A Clear Regulatory Path Will Boost Fintechs’ Confidence

The fintech sector in Wales is facing many of the same challenges as other industries, but with an added layer of complexity. Business confidence is muted, with economic conditions making investment decisions more difficult, and for fintech firms, uncertainty around regulation is an additional challenge.  

However, there are reasons to be measured in our outlook – funding conditions may be tough, but there is still capital available for the right opportunities. 

FinTech Wales exists to support fintech and financial services companies across Wales, helping them to grow, scale, and succeed. From start-ups to established businesses, they are all navigating an environment that is changing rapidly.  

One of the biggest factors influencing confidence at the moment is the shifting approach to regulation. One major regulator, the Financial Conduct Authority (FCA) is facing increased scrutiny, with pressure from central government to refine its role and to ensure greater competition in the financial services industry. 

In principle, that should be a positive for fintech firms. A regulatory environment that encourages competition creates opportunities for new entrants and innovative business models. However, in practice, the situation is more complex. The FCA’s focus in recent years has been on consumer protection, particularly through the introduction of the Consumer Duty. Now, with a renewed push towards competition, fintech businesses are facing an uncertain regulatory future. For businesses that want to invest in emerging and poorly regulated technologies like artificial intelligence in order to achieve a competitive edge, that uncertainty makes decision-making difficult. 

At the same time, access to funding remains challenging. In particular, venture capital investment has been under pressure recently, with a decline in fintech investment over the past two years. The latest Innovate Finance report on UK fintech funding put a positive spin on the numbers by highlighting that the decline is slowing. While that is technically true, it still means that the market is not yet recovering at the pace many would like to see. 

One of the reasons for this is the difficulty in valuing fintech businesses. In 2021, valuations soared, only to come crashing down in 2022. The market is still working through how to price fintech firms, particularly given the risks associated with new technologies and an uncertain regulatory environment. That is contributing to a slower recovery in investment compared to other sectors. 

However, there is capital available. The phrase often used in the industry is that there is “dry powder” waiting to be deployed, and we are beginning to see signs that some of it is coming back into the market. The challenge for fintech firms is demonstrating their value to investors in an environment where expectations around pricing and risk are still evolving. 

For fintech businesses in Wales, this is a time for measured decision-making. Regulation may be shifting, but businesses that stay engaged with regulators and industry bodies will be in the best position to adapt. The funding landscape is challenging, but opportunities remain for firms that can demonstrate strong business models and the ability to navigate market uncertainty.