Navigating the fintech risk landscape

Fintech investment faces challenges, but optimism remains for future growth and innovation.

Published on January 20, 2025

By Nick Rugg

Head of Fintech and Investment Management Insurance |

3-minute read

As we look ahead into 2025 and beyond, headwinds continue to stifle fintech investment, but the future looks bright.

While the cost of capital remains high—leading to a reduction in fintech investment in 2024—the UK remains the dominant sector in Europe, with a 65% share of all deals done in the first half of 2024.

Over the past 12-18 months, we’ve seen investors scrutinising the business plans of fintech companies and prioritising profit and sustainability over growth. This has led to fintech companies focusing on core revenue products in core markets as well as controlling costs.

We have seen a new government in the UK as well as the US election and Donald Trump returning to the White House in recent months, and now these are out the way, investors should have more certainty on the political and regulatory landscape in both territories. This enhanced confidence—and the potential for further interest rate cuts—should mean a more favourable environment for fintech investment across this year.

The introduction of the Authorised Push Payment (APP) Reimbursement Scheme will reduce fraud risk

In October 2024, we saw the introduction of the Authorised Push Payment (APP) Reimbursement Scheme, which presents a potentially significant cost to payment service providers. Figures taken from the Payment System Regulator in the UK show that £459.7 million was lost to APP scams in 2023.

Article highlights

Fintech investment faces challenges, but optimism remains for future growth
High capital costs reduce fintech investments, but the UK leads in Europe
Investors prioritize profit and sustainability, focusing on core revenue products
Political stability in the UK and US boosts investor confidence in fintech

AI can bring operational enhancements and efficiencies whilst also providing enhanced protection against fraud and crime risks.

PSPs will now be making significant changes to their fraud prevention systems as well as to their operating models to ensure that they are now complying with the new requirements. Investment in technology and educating their customers about this type of fraud will be key in the defence of this type of fraud and to mitigating the amount of money that PSPs will be paying out under this new piece of legislation.

AI technology will continue to take centre stage

2024 saw a significant shift towards the adoption of artificial intelligence (AI) in the fintech industry. AI can bring operational enhancements and efficiencies whilst also providing enhanced protection against fraud and crime risks.

The adoption of AI by companies will continue to increase in 2025 as will the level of sophistication of the technology. Whilst the benefits of AI adoption are obvious, there are challenges and risks for companies utilising this technology.

In terms of regulation, the UK has so far adopted a light touch approach to regulating AI, which could potentially lead to compliance issues for adopters of AI down the line when there is a change in this approach to a more formalised regulatory oversight framework. The European Union has taken a different approach to the UK by passing the AI Act, which came in to force in August 2024.

The Act aims to promote safe and trustworthy AI, safeguard fundamental rights and foster innovation while mitigating potential risks associated with AI technologies.

This provides a definitive set of guidelines for AI systems, adopting a risk-based approach to regulation, and specifically prohibits AI systems that are harmful, deceptive, exploit vulnerabilities or support social scoring systems. Outside of regulatory risk, AI also presents risks to companies in terms of data privacy and security, inaccurate outcomes due to data quality and unfair bias.

As we look ahead into 2025 and beyond, headwinds continue to stifle fintech investment, but the future looks bright.

Companies will have to ensure they have robust compliance and risk management processes in place to fully realise the benefits of AI whilst avoiding these exposures.

We can expect the use of AI by criminals to continue to increase in 2025. We have already seen instances of criminals using AI to mimic text, voices and images through deepfake technology. Companies will have to ensure they are raising awareness of this type of fraud to employees and to deploy technology to mitigate the threat.

Strengthening IT systems through DORA legislation

From 17 January 2025, the Digital Operational Resilience Act (DORA) will apply after coming in to force in 2023. This is an EU regulation that aims to strengthen the IT security of financial companies in the UK and EU. Fintech companies within scope for DORA will have to ensure they are complying with the governance and control framework for risk management by establishing an incident management processes, regular testing of technology and mitigation of counter-party risk with third-party ICT providers.

In the future, the advancements in technology will bring both opportunity and risk to fintech companies.

The prevalence of fraud has brought about regulatory change in the form of the APP Fraud Reimbursement Scheme in the UK, whilst the advancements and accessibility of AI has led to an increased threat of fraud against companies and a new regulatory act in the EU.

Regulatory scrutiny on the fintech sector will continue and there are planned changes to regulation in certain areas such as the Buy Now Pay Later and Crypto sectors. Companies will need to be aware of these regulatory changes and ensure they are ready for compliance to avoid regulatory sanctions.