The fintech revolution: Changing the future of financial services

The acute challenges of the global COVID-19 pandemic have demanded fast responses from the world’s most innovative industries. And there are few sectors where this has been demonstrated more clearly than in Fintech.

As we enter 2022 the UK’s world leading fintech industry is empowering resilience at a time of continued worldwide uncertainty with innovative solutions and partnerships. The UK remains a world leader making up around 10% of the global market. In addition, London is ranked second as a top financial centre after New York.

Fintech then is a great example of the UK punching above its weight internationally and one result of this growth is a fast-spreading financial technology revolution.

At Harper James Solicitors we support a number of clients who are thriving within this space. Experts and commentators are now speculating what 2022 and beyond likely to hold for the sector. Our Senior Financial Services Solicitor John Pauley has helped provide some of the answers in a new article for MoneyWeek, one of the world’s leading journals on Fintech news.

Here John addresses some of the key questions facing the sector.

How will innovation from fintech continue to affect the financial services industry?

Over the next five to ten years, we can expect to see increased and easier access to a variety of products to consumers. This will be driven through by the introduction of new technology, particularly via app-based platforms which cover almost all financial services for consumers. 

A lot of the change will be driven by disruptors, which are often small nimble entities with a customer and product focus that the bigger and more established financial institutions struggle to match. 

We can expect to see even more evolution within the payment services landscape too, which has already changed massively in recent years as the larger companies adopt some of the newer areas pioneered by others such as allowing customers to authorise payments directly from their accounts or accessing all of their account information in one place. 

the FCA have made it clear that they will be introducing new legislation to bring all BNPL activity within the regulated sphere

The buy now pay later credit sector has seen a lot of development recently, especially during the Covid pandemic where volumes grew significantly. This sector currently operates both within and outside of the financial services regulation. However, the FCA have made it clear that they will be introducing new legislation to bring all BNPL activity within the regulated sphere so there will be significant changes in the market. There have been some very novel customer centric products developed in this area that provide cheaper credit than traditional credit cards and much cheaper than payday loan operators but their models may face challenges in the new regulated environment and this could result in changes in the market including potential consolidation.

Cryptocurrency will remain a part of the story. Make no mistake, crypto is here to stay but the extent of its long-term influence is difficult to predict. Certain currencies will come and go over time and may have developments and improvements on existing platforms. One development that would be very useful is faster transaction times but the systems have certain limitations that may limit this (e.g. Dogecoin can process more transactions per second than Bitcoin but neither are anyway near traditional processing methods such as those provided by the likes of Visa and MasterCard). However, there have already been significant challenges and developments from governments and regulators. It’s interesting to see that the UK has already brought about certain entities within the regulatory regime, i.e. crypto exchanges and crypto wallet custodians. This trend could continue and grow in the UK and elsewhere.

Artificial intelligence and increased automation of services will play a key part in the evolution of financial services too. When combined with Open Banking, these tools can provide increasingly powerful analysis. The impact of Covid is also likely to remain fundamental as we continue to rely on remote payment methods to pay for goods and services. And don’t be surprised to find more and more venues and businesses asking for electronic proof of payment. NFTs will also continue to grow and trading in these platforms could drive further change, both in the regulated and unregulated spheres. 

Do you think the rise of fintech poses a threat to traditional financial services?

Challengers are already disrupting the sector and getting market share in a range of areas. Some will sadly fail to create the required framework to ensure compliance with the multitude of regulatory requirements. However, larger players will be able to buy some of the challengers. We can expect to see new products and services developing, and I’d expect many to focus on looking to capitalise on the move towards greener and eco-friendly products and services.

Which companies are likely to directly benefit from the fintech revolution?

The biggest winners from these changes will be innovative firms with novel customer centric ideas. We can expect to see larger institutions looking to acquire more and more companies that are in keeping with their corporate strategy and brand. Investors will also benefit from these changes because opportunities within the sector will hit new heights. 

As competition grows, companies who use the services may also benefit from improved and/or cheaper services.

 Should we expect an increase in mergers and acquisitions of fintech companies?

It has always been a strong area for M&A and this will likely continue into 2022 and beyond. 

There are a lot of new areas that have potential for mass market products and services that, if done well, would be key targets. These include payment initiation services which could challenge existing established payment providers.

Partnerships also seem to be a potential growth area. The recent collaboration between Apple and Goldman Sachs’ credit card is a good example, though affinity credit cards are not necessarily new. However, bundling financial services with other services in a novel way is likely to become more common and this could result in further M&A.

Which sectors could benefit indirectly from the fintech revolution?

Tech platforms and service providers to the issuers and providers of such services: probably less hardware (save for cloud) and more software and services, particularly those that know the regulations and can adapt their offerings accordingly. 

Customers, both businesses and consumers will benefit too as they may have cheaper prices and new and improved services that are more tailored to their needs, e.g. opening a business bank account with a challenger bank can be done in a few minutes on a mobile phone – something established banks could not dream of previously and still struggle to match. Investors in fintech are entering a potentially golden age.