybercrime using advanced technologies. For instance, Payrow employs solutions and services using machine learning and AI to detect and prevent cyberattacks, enhancing security with multi-factor authentication, including one-time passwords. Data encryption is another critical focus, ensuring the protection of sensitive customer information.

Payrow also continuously monitors for data leaks and implements strict security policies to maintain a robust defence. Furthermore, fintech companies partner with specialised cybersecurity firms and startups to access the latest technologies and expert knowledge, ensuring they stay ahead in the fight against cyber threats. These combined efforts significantly bolster their overall cybersecurity posture.

Slowdown in the venture market and government measures

The UK’s venture market has experienced a noticeable slowdown, affecting many fintech companies. Industry leaders in the UK’s fintech sector are urging the British government to increase tax incentives and attract more investments, warning that a lack of domestic investors is holding the sector back. The “Unicorn Board” of Innovate Finance, 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 Mansion House Compact to direct funds from pension schemes into unlisted companies, aiming to persuade these schemes to invest in infrastructure and technology. However, the chancellor stated that the UK will not force pension funds to invest in high-growth companies. Hirt noted that while the Mansion House Agreement has made some progress, there needs to be greater transparency about where pension funds intend to invest.

The UK government is committed to supporting the fintech industry and last year backed the launch of the Centre for Finance, Innovation, and Technology to help remove barriers to sector growth and stimulate job creation.

Despite these efforts, lower startup valuations compared to the US and a conservative approach by venture investors are hindering the fintech industry’s growth. These factors indicate a need for a more dynamic and supportive investment environment to ensure the robust development of the UK’s fintech sector.

Payrow is a British fintech company offering a comprehensive suite of services designed to automate and streamline financial management for small and medium-sized enterprises (SMEs). With features like multicurrency accounts, automated invoicing, expense tracking, and support for complex ownership structures, Payrow simplifies businesses’ financial operations.

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