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The UK Fintech Investment Landscape and Expectations for 2025

Introduction

Innovate Finance has published a fascinating report on the  ‘FinTech Investment Landscape 2024’, which examines  the performance of the UK FinTech sector during the course of last year.

We take a look at the key themes in the report and also share insights into the panel discussion about the report, hosted by Innovate Finance at London’s Guildhall at the end of January. 

The top headline is that 2025 must be a year of action.

The UK FinTech sector remains a global leader, but it faces significant challenges and increased competition. But as Janine Hirt, CEO of Innovate Finance said in her opening remarks – “2025 must be a year of action” with tangible progress on regulatory reform, investment, and a renewed focus on the strengths of the UK ecosystem. 

Unlocking pensions, encouraging risk-taking and creating a pro-business environment were identified as key levers for progress. The panel emphasized the importance of sustained effort to ensure that London remains the most pro-business, pro-safety and pro-’fun’ place in the world to build and grow an innovative FinTech business.

The report and discussion took into account the state of UK FinTech, the challenges faced, and potential opportunities for growth, with a focus on the need for action in 2025. Here is our summary of the discussions.

The State of UK FinTech

  • Global Leadership: The UK remains a global leader in FinTech, second only to the US and the leader in Europe. However, it has lost its crown for attracting more investment than the rest of Europe combined, signalling that other regions are catching up.
  • Investment Decline: Global FinTech investment declined by 20% in 2024, and UK FinTech investment saw a steeper drop of 37%. While this is a significant downturn, there’s a recognition that quality businesses can still raise money.
  • UK Strengths: The UK has several fundamental strengths, including a strong community of entrepreneurs and innovators, world-class universities, a government that prioritises FinTech, and a history of financial services leadership.
  • Market Sentiment: There’s a need to boost positive sentiment toward UK FinTech. The UK market has been prone to talking itself down, and needs to emphasize the country’s strengths and potential. Investors desire clarity on regulation and direction of travel.

Challenges Facing UK FinTech

  • Negative Press and Frustration: The industry is experiencing negative press and frustration, partly due to a slow pace of progress on key areas such as regulation.
  • Regulatory Uncertainty: The regulatory environment in the UK is perceived as unhelpful and uncertain by some investors. Concerns were cited about consumer duty, payment regulations, and motor finance data, all adding to regulatory headwinds.
  • Competition from Other Markets: Other regions are catching up, meaning the UK can no longer rely on its past success. Spain and other European countries are demonstrating increased FinTech investment and growth
  • Investor Hesitation: The market has seen a shift in investor behaviour, with some sitting on their hands, influenced by geopolitical and macroeconomic stress. Investors have been seeking new metrics different from those in 2020/21.

Opportunities for Growth and Action

  • Year of Delivery: 2025 needs to be a year of action. It’s time to move past thought leadership and reports and focus on tangible progress and delivery to support the growth of the ecosystem.
  • Regulatory Reform: A tech-positive regulator is needed, embracing competition and moving quickly on regulation around areas such as open banking, buy now, pay later, crypto, and stable coins. Incentives are required to keep and build the entrepreneur/innovator community.
  • Government Role: The government must continue its explicit support for FinTech as a core priority, and also create a pro-business and “safe” environment for growth. The government is actively addressing the growth and risk balance, and seeking changes to existing regulatory practice.
  • Unlock Pension Funds: Unlocking pension funds was highlighted as the biggest potential boost for both private and public markets. It’s essential to encourage long-term investment in UK equities and growth industries. Removing or reducing tax incentives from cash-based ISAs and encouraging equity investment was also suggested.
  • Focus on Second-Generation Entrepreneurs: There’s an opportunity in Europe to support second-generation entrepreneurs who are building niche businesses and willing to scale quickly.
  • Address Value Misunderstandings in the Market: There is a need to educate investors about the true value and liquidity of UK FinTech companies, as they often trade at a premium compared to some US counterparts when accounting for liquidity.
  • AI Adoption and Integration: AI is becoming more prevalent across the sector, with companies integrating generative AI into customer services and other areas. There’s also a potential for AI to revolutionize previously “untouched” sectors

Diversity & Inclusion

  • Pipeline Issue: The pipeline of women founders at the seed level isn’t as strong as desired, despite increasing awareness and initiatives.
  • Broader Definition of Success: Women founders might prioritize factors beyond solely monetary gains, which may influence the type of businesses they start (often more purpose-driven)
  • Need for Mentorship and Support: There is a need for continued support, mentorship, and funding specifically targeting female FinTech founders at the early stages.

Specific Sector Insights

  • Challenger Banks: Challenger banks did well in fundraising, overtaking payments as the biggest capital raisers in 2024.
  • Payments: While still a significant sector, the focus is shifting to innovative modern payment methods beyond traditional card-based systems.
  • Blockchain/Crypto: This area is struggling to gain traction in the UK/Europe, with the US leading. However, opportunities may exist in CBDCs and stablecoins.
  • RegTech: Regulation-focused technology (RegTech) is becoming a larger area of activity, with companies leveraging AI.

Market Outlook

  • Market Bottom: There’s a growing consensus that the market is near the bottom. Multiples and valuations are at the lowest levels seen in recent years, potentially presenting an opportunity for investors.
  • Optimism for 2025: Despite uncertainty, there’s optimism for 2025, driven by potential regulatory changes, increased adoption of new technology, and the cyclical nature of the market. It is hoped that private market valuations have adjusted to reflect public market realities.
  • Private Markets vs. Public Markets: Analysis suggests that private market valuations are actually discounted relative to comparable public market companies. It is suggested that the public market has become more receptive, and there may be several FinTech IPOs in 2025.

Government Wishes

Panelists were asked for their “magic wand” wish for the government:

  • Unlock Pensions: The overwhelming consensus was that the government should unlock pension funds for investment into growth industries like FinTech.
  • Regulatory Clarity and Reform: Provide a clearer regulatory environment and move to a more responsive, innovative and supportive regulatory system.
  • Fiscal Certainty: Provide clarity and predictability regarding future fiscal changes to aid in business planning.

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