Melba Montague, Head of Financial Services, Genpact
Despite ongoing economic turmoil and a slowdown in investment, the UK has managed to retain the top spot as Europe’s financial centre, and London, as the Silicon Valley for fintechs. While 2023 looks uncertain still, fintechs are known for swift innovation and reinvention. UK fintechs in particular, will ride this wave, capitalising on the $28.2 million in capital invested in the industry in H2 2022.
However, the fintechs that come out on top will be those that focus on, and demonstrate to investors, one word: resilience.
To do this fintechs must remain laser-focused on operational basics to prove their worth. This is even more vital as the world watched the collapse of cryptocurrency exchange FTX and lender BlockFi in 2022. And with growing industry concerns around alternative finance, there is also no doubt that regulatory complexities will increase in the coming year, especially with a greater presence of Buy Now, Pay Later (BNPL) products on the market.
Access to capital will diminish sooner than you think
According to the latest Innovate Finance report, global fintech investment reached £75.6bn ($92bn) in 2022, a decrease of 30% from the previous year. The drop is the result of the macroeconomic and geopolitical disruption, but despite this, the UK fintech industry received £10.5bn ($12.5bn) in investment – only an 8% drop from a record-high 2021. This demonstrates great resilience in this space. Further, the report shows that the UK is still receiving more fintech investment than all the next 10 European countries combined and remains second in the world only to the US.
That said, for rapidly evolving fintechs looking to continue their scaling journeys across the UK and beyond, access to capital and a global slowdown in venture capital (VC) investment will test their durability in the market. Even as the cost-of-living crisis drives demand, inflation has hit BNPL companies, bringing down valuation as Klarna announced that it had closed its major financing round with an 85% decrease of its valuation, down to $6.5bn in the latter half of 2022.
This year, investors will want to see fintechs lower their reputational risks, follow regulatory advice to maintain compliance, keep customers well-protected, and make use of innovative technology to accelerate and scale their processes.
Regulatory complexities will increase
While the UK government cultivates a strong culture of innovation and boasts a strong reputation for financial services, it needs to be more proactive in its regulatory stance. This is especially true for areas of alternative finance, such as BNPL.
BNPL’s resurgence in recent years has made it an attractive alternative to traditional spending, but not without major risks. At present, BNPL is an unregulated, decentralised industry, and presents major risk to consumers borrowing beyond their means without adequate financial advice or safety nets. Arguably, BNPL has made it easier to create debt, with figures showing that 4 in 10 people will even use additional lending to pay off their BNPL debts.
With urgent calls for the FCA to advocate for new government regulations from the UK Treasury and consumer champions alike, this will begin to establish concrete guardrails for both fintechs and for shoppers looking to manage their finances. While waiting, providers must step up and protect customers as more structured regulatory models are finalised.
BNPL providers have also made growth commitments to investors. They will be expected to keep those promises this year, as well as maintain operational stability, all the while customer experience is not adversely impacted. It will be crucial for fintechs to take the high ground and look for innovative ways to both educate and protect their customers whilst preparing for regulations recommended by the FCA come into play this year.
Resilience will be critical
The FCA is expected to introduce new requirements to perform credit checks this year, fintechs, neo banks, and BNPL companies now hold a greater responsibility to identify those at risk and support them with appropriate measures.
This presents growing opportunity for fintechs to promote financial resilience to improve their valued customers’ financial health. For example, with open banking-enabled solutions, they can provide insight to customers looking to monitor and consolidate spending.
As the industry awaits these incoming regulations, the onus will remain with fintechs to ensure their products are not at risk of endangering consumer debts. As such, it is critical that a proactive approach to educate the consumer is taken to avoid exacerbating an already fragile cost-of-living crisis. This could be done in many ways, from improving financial education in schools and boosting financial literacy across the board, to turning the onus of accessibility on banks to ensure that customers can receive tailored, personal support and counsel on their finances.
BNPL providers must also ensure their collection process engages empathetically with its customers navigating through financial hardship. Providers should leverage data-driven insights and segmentation from data, technology, and AI (artificial intelligence) to align with BNPL users’ specific communication preferences and chosen payment methods.
In addition, machine learning, AI, and automation of complex manual processes will enable secure operations with consistent quality and controls, while finding new ways to pre-empt risk and meet compliance and reporting obligations.
Persevering in today’s financial landscape
Not only do fintechs need to demonstrate resilience to their investors this year, but they must encourage and enable financial resilience amongst their customers. Fintechs participating in BNPL schemes must be made aware of the potential pitfalls that come with unregulated short-term lending, as practice shows that it increases individual risk as consumers borrow beyond their means without sufficient financial advice and regulation.
Implementing advanced technologies, such as AI/ML and data analysis into fintech operations also improves efficiency, enhances the user experience, and saves cost, particularly vital during a time when companies are confronted with record-high inflation and a volatile stock market.
