January 31, 2024
Key Trends Shaping Fintech Across the UK and Europe in 2024
Head of Europe, Plaid
It's no secret that we’re evolving into a fundamentally new era in financial services, driven in large part by the evolution of open finance regulation. In the UK alone, there are over 2,500 fintech companies – a number that will continue to grow despite challenging market conditions. By receiving 20% of all VC investments, fintech is the largest VC investment category in Europe, a higher percentage than in Asia and the US. In fact, Europe makes up 27% of the global cumulative valuation of the fintech industry.
Today, the European Union and the UK remain at the forefront of developing regulatory frameworks to support open finance initiatives as they evolve from the origins of open banking. As we move into 2024, Plaid is encouraged to see the progression of open finance from PSD2 to PSD3 and other new regulatory frameworks. The long-term implications of these changes include shifts in market dynamics, greater access to a variety of new kinds of credit lines for consumers, and new avenues of innovation for those of us who empower businesses to build and grow.
In 2024, we expect the following areas to see the benefits of evolving financial regulations:
1. The EU will see an increase in open banking conversion rates, resulting in more consumer and business adoption: While the UK has led the charge in open banking functionality, the landscape is evolving. Thanks to clarity from industry bodies and regulators, as well as investments by banks into their open banking infrastructure, EEA bank performance is steadily improving. Just in the last year, Plaid has seen as much as a 20% absolute improvement rate at a country level. As users become more familiar with open banking, coupled with API improvements (e.g., the regulator mandating app2app journeys in France), conversion rates are expected to continue to rise, narrowing the gap with the UK.
2. Adoption of Variable Recurring Payments (VRP) will help continue to close the functionality gap between open banking payments and other alternatives like cards: VRP (and eventually DRP in the EEA) is functionality that enables much of the flexibility of direct debits and card-on-file with all of the advantages and security of open banking payments. The immense hype surrounding this iteration on the open banking standard since the release of PSD2 is justified. Already, VRP has claimed over 10% market share of open banking payments in the UK. As VRP becomes the norm and additional use cases are enabled, its adoption is expected to surge, offering seamless execution of payments with the assurance of safety and trust.
3. Greater data accessibility will support better lending decisions: In the UK and across Europe, the cost of living crisis squeezed the pockets of millions. A higher interest rate environment is pushing costs even higher, and wages are not keeping pace. Many are turning to credit in order to manage through these challenging times. However, the credit industry is largely based on legacy data and systems which don’t cater to lenders or borrowers, which means that consumers are not always privy to understanding why they cannot access the credit they need, when they need it, and lenders are not making the most optimal lending decisions. By enabling permissions for third-party providers to access data, lenders can gather a more holistic view of a consumer's credit-worthiness, and in turn consumers can access more of the lending outcomes that work best for them. From 2024 and onward, we expect it to become industry-norm in the lending space to leverage the power of open banking data in credit decisioning.
4. Fraud rates will decline due to advanced authentication methods: In addition to opening up access to in-demand lines of credit, open finance can help the broader financial system close the loop on rising fraud. For example, in Europe mandatory Strong Customer Authentication (SCA) will continue to be enforced as part of PSD3, lowering fraud rates thanks to enabling more sophisticated ways to verify consumers and money movement. Open finance also enables brands to identify consumers and verify their accounts in new ways, quickly identifying authentic users and more effectively weeding out fraudsters. As millions more people live their financial lives online, it’s imperative that everyone involved proactively move to protect consumers by leaning on technology to combat bad actors. The beauty of open banking is that it enables quicker transactions, but is also proving to be more secure, and we expect those trends to continue into 2024 and beyond.
Every year, people put out predictions about the impact of open banking and the future of finance. It’s generally accepted that open banking was productive in ushering a thriving fintech ecosystem across Europe. However, in 2024 PSD3 is expected to accelerate opportunities across the digital finance landscape in Europe and the UK by promoting even more innovation and stronger competition. We predict that this will lead to better offerings for consumers, higher performance for businesses, and more convenient solutions. In the coming year, we look forward to partnering with thousands of innovative businesses to reimagine how financial services can drive better outcomes for millions of people.