Krishna Subramanyan is the CEO of Bruc Bond, a global cross-border payment provider for corporate banking.
The fintech sector is set to continue on its course of exponential growth, with revenues projected to reach $1.5 trillion by the end of the decade. But, 2025 marks a pivotal year as regulatory frameworks undergo fundamental changes that will reshape how financial technology companies operate, particularly in payment services and digital money management.
So, what does this mean for payment firms? With new FCA safeguarding rules on the horizon and DORA implementation in January 2025, the industry faces its biggest regulatory overhaul since PSD2.
The evolution of payment safeguarding
The Financial Conduct Authority’s new safeguarding rules for payment and e-money firms, set to be fully implemented by 2025, represent the most significant shift in the regulatory landscape since the introduction of PSD2. These regulations will require payment institutions to maintain stricter segregation of client funds and implement enhanced reconciliation processes. I anticipate this will drive a fundamental restructuring of how fintechs manage their operational frameworks, particularly in areas such as account structure setup and treasury management processes.
The new requirements specifically mandate daily reconciliation of safeguarding accounts and the appointment of dedicated safeguarding officers – a shift that will particularly impact smaller payment institutions. Payment firms will likely need to significantly upgrade their compliance infrastructure to meet these requirements. What we need to see from fintechs is a proactive approach to these changes, including the implementation of automated reconciliation systems, enhanced audit trails for all client fund movements, and robust risk assessment frameworks for safeguarding account providers. Regulators will need to support FCA-regulated firms through clear implementation guidelines, staged compliance deadlines, and dedicated support channels for smaller institutions that may struggle with the technical aspects of the new requirements.
Strategic adaptation and market consolidation
This challenging regulatory environment is already reshaping the fintech landscape. The implementation of enhanced safeguarding measures coincides with broader regulatory changes, including the EU’s Digital Operational Resilience Act (DORA) coming into effect in January 2025. This convergence of regulatory pressures will demand significant operational costs – analysis suggests compliance costs could increase again for medium-sized payment institutions, which has already seen a rise of 12% from 2023.
This cost pressure is likely to catalyse market consolidation, particularly in the payments sector. We’re already seeing early signs of this trend, with an increase in fintech M&A activity in Q2 of 2024 compared to the previous year. For smaller firms, strategic partnerships with regulated payment providers will become crucial for survival, particularly in areas like credit provision and cross-border payments where regulatory complexity is highest. Firms that have established compliance partnerships and technological infrastructure will be best positioned to not only meet regulatory requirements but also capitalise on new market opportunities as weaker players exit or consolidate.
Technology-driven compliance transformation
The regulatory evolution is driving unprecedented investment in regulatory technology. Open Banking implementations, which are expected to facilitate over $116 billion in global payment transactions by 2026, are becoming increasingly intertwined with compliance systems. This integration is crucial as regulators demand more granular transaction monitoring and enhanced due diligence.
Artificial Intelligence is emerging as a critical tool for managing these complex compliance requirements. A survey by Gartner revealed that 60% of compliance officers are planning to invest in AI-powered RegTech solutions by 2025, including transaction monitoring and customer due diligence processes. Payment providers that have not yet begun implementing AI-driven compliance solutions risk falling behind not only in operational efficiency but also in their ability to meet regulatory requirements. The window for catching up is narrowing as more reporting requirements come into force.
Looking ahead: Preparing for the new normal
As we move towards 2025, the fintech sector faces a period of significant transformation. Success will depend on firms’ ability to build compliance-first infrastructure while maintaining the innovation that has defined the sector. The most successful firms will be those that view regulatory changes not as obstacles but as opportunities to build more resilient and trustworthy financial services.
While the transition may be challenging, particularly for smaller firms, the end result will be a stronger, more resilient financial technology ecosystem that better serves both consumers and the broader economy.
