The UK’s FinTech sector, a global leader in financial technology innovation, has faced many transformative developments over the past five years: the COVID-19 pandemic, Brexit, rapid technological advancements, legislative changes, economic downturns, and significant fluctuations in global FinTech investment levels. These factors have reshaped the industry, presenting both obstacles and opportunities. We spoke with Aleksei Glukhov and Evgeny Mishchenko, co-founders of British FinTech company Payrow, to gain expert insights into navigating this complex environment.
Innovations Transforming UK Financial Services
Over the past five years, FinTech companies have achieved remarkable technological advancements. Historically, FinTech has been more agile in embracing innovations than traditional banks. During this period, the UK market has cultivated trust in major FinTech firms, which have evolved into SuperApps and ecosystems seamlessly integrating essential services for B2C and B2B.
The industry’s technological sophistication has significantly increased, driven by several key factors:
Automation of Business Processes: Automation at every level has streamlined operations, enhanced efficiency, and reduced costs.
Implementation of Gen AI: The integration of AI has transformed service delivery and decision-making processes.
Niche Products: Tailored solutions that address specific customer needs have gained popularity.
Open Banking: This innovation has facilitated greater transparency and interoperability within the financial sector.
Aleksei Glukhov observed, “Users have become accustomed to user-friendly interfaces, swift transactions, and minimal fees, reflecting the enhanced range of services offered by fintech companies.”
Technological advancements such as the Internet of Things (IoT), AI, and Big Data are leading this technological era. According to McKinsey, Straits Research, Statista, Bloomberg, and Fortune Business Insights, it is anticipated that by 2030, the value of this vast sector will range between 11 and 17 trillion dollars. Data is becoming the new currency, and together with AI, these technologies are set to revolutionise FinTech.
The Impact of COVID-19 on UK FinTech
The COVID-19 pandemic dramatically accelerated the digital transformation of the financial sector. As businesses and consumers shifted to online services, FinTech companies saw a surge in demand for innovative solutions. Burdened by legacy systems and physical branches, traditional banks struggled to adapt quickly to the new digital-first environment.
Aleksei Glukhov explained, “The pandemic moved all business operations online, especially impacting legacy banks with physical branches. Company employees had to organise home offices, which was challenging for some. However, this created a significant trend towards hiring remote workers, permanently changing some companies’ approach to office rentals.”
For Payrow, which was already operating with a fully online business model, the pandemic highlighted the advantages of a digital-first approach.
The sharp transition of many sectors and businesses to online operations, along with the rapid increase in demand for FinTech services, has led to a rise in cybercrime. This has prompted the industry to focus on implementing cybersecurity measures at various levels - from technological innovations to legislative initiatives.
Investment in Cybersecurity: FinTech companies are increasing their investments in cybersecurity, allocating more resources to the development and implementation of advanced protection technologies, staff training, and cyber threat monitoring.
Application of Machine Learning and Artificial Intelligence: FinTech companies are deploying machine learning and artificial intelligence technologies to detect abnormal behaviour and prevent cyberattacks. These technologies help quickly and accurately identify threats and attacks, as well as take measures to prevent them.
Multi-Factor Authentication: FinTech companies are increasingly implementing multi-factor authentication to enhance user security. This includes the use of biometric data, one-time passwords, and other identity verification methods.
Enhanced Data Protection: FinTech companies are improving the protection of customer data through the encryption of confidential information, regular monitoring for data breaches, and the implementation of strict security policies.
Partnerships with Cybersecurity Firms: Many FinTech companies are establishing partnerships with specialised cybersecurity firms and startups to gain access to advanced technologies and expertise in cybersecurity.
Governmental Measures: On a governmental level in the UK, measures have been taken to enhance data security. For example, 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.
Evgeny Mishchenko noted, “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.”
Brexit has significantly impacted the UK’s licensing process and market access for FinTech companies. For companies incorporated in the UK and wishing to do business with clients in or from Europe, obtaining a European licence has become a necessary component of their operations. Additionally, they must comply with other EU regulations, such as data storage within European countries and adherence to client-related norms. This has undoubtedly created additional barriers for businesses.
Aleksei Glukhov observed, “The necessity to obtain a European licence and comply with EU regulations adds a layer of complexity and cost, impacting our operations.”
The ability of British FinTech companies to scale has weakened as access to EU markets is restricted. The forced relocation of parts of the business to the EU means a loss of revenue for the UK from FinTech companies. Major British FinTech companies are more inclined to merge with or acquire technology companies outside the UK, which could lead to a loss of potential investments in the coming years.
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.
The UK government has introduced several initiatives to stimulate the FinTech sector, including the expansion of government funding through grants and R&D tax credits. There are also tax incentives for investors, such as the Enterprise Investment Scheme (EIS/SEIS) and Venture Capital Trusts (VCT).
Industry leaders in the UK’s financial technology sector are urging the British government to increase tax incentives and assist them in attracting more investment, as some executives warn that a shortage of domestic investors is holding the sector back.
“The unicorn board” of the trade organisation Innovate Finance, which includes leaders from Monzo, the UK branch of Revolut, and ClearBank, has outlined policy recommendations that it believes will help the UK maintain its position as a FinTech hub.
Evgeny Mishchenko explained, "In these circumstances, a steadfast shareholder base can bolster and fortify the business, which is essential for both the company's partners and clients. Therefore, the Payrow team has concentrated its development strategy on shareholder equity rather than venture funding."
In July 2023, the UK government launched the “Mansion House Compact” to help direct funds from defined contribution pension schemes into private companies. However, the Chancellor stated that the UK would not mandate pension funds to invest in high-growth companies. More transparency is needed regarding where pension funds plan to invest.
The UK government has expressed its commitment to supporting the FinTech industry and last year backed the launch of the Centre for Finance, Innovation, and Technology to help remove barriers to the sector’s expansion and drive job creation.
Despite competitive pressure from FinTech hubs in the US and EU, the UK offers unique advantages to startups in this sector. The UK supports FinTech companies, founders, and employees at an early stage, which has a significant positive impact. This includes the Talent Visa and early-stage investor tax incentives like EIS/SEIS. However, during the growth stages, UK startups face a shortage of funding.
Regarding the current investment environment, Evgeny Mishchenko noted, “Low startup valuations compared to the US and the conservative approach of venture investors do not stimulate the FinTech sector and prevent startups from growing rapidly.”
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