Four experts predict the state of the industry

The UK is a global fintech hub. It is a sector that has seen rapid growth since the early 2010s and in recent years has been the UK’s most dominant sectors for funding.

However, fintech in 2022 – like most other industries – was full of challenges. The technology industry’s trend of lower valuations did not make an exception for fintech, and cautious investors are becoming less patient when it comes to waiting for profitability.

At the start of the new year, four industry experts look ahead to see both the positives and the new challenges that UK fintech will face in 2023.

Investors will focus on profitability

“I think we’re going to see a lot more M&A activity in the UK fintech sector in 2023 as funding becomes harder to secure,” says Oliver Prill, chief executive of digital banking service Tide. “Investors will increasingly look to companies with business models that solve the real problems facing consumers and businesses, and that also have a clear path to profitability.”

For Prill, investors will bet more securely in companies with predictable income streams, a stark contrast to previous investment trends in emerging industries where growth took precedence over profit.

“There was an emphasis on big cash investment and rapid growth for tech startups in the years just before 2022, macroeconomic conditions have unsurprisingly cooled big spending by many investors, and the increased interest rates may have driven that even further.”

Consumers will cut “nice to have” products

“Here in the UK it has been widely predicted that we are heading for tough economic times in 2023,” says Victor Trokoudes, CEO of automated investment app Plum. “This will present a unique set of opportunities and challenges for the fintech industry.”

Trokoudes predicts that as consumer spending tightens to meet the demands of the rising cost of living, there will be a significant reduction in the use of “higher risk or nice-to-have, non-essential” financial products.

“That means some fintechs may lose customers,” says Trokoudes. “But there will also be new ways of using fintech that are ideally suited to a turbulent financial climate.”

Trokoudes predicts an increased movement towards “connected and socialized finance” in 2023 – in other words, fintech products that encourage a sense of community.

“Investing, for example, has become an increasingly social activity in recent years as people have become able to discuss their investment strategy online with their peers. As this is a free way to get financial guidance and information, it makes sense that this will become more essential in a time of rising prices. However, companies that enable this must be careful to do so responsibly.”

BNPL will face a regulatory squeeze

According to Neil Kadagathur, CEO of lender Creditspring, there is one subsection of fintech in particular that will face a tough 2023: buy now pay later (BNPL).

“BNPL suppliers have been warned – regulation is coming, says Kadagathur. “No matter how stringent the incoming legislation ends up being, BNPL suppliers face a challenging 12 months.

Kadagathur noted an “increasing demand” for the service as “consumers’ reliance on BNPL increased in response to the cost of living crisis”.

Recent research from Creditspring has shown that the use of BNPL products by 18-34 year olds has increased rapidly, despite a third of that age group not understanding the risks of the service.

“Quite rightly, this has raised a lot of concern over the risk this poses to borrowers,” Kadagathur said.

“The view of many in the credit industry as well as investors is that the BNPL market in its current form is unsustainable with a fully regulated sector,” adds Kadagathur.

“At its heart, BNPL can be a good credit product that offers flexibility to borrowers if used correctly – but the way it is marketed, offered and understood by buyers means it can rarely be used correctly.

“The industry has already seen mass layoffs, the collapsing value of some major players and reduced investor sentiment, can BNPL be pushed out of the mainstream by regulation?”

Employers will increase the cost of living allowance

For Steve Watson, head of policy and research at financial wellbeing app Cushon, a key focus will be on reducing the financial dangers of the cost of living crisis for employees.

“Households will continue to be under massive financial pressure, so we should expect an increased focus from employers on solutions that will help employees right now,” says Watson.

According to Watson, there will be a shift away from short-term cost-of-living support in favor of “helping employees become more financially resilient in the long term.”

He adds: “Until now, workplace savings have primarily been about saving for retirement. But with the cost of living crisis and an impending recession, employers are looking to help employees become more financially resilient during their working lives, not just in retirement.

“In 2023, we should expect to see more and more employers introducing accessible savings schemes for their employees to sit alongside their pension.

“As this is about employees making informed decisions, an improved user journey with minimal friction is necessary. Pension and savings providers that have both pension and savings products supported by good technology – such as intuitive apps – are likely to thrive.”