Fintech encompasses a wide range of financial services and products and includes peer-to-peer (or P2P) lending, online payments and foreign exchange services, digital wallets and e-money, automated/robo investment advice, artificial intelligence (AI), big data analytics, blockchain and crypto currencies to name but a few.

While these products and services are all different, they all make use of new or developing technology to provide traditional financial services in a more cost effective, accessible and consumer friendly way, and/or facilitate the expansion of new or innovative financial products and services.  

The Financial Technology industry has grown at a rapid pace, and I expect to see growth at a similarly sustained pace in 2020 and beyond as businesses and indeed the general public become more familiar with the services and products available from the industry. 

However, I do expect the industry to face a more challenging operating environment from 2020 as the UK’s exit from the European Union is accelerated.

The two main risks to flag are:

  • With over 40% of workers in UK fintech being from overseas the acceleration of UK’s exit from the European Union is likely to have an impact on the availability of talent in the sector upstream, and firms should have contingency plans and talent development strategies in place.
  • Much of the fintech industry operates in highly regulated sectors. Many of these regulations are set by the EU, but as the UK looks to accelerate its exit, I anticipate there will be impactful changes upstream, and businesses operating in the sector who are not well prepared are likely to face significant challenge.

Putting BREXIT to one side, I anticipate huge opportunities for agile Fintech companies to continue disrupting where traditional financial operators are unable or cannot adapt to change. It is likely that M&A activity levels in the sector will increase and some consolidation as a result is inevitable, as traditional operators look to the fintech industry to fill their gaps and help them evolve.

I expect cryptocurrencies will continue to have an impact on the financial sector as vast organisations plan their own cryptocurrency issues with global and diverse brands such as Amazon, Google, Facebook, Walmart, JP Morgan Chase pursuing their own solutions.

In alternative finance and specifically P2P, risk management and returns will continue to be under scrutiny following recent high profile failures such as Lendy and FundingSecure and there will be further regulatory focus on the industry with wind down contingency plans being a requirement. With customer failures impacting profitability and the return to investors, P2P lenders will need to ensure that their due diligence and security package processes for new lending and their recoveries strategy for potential failures are tightened wherever possible.  

In addition, it is without doubt that the entrepreneurial spirt which underpins the appetite of SMEs to borrow and grow is going to be affected by new HMRC legislation restoring their preferential status in insolvency proceedings for “collection taxes”. That is those taxes where the business either deducts tax to be paid to HMRC or collects VAT on HMRC’s behalf.

The effect is likely to be two diverse consequences:

  • It will present an opportunity for alternative finance providers as these SMEs look for further borrowing where they have traditionally used funds such as VAT to provide cash flow
  • It presents a serious threat both to the appetite of entrepreneurs to take trading risks by using HMRC funds to support a business (which could lead to personal liability for some Directors) and, depending on the nature of security, will reduce the likely return both to alternative finance providers and traditional lenders from insolvencies.

Simon Bonney is an advisory and restructuring partner at Quantuma, with a breadth of expertise in the sector. Simon has advised a wide range of fintech businesses on a range of matters both relating to their own business as well as on a range of recovery strategies.