After years of significant growth, fintechs have entered a new phase of value creation, focusing on delivering sustainable, profitable growth. A new report from McKinsey explores how fintechs can achieve progress during challenging and disruptive times.
Over the last few years, technological progress and innovation have accelerated the fintech industry towards a critical part of the financial services industry. The growth has been rapid, supported by structured growth in the banking sector, accelerated digitalisation, changing customer attitudes and rising support from investors and regulