Fintech
The key to reviving fintech is profitability, not growth at all costs
A few years ago, many fintech leaders saw “growth at all costs” as the most important factor for their company’s survival. After all, the fintech market was booming. In the wake of this hype, however, many companies were forced to close their doors. Nonetheless, the sector remains resilient as fintech revenues grew by 14% between 2021 and 2023. But how?
According to a new report Global Fintech 2024: Caution, Profits and GrowthOf Boston Consulting Group (BCG) e QED Investorsfintechs are increasingly focusing on unit economics and profitability. Drawing on insights from interviews with over 60 global fintech CEOs and investors, the report outlines the key forces shaping the industry and the trends that will drive innovation.
“Profitability and compliance are the pillars of fintech success today,” he says Deepak Goyal, BCG CEO and senior partner and co-author of the report. “They are essential to attracting ongoing investment, expanding operations and building lasting, valuable businesses.”
“With annual global profit of $3.2 trillion on a base of $14 trillion in total revenue, the financial services sector is huge and ripe for innovation,” he says QED Investors managing partner Nigel Morris.
“Fintech companies are growing faster than incumbents, and while the $320 billion in fintech revenue represents less than three percent today, exponential advances in genAI and the continued growth of embedded finance mean we are still early in the journey of fintech, where the separation between winners and losers is becoming evident.”
A new fintech ecosystem is emerging
After reaching 2021 highs, fintech revenue valuation multiples have fallen from 20x to 4x on average. Additionally, funding has declined by 70% and nearly 50% in the past year. However, the global fintech market has continued to grow revenues at a strong pace: 14% over the past two years across the board and 21% excluding fintechs exposed to cryptocurrencies and China (both with a compound annual growth rate) . ).
Governments, especially in countries like Brazil AND Indiaare reaping the benefits of investing in integrated digital public infrastructure, spurring exponential growth in digital payments and innovation. Perhaps even more notable is that the industry has begun a shift from a “growth at all costs” model to one focused on profitable growth, with margins improving by nine percentage points on average.
The report outlines four trends that will drive the industry in the coming years:
Integrated finance will constitute a $320 billion market by 2030
The small and medium-sized business (SME) segment will account for about half ($150 billion); the consumer segment – already bustling with activity and adoption in payments, insurance and lending – will be worth $120 billion in revenue by 2030; and the enterprise segment will reach $50 billion in revenue. Established fintechs will continue to reap the lion’s share of the short-term benefits, while larger, more established banks will increasingly increase their share over time.
Connected commerce is ready to take off
Connected commerce is emerging as a long-awaited killer app for banks, creating a new revenue stream, increasing customer loyalty and allowing banks to offer a marketing channel to SMEs and corporate customers. Using granular customer data, banks show hyper-personalized ads to their customers; merchants then pay the bank based on attributable sales or traffic.
As key revenue streams continue to come under pressure and deposits risk becoming a commodity in a higher yield environment, connected trading suggests a future model for banks.
Open banking will have a modest impact on banking, but a larger impact on advertising
Open banking will continue to be relevant, but it is unlikely to change the basis of competition in consumer banking. In countries where open banking has had a decade or more to mature, no killer use cases have emerged on the new services front.
Of course, this is not to say that open banking will have no impact. But revenue in the connectivity layer will remain modest, with value going to end-use case providers leveraging open banking infrastructure. By contrast, in advertising, access to transaction-level data will enable more timely, targeted and personal offers.
Generative AI will be a game-changer for productivity, and will follow product innovation
GenAI is already delivering tangible productivity gains in financial services. For GenAI in fintech, given that their “digital-first” cost structures are heavily skewed towards areas where the technology is delivering huge gains – coding, customer service and digital marketing – the impact will likely be even more pronounced in the near term . The use of GenAI in product innovation will lag behind its uses for productivity, but is expected to follow eventually.
To thrive in this new environment, players will need to focus on the following:
- Prudence. Treat risk and compliance as a competitive advantage
- Profit. Aim to improve profitability by 25 percentage points
- Growth. Establishing the conditions for sustainable growth across the ecosystem
Fintechs need to begin their journey to IPO (or strategic sale) and beyond. Retail banks must become digital engagement platforms. Finally, governments must support the creation of comprehensive and integrated digital public infrastructures.
Will we see investment levels return?
In response to the report’s findings, Laurent Scoutoutfounder and CEO of Neothe liquidity management platform noted that we were unlikely to reach the highs of the early 2020s.
“We are starting to see fintech valuations recover now as VCs loosen their purse strings and ramp up fintech investment again, but I think we are unlikely to see the stratospheric valuations of 2021 in the near term,” he said.
“While high valuations can help some companies stand out from other VC-backed companies, they also create enormous expectations that must be carefully managed to ensure long-term success.”
On the road to recovery
Rhys Merretthead of technology PR, The PHA Groupthe public relations and crisis management firm, commented on the current state of fintech and its nature, saying: “There has been a negative narrative underpinning much of the recent coverage of the UK fintech scene. Challenges around valuations, funding rounds, IPOs, customer acquisition and scalability are regularly cited. It is true that the last 12 months have been a difficult time for fintech, but no sector has been unscathed by inflation, instability and volatility.
“BCG research is positive and suggests renewed investor interest and growth. Long-term revenue generation for the sector is positive and London will continue to be a global fintech hub.
“What we need to do is take a step back. The impact that fintech has had on the banking sector over the last decade cannot be understated. Fintechs have created new offerings, improving the way consumers, investors and businesses can manage their finances. It’s a movement that has forced legacy institutions to no longer be complacent, but to actively integrate technology into their services to keep up with the latest innovations.
“Fintech is still in its infancy. There is a long way to go. Recovery will not happen overnight, but the success of the sector is the result of its agility in responding to new market conditions. There is no denying that it will not recover.”