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Four industry experts predict the state of UK fintech in 2023

Fintech 2023

The UK is a global fintech hub. It’s a sector that has enjoyed 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 tech industry-wide 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 are 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, CEO of digital banking service Tide. “Increasingly investors are going to be looking at companies with business models that solve the real problems that consumers and businesses are facing and that also have a clear path to profitability.”

For Prill, investors will be making safer bets in companies with predictable revenue streams, a stark contrast to earlier investment trends in burgeoning industries where growth took precedence over profits.

“There was an emphasis on big money investments and rapid growth for tech startups in the years just prior to 2022, the macroeconomic conditions have unsurprisingly cooled off big spending from many investors, and the increased interest rate might have driven that even further.”

Consumers will cut ‘nice to have’ products

“Here in the UK, it’s been widely predicted that we’re heading for tough economic times in 2023,” says Victor Trokoudes, CEO of automated investment app Plum. “This will pose 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 could lose customers,” says Trokoudes. “However, there will also be new ways to use fintech that are ideally suited to a turbulent financial climate.”

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

“Investing, for example, has become an increasingly social activity over the past few years, as people have become able to discuss their investment strategy online with their peers. As this is a free way of getting financial guidance and information, it makes sense that this will become more essential in the era of rising prices. However, firms that enable this will need to be careful they do this in a compliant, responsible way.”

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 providers have been warned – regulation is coming,” says Kadagathur. “Regardless of how strict the incoming legislation ends up being, BNPL providers face a challenging 12 months.

Kadagathur noted a “growing demand” for the service as “consumer reliance on BNPL soared in response to the cost of living crisis”.

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

“Quite rightly, this has prompted huge concern over the risk this poses to borrowers,” Kadagathur said.

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

“At its heart, BNPL can be a good credit product offering flexibility to borrowers if used correctly – however the way it is promoted, offered and understood by shoppers means that it can rarely be used correctly.

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

Employers will step up cost of living help

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

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

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

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

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

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