Four experts predict the state of the industry

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The UK is a global fintech hub. It is a sector that has grown rapidly since the early 2010s and in recent years has been the most dominant funding sector in the UK.

However, fintech in 2022, like most other industries, was full of challenges. The downward trend in valuations across the tech industry has been no 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 to the future 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 come by, says Oliver Prill, CEO of digital banking service Tide. Increasingly, investors are going to turn to companies whose business models solve the real problems facing consumers and businesses and who also have a clear path to profitability.

For Prill, investors will make safer bets in companies with predictable revenue streams, a stark contrast to past investment trends in booming industries where growth has trumped profits.

The focus was on big investments and the rapid growth of tech startups in the years leading up to 2022, macroeconomic conditions unsurprisingly chilled big spending for many investors, and rising interest rates could have pushed that even further.

Consumers will be delighted to have products

Here in the UK, 2023 has been widely predicted to be heading for tough economic times, says Victor Trokoudes, CEO of automated investing 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 riskier or nicer-to-have, non-essential financial products.

That means some fintechs could lose customers, Trokoudes says. However, there will also be new ways to use fintech that are perfectly suited to a turbulent financial climate.

Trokoudes predicts an increased shift towards interconnected and socialized finance in 2023, i.e. 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 a free way to get financial advice and information, it only makes sense that it will become more essential in an age of rising prices. However, companies that allow this will need to ensure that they do so in a compliant and responsible manner.

The BNPL will face a regulatory tightening

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

BNPL suppliers have been warned that regulation is coming, Kadagathur says. However stringent the incoming legislation, BNPL suppliers face a difficult 12 months.

Kadagathur noted growing demand for the service as consumer 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 rapidly increased, although a third of this age group does not understand the risks of the service.

Rightly, this has raised huge concern about the risk it 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 industry, adds Kadagathur.

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

The industry has already seen massive layoffs, the collapse in value of some major players and declining investor sentiment, could BNPL be squeezed out of the mainstream by regulation?

Employers to increase cost of living assistance

For Steve Watson, head of policy and research at financial wellness app Cushon, the 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 employers to focus more on solutions that will help support employees at this time, Watson says.

According to Watson, there will be a move away from short-term cost-of-living support to help employees become more financially resilient in the long term.

He adds: Until now, saving in the workplace was mainly about saving in a pension. But, with the cost of living crisis and recession looming, employers are looking to help employees become more financially resilient throughout their working lives, not just in retirement.

In 2023, we should expect to see more and more employers setting up savings plans accessible to their employees to support retirements.

Since it’s about employees making informed decisions, an improved user journey with minimal friction is needed. Retirement and savings providers that offer both retirement and savings products backed by advanced technology such as intuitive apps are likely to thrive.

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