How might distressed fintech firms affect UK growth and private debt?

Rare cases of severe losses in large fintech firms – what are known as black swan events – may harm UK growth and significantly increase debt among households and small businesses. Current regulations are adequate for addressing this tail risk, but there are challenges in enforcement.

The Financial Conduct Authority (FCA) and its supportive regulatory approach have been key to the growth of the UK’s fintech sector – new financial services providers using digital technologies. But higher interest rates, increased uncertainty and scarce capital are causes for concern. Open banking barely grew in 2025, new investment has been falling since 2022, and profitability is a challenge. In such an environment, is fintech regulation adequate, and are the risks well understood and captured?

In this article, we focus on tail risk, or what’s colloquially referred to as a black swan: rare, unexpected and severe distress of a fintech firm or the whole sector. In such cases, both growth and private debt may be affected.

For example, fintech loan providers may increase repayment pressure and costs for clients (businesses and households) that are already facing difficulties; fintech investment platforms may increase costs or cause loss of investor capital; and/or there may be a politically and economically troublesome hit to the UK’s economic growth.

What does research say about risk in fintech?

In the UK, the Kalifa review (2021) suggests that a regulator’s role is to enable fintech growth by simplifying rules, supporting partnerships between firms and fostering innovation. Risk is viewed as something that may limit industry growth rather than carry greater danger. High numbers of failing firms are natural, and a regulator should ensure the resilience of the fintech ecosystem, not of individual firms. Failures in innovation, regulation and supervision can greatly harm consumer and investor confidence.

Other researchers call for a wider view. Such a narrow focus of regulation does not consider risks that affect the wider financial system or fintech’s ability to solve persistent issues in the financial sector, such as organisational failures, fraud and systemic risks (McNulty and Milne, 2021). Therefore, regulators in many countries have a limited perspective and only make light-touch interventions that concern known market failures (Omarova, 2020).

A further view suggests that fintech does not deserve special treatment from regulators (Allen, 2025a and 2025b ).

How does fintech risk affect consumers and small businesses?

‘Buy now, pay later’ (BNPL) credit from fintech firms is often associated with over-indebted and low-income households. BNPL borrowers are, on average, much more likely to be highly indebted, to overuse their credit cards, to pay high interest rates and to have lower credit scores (Shupe et al, 2023).

In 2023, more than three million UK households owed £2.7 billion of BNPL credit, with 21% of debtors having fallen behind on payments and 47% of UK adults not realising than BNPL can cause indebtedness (Gunner and Waddell, 2023). Young UK consumers or those living in the most deprived areas are more likely to charge BNPL to credit cards (Guttman-Kenney et al, 2023), while the more consumers use BNPL, the more likely they are to face financial issues (Schomburgk and Hoffmann, 2023).

Prominent BNPL firms Afterpay, Klarna and Zip frame responsibility as providing cheaper loans to people who would otherwise use credit cards or be rejected by banks (and repaying those loans in time), rather than the personal responsibility of managing a household’s debt and expenses prudently (Aalders, 2023). Consumers with understanding of finance see fewer benefits in BNPL compared with those without such understanding, who overlook its risks (Gerrans et al, 2021).

Fintech finance, such as peer-to-peer (P2P) lending platforms, is an important source of credit for small and medium-sized enterprises (SMEs). These organisations face a £22 billion funding gap (Bank of England, 2020), which has created a large market for fintech.

The share of total lending to SMEs by non-traditional banks and alternative financing providers rose to around 60% in 2023, while that of mainstream banks fell. Non-bank finance represented about 15% of total SME lending in 2018. But since 2017, all the net growth in SME lending has come from smaller banks or from alternative sources such as P2P lending, with the UK banking sector withdrawing.

It is striking that SMEs often use fintech funds to invest in new assets that are used as collateral for cheaper, safer bank credit, rather than relying primarily on fintech lenders (Beaumont et al, 2022). Legal protection and enforcement matter less to the cost of fintech credit, but such credit rates are affected by higher risk loans and fintech platforms with fewer risk-sharing tools (Peng et al, 2023).

