The UK fintech transformation: regulatory and technology trends

Over the past five years, the UK fintech sector has undergone significant change driven by technological advances and regulatory reforms. Collectively, these changes have supported economic growth and innovation while creating new challenges for companies operating in this environment.

Aleksei Glukhov and Evgeny Mishchenko, co-founders of British fintech company Payrow, share their insights on these transformative years.

Technological changes supporting the development of fintech

Traditionally, fintech adapts to innovation faster than traditional banks. Significant technological changes have accelerated the development of fintechs.

Open banking: By gaining secure access to consumer banking data, fintech companies are creating custom solutions, leading to more personalized services, greater transparency and increased competition.

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

Generation Artificial Intelligence 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 increases efficiency at all levels.

Niche products: Developing specialized products that address specific customer problems creates unique value propositions and drives growth.

The greatest threats to the development of fintech in the UK

Despite the positive prospects, the development of the British fintech sector may be hampered by several threats.

Regulatory challenges: Regulations that are too stringent or slowly changing can hinder innovation. It is crucial that the regulatory framework strikes a balance between consumer protection and supporting an innovation-friendly environment. Stricter cryptocurrency regulations could limit the scope for innovation and adoption of digital assets in the sector.

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

Cybersecurity threats: As fintech companies process increasing amounts of sensitive data, the risk of cyberattacks and data breaches increases. These threats can undermine consumer confidence and pose significant challenges for the sector.

Economic instability: An economic downturn could impact fintech investment and consumer spending, potentially slowing growth.

Slowdown in the venture capital market: Decreased venture capital investment may limit the ability of financial technology startups to provide the resources needed to grow and innovate.

Lower startup valuations compared to the US: Lower startup valuations in the UK could make it harder for fintech companies to attract significant investment, impacting their growth potential.

Post-Brexit data and regulatory issues

Brexit has significantly impacted the licensing process and market access of British fintech companies. For UK-registered companies looking to do business with customers in Europe, obtaining a European license has become an essential part of their business. Additionally, these companies must comply with various EU regulations, such as data retention requirements in European countries and adherence to customer engagement standards. This situation has undoubtedly imposed additional barriers to running a business.

Changes in costs and market opportunities post-Brexit are noteworthy. Companies are struggling with increased expenses related to licensing and related processes, such as establishing 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.

Moreover, the ability of UK fintech companies to scale has weakened due to limited access to EU markets, leading to potential loss of investment as large UK fintech companies consider mergers or acquisitions outside the UK. Despite these challenges, the UK government is supporting 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), which aim to supporting innovation and development in the industry.

Since Brexit, the UK has adopted several legislative measures affecting the fintech sector, including the Financial Services Act 2021 and the Financial Services and Markets Act 2023. These bills aim to adapt the UK’s post-Brexit regulatory environment, maintaining the status of the center’s leading financial services provider.

Cybersecurity measures in the fintech sector

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

According to the Cyber ​​Security Sectoral Analysis 2024 research and analysis report, 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 strong economic performance.

Compliance with regulations such as GDPR and PCI DSS, which set the rules for fintech cybersecurity, has been tightened. In March 2024, the UK government discussed changes to the UK GDPR, which regulates the processing of British people’s information. The UK GDPR mandates lawful, transparent and fit for purpose data processing. Individuals have the right to access, rectify, delete and restrict their data, enabling consumers to control their digital footprints. For businesses, GDPR compliance requires significant efforts, 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 the growing threats in the digital age, the United Kingdom introduced the Product Safety and Telecommunications Infrastructure Act, effective from April 29, 2024. This Act requires smart devices to meet minimum security standards, including a ban on the use of easily guessed default passwords and requiring manufacturers to provide contact information for reporting security issues and update duration. The purpose of these regulations is to increase device security and consumer confidence, protecting personal data, privacy and finances from cyber threats.

In addition to the government, fintech companies also fight cybercrime using advanced technologies. For example, Payrow uses machine learning and artificial intelligence solutions and services to detect and prevent cyberattacks, enhancing security with multi-factor authentication, including one-time passwords. Data encryption is another important issue to ensure that sensitive customer information is protected.

Payrow also constantly monitors data leaks and implements stringent security policies to maintain robust protection. Moreover, fintech companies partner with specialized cybersecurity companies and startups to gain access to the latest technologies and expertise, giving them an advantage in the fight against cyber threats. These combined efforts significantly improve the overall level of cybersecurity.

Slowdown in the venture capital market and government actions

The UK venture capital market has experienced a noticeable slowdown that has affected many fintech companies. Industry leaders in the UK fintech sector are calling on 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, Revolut’s UK arm, and ClearBank, has set out 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 to unlisted companies, with the aim of persuading these schemes to invest in infrastructure and technology. However, the Chancellor stated that the UK would not force pension funds to invest in rapidly growing companies. Hirt noted that while some progress has been made under the residency agreement, there needs to be more transparency about where pension funds intend to invest.

The UK government is committed to supporting the fintech industry and last year supported the launch of the Finance, Innovation and Technology Center to help remove barriers to the sector’s development and stimulate job creation.

Despite these efforts, lower startup valuations compared to the US and the conservative approach of venture investors hinder the development of the fintech industry. These factors highlight the need to create a more dynamic and supportive investment environment to ensure the robust development of the UK fintech sector.

Payrow is a British fintech company offering a comprehensive suite of services aimed at automating and streamlining financial management for small and medium-sized enterprises (SMEs). With features such as multi-currency accounts, automatic invoicing, expense tracking and support for complex ownership structures, Payrow simplifies companies’ financial operations.

Learn more about Payrow

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