Navigating five years of UK fintech amid Brexit and Covid-19

Payrow is a Business Reporter client.

The UK’s fintech sector has transformed in the past five years thanks to technological advancements, evolving consumer expectations, and regulatory changes. Despite challenges such as Covid-19 and Brexit, the sector has shown remarkable resilience. Aleksei Glukhov and Evgeny Mishchenko, co-founders of the British FinTech company Payrow, provide their insights on the industry’s evolution.

The impact of Covid-19 on UK fintech

Covid-19 accelerated the digital transformation of the financial sector. As businesses and consumers shifted online, fintech companies saw a surge in demand for innovative solutions. Traditional banks, burdened by legacy systems and physical branches, struggled to adapt quickly. For Payrow, operating with a fully online business model, the pandemic highlighted the advantages of digital innovation. This period reinforced the importance of a digital-first approach in financial services.

Changing consumer expectations and behaviour

Consumers now trust fintech brands and neobanks more, driven by the rise of online services. fintechs have started developing excellent apps and integrating all necessary services for the B2C and B2B markets. The use of Open Banking technology has expanded the range of services provided. Users have become accustomed to 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.

Enhanced cyber-security measures

The growth of online services led to increased cyber-crime, prompting fintech companies to bolster their cyber-security measures. Investments in advanced security technologies, 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 leverage expertise to stay ahead of cyber-threats. The UK government has also implemented measures to enhance national data security, including new laws mandating stricter security standards.

Brexit and its ramifications

Brexit significantly impacted licensing processes and market access for UK-based fintech companies. They now face the necessity of obtaining European licences and complying with EU regulatory requirements, which introduces 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 such as the Enterprise Investment Scheme (EIS/SEIS) and Venture Capital Trusts (VCT) to foster innovation and growth within the fintech industry.

Investment trends and challenges in the UK fintech sector

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, although more transparency in where pension funds plan to invest is needed.

The current investment environment in the UK for fintech startups is seen as conservative, with lower valuations compared with the US and a cautious approach from venture investors. But 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 such as the Global Talent Visa and tax incentives for early-stage investors via the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). However, there remains a funding gap for UK startups at the growth stage.

Key factors driving fintech growth

Despite the challenges, the prospects for the fintech market are promising, with new technologies continuously being implemented. Today, we are witnessing a technological surge, particularly with the practical application of AI in the fintech sector.

According to reports from McKinsey, the value of the sector is projected to reach between $11 to $17 trillion by 2030. Data is becoming the new currency, and combined with AI and other technologies, is set to revolutionise industries and transform the technological landscape. Fintech companies, traditionally more responsive to innovation than legacy banks, will see revenue growth driven by factors such as automation of business processes, implementation of Generative AI and niche products addressing specific customer pain points.

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.

Discover more about Payrow.

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