Current economic uncertainty brings about challenges and opportunities for every business, including fintech businesses, which can certainly take advantage of this climate by making full use of their flexibility, speedy customer service and innovation.
This is likely to be the case for the regtech, cybersecurity and wealthtech sub-sectors of fintech.
The UK fintech market has been rapidly growing over the past few years, as investment rose to £27.59 billion in 2021, seven times more than what was achieved a year earlier, at £3.85 billion, according to KPMG’s Pulse of Fintech report.
According to the report, this explosive growth came as a result of record deal-making activity, as fintech companies soared back from the lull of the pandemic, as the number of M&A, private equity and venture capital transactions hit 601 last year, an increase from 470 in 2020.
Partner and fintech co-lead at KPMG UK expressed that the increase in investment activity was a result of private capital which had been seeking to invest in emerging tech, and the ever-growing transition to digital work has helped to advance that process.
However that period of growth has started to plateau, as the UK is set up for slower growth in the months to come, economic outlook is losing optimism and interest rates are on the rise, causing potential challenges for fintech companies.
In Hallworth’s words, “The cost of funding has gone up” and “the economic conditions mean that investors are more nervous about what they invest in and so it’s harder to attract investment.”
As the stringent regulatory backdrop continues to sharpen, areas within the cryptocurrency space, as well as buy now pay later fintechs are likely due to confront increased scrutiny, potentially limiting growth in these areas.
However, this uncertainty is not going to have the same impact on all fintechs, as some sub-sectors are predicted to prosper in the current challenging market conditions.
According to Partner and head of FS strategy at KPMG UK, Joe Cassidy, fintech businesses which are non-discretionary are expected to have the best chance of getting on well in this economic climate.
This is as opposed to fintech businesses which are discretionary and are focused on business to consumer activities, which may experience a lull in these market conditions, according to Cassidy.
Given the intensifying regulatory background and the long compliance processes which financial institutions face, regtech business are likely to profit.
Rising compliance costs and a tighter labour market have meant that financial institutions are increasingly taking heed of technology in order to manage regulatory change in a more efficient way, as know your customer and anti-money laundering technologies attract high demand.
Cybersecurity businesses are also expected to be in demand, as a host of financial institutions have extended their working bounds by establishing wide-spread remote working, meaning an increasing number of cyber threats and fraud cases need to be supervised via digital surveillance.
Wealthtech firms, which will be able to access shared data on a client’s whole financial situation, are in a favourable position given the UK’s Data Reform Bill, and the introduction of an open finance system.
At the same time, fintech companies which provide working capital, trade finance and supply chain finance are also expected to be in a favourable position with the growing financial pressures on SMEs amongst current market turbulence.