A few years ago, many fintech leaders saw ‘growth at all costs’ as the most important factor for their business to survive. After all, the fintech market was booming. In the wake of this hype though, many firms were forced to call it quits. Nonetheless, the industry remains resilient as between 2021 and 2023, fintech revenues grew by 14 per cent. But how?
According to a new report Global Fintech 2024: Prudence, Profits, and Growth, by Boston Consulting Group (BCG) and QED Investors, fintechs are putting a greater focus on unit economics and profitability. Drawing on insights from interviews with more than 60 global fintech CEOs and investors, the report outlines the key forces shaping the industry and the trends that will drive innovation.
Deepak Goyal, managing director and senior partner, Boston Consulting Group and co-author of the report
“Profitability and compliance are now the cornerstones of fintech success,” says Deepak Goyal, BCG managing director and senior partner and co-author of the report. “They are essential for attracting continued investment, scaling operations, and building lasting, valuable companies.”
Nigel Morris, managing partner, QED Investors
“With an annual global profit pool of $3.2trillion on a base of $14trillion of total revenue, the financial services industry is both massive and ripe for innovation,” says QED Investors managing partner Nigel Morris.
“Fintechs are growing faster than incumbents and, while the $320billion of fintech revenue represents less than three per cent today, the exponential advances in genAI and continued growth in embedded finance means we’re still in the early innings of fintech’s journey, where the separation of winners and losers is becoming apparent.”
A new fintech ecosystem is emerging
Coming off the highs of 2021, fintech revenue valuation multiples have fallen from 20x to 4x on average. Additionally, funding is down by 70 per cent—and almost 50 per cent in the last year. However, the global fintech market has continued to grow revenues at a robust pace: 14 per cent over the past two years across the board, and 21 per cent when crypto- and China-exposed fintechs are excluded (both at a compounded annual growth rate).
Governments, especially in countries such as Brazil and India, are reaping the benefits of investment in integrated digital public infrastructure, spurring dramatic growth in digital payments and innovation on top. Perhaps more notably, the industry has initiated 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:
Embedded finance will be a $320billion market by 2030
The small and medium-size business (SMB) segment will account for about half ($150billion); the consumer segment—already humming with activity and adoption in payments, insurance, and lending—will be worth $120billion revenue by 2030; and the enterprise segment will reach $50billion in revenue. Established fintechs will continue to reap the lion’s share of the near-term benefits, while larger, more established banks will increasingly grow their share over time.
Connected commerce is poised for liftoff
Connected commerce is emerging as a long-awaited killer app for banks, creating a new revenue stream, increasing customer loyalty, and enabling banks to offer a marketing channel to their SMB and enterprise customers. Using granular customer data, banks surface hyper-tailored ads to their customers; merchants then pay the bank based on either attributable sales or traffic.
As core revenue streams continue to come under pressure, and as deposits risk becoming commoditized in a higher-yield environment, connected commerce hints at a future model for banks.
Open banking will have a modest impact on banking, but a greater impact on advertising
Open banking will continue to be relevant but 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 case has emerged on the new service front.
Of course, this is not to say that open banking will have no impact. But revenue pools in the connectivity layer will remain modest, with value accruing to the ultimate 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 now for productivity, with product innovation to follow
GenAI is already delivering tangible productivity gains in financial services. For GenAI in fintech, given their “digital-first” cost structures are heavily weighted toward areas where the technology is delivering huge gains—coding, customer support, and digital marketing—the impact is likely to 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. Seeing risk and compliance as a competitive advantage
Profit. Aiming to improve profitability by 25 percentage points
Growth. Setting the conditions for sustainable growth across the ecosystem
Fintechs must begin their journeys to IPO (or strategic sale) and beyond. Retail banks need to become digital engagement platforms. Lastly, governments need to support the creation of comprehensive and integrated digital public infrastructure.
Will we see investment levels return?
Laurent Descout, founder and CEO of Neo
Responding to the findings of the report, Laurent Descout, founder and CEO of Neo, the cash management platform noted it was unlikely we would see the highs of the early 2020s.
“We’re starting to see fintech valuations recover now as VC’s loosen the purse strings and increase investment in fintechs again, but I think we’re unlikely to see the stratospheric valuations of 2021 in the near term,” he said.
“While high valuations can help some firms stand out against other VC-backed firms, they also set huge expectations that need to be carefully managed to ensure long-term success.”
On a road to recovery
Rhys Merrett, head of tech PR, The PHA Group
Rhys Merrett, head of tech PR, The PHA Group, the PR and crisis management firm, commented on the current state of fintech and its nature saying: “There has been a doom and gloom narrative underpinning a lot of recent coverage of the UK’s fintech scene. Challenges with valuations, funding rounds, IPOs, customer acquisitions and scalability are regularly cited. Yes, the past 12 months have been a trying time for fintech, but no industry has been unscathed from inflation, instability and volatility.
“BCG’s research is positive, inferring 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 fintech has had on banking over the last decade cannot be understated. Fintechs have created new offerings, improving how consumers, investors and businesses can manage their finances. It is a movement, one that has compelled legacy institutions to no longer be complacent, but actively integrate technology into their services to keep up with the latest innovations.
“Fintech is still in its infancy stage. There is a long way to go. A recovery won’t happen overnight, but if anything, the sector’s success is a result of its agility to respond to new market conditions. There is nothing to say it won’t bounce back.”
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