Preliminary evidence on fintech tail risk, debt and economic growth

Research on fintech tail risk is rare and often limited to the relationship between fintech and regulated banks. Distress connections between large US fintech firms increased during and after the Covid-19 pandemic, while their default risk increased jointly (Anwer et al, 2025). For European firms, tail risk passes from banks to fintech, while low regulation can affect output more and for longer (Pacelli et al, 2022).

In our research, we make a first attempt to examine the relationship between fintech tail risk, economic growth and overall credit, with a particular focus on SME and household/consumer credit. We look at 60 fintech firms listed on the London Stock Exchange and calculate two common tail risk indicators (‘value-at-risk’ and ‘expected shortfall’) based on past returns and a model constructed to take tail risk into account over the period 2021-24 (Chondrogiannis and Chatzipanagiotis, 2025).

Shares in smaller fintech firms tend to be riskier, but both small and large firms face the danger of sudden, severe losses. When these losses occur, the firms don’t stay in the markets. The impact often shows up a month later as slower economic growth and rising debt for households and small businesses.

Two possible interpretations are increased loans to new clients and an increased number of borrowers who wish to take new loans to cover their old debt. If fintech firms are under distress, they may grant loans and services to otherwise precarious customers who are already in debt (for example, low-income households) or might increase borrowing costs for customers, leading to further indebtedness.

Notably, some forms of credit, such as credit card debt, are unsecured and thus riskier and more expensive. These findings expand on earlier FCA research, which finds that BNPL borrowing increases future missed payments modestly, but it does not necessarily cause financial distress indebtedness or higher rates of missed payments on other credit products (Chan et al, 2025).

What can the regulator do?

The efficiency of UK regulations has not been tested by an event like the case of Wirecard in Germany – that is, the collapse of a large firm central to the fintech ecosystem. But even without such ‘too-big-to-fail’ firms, distress among smaller, interconnected firms with fewer reserves may still spread quickly and widely, causing losses, reducing investor confidence and harming reputation.

Small firms and households may be unable to bear the losses or an economic slump. Capital may move to safer investments, leaving the regulator to decide whether to save everyone, no one or only some. Within a broad and intertwined fintech network, this can be a daunting task.

Two major advantages of the FCA’s framework for regulation are adaptability and flexibility. These allow the regulator to combine incentives and prevention mechanisms in different ways to ensure compliance.

But if distress happens, the FCA might still be constrained by past choices – for example, having chosen in the past to develop in-house supervisory tools instead of outsourced cloud-based tools (McCarthy, 2023).

SME protection from fintech malpractice follows the same rules as traditional lenders. Although there is no ready-to-use legal template tailored to fintech, the regulator can better understand the various fintech business models, use available information and apply record-keeping standards (Black, 2012, Magnuson 2018, Boeddu and Chien, 2022).

Internationally, the UK framework has been adopted elsewhere in the world. This makes the country a global leader and eases international cooperation and sharing experience (Magnuson, 2018; Financial Stability Board, 2017; Schilling de Carvalho, 2022).

The FCA should account for behavioural factors (such as optimism bias and availability bias) that may increase tail risk and address them – for example, by reminding fintech firms of personal liabilities for non-compliance or better enforcement of wind-down plans. It can also extend the cases where fintech firms must report serious technical incidents that affect them.

We suggest stricter requirements adjusted to the characteristics of some fintech firms (for example, multi-currency operations) to safeguard clients’ money. Extending deposit protection schemes would turn fintech creditors into de facto banks but without the safeguards, which can increase moral hazard and affect financial stability.

Improved tools for supervision and risk management tailored for unexpected shocks are vital, but they should be used with caution since they tend to repeat past trends rather than spot new threats.

We first argue that increased fintech tail risk is related to lower growth and increased household and SME debt, especially credit card debts and unsecured loans. These are some of the riskiest forms of lending, and borrowers might face increased debt and costs.

We then argue that current rules allow the FCA to locate and deal with risks in fintech, but there may be blind spots on tail risk. The regulator can improve the technical toolkit, collect and process data from fintech firms more efficiently, and pay close attention to small firms while avoiding regulatory capture.

Where can I find out more?

Financial Conduct Authority research publications.
Bank of England publications.
Driverless Finance: Fintech’s impact on financial stability: a book by Hilary Allen.
World Bank publications on fintech consumer risks and protection.
The Kalifa Review of UK FinTech (2021): an independent report on the sector commissioned by the UK government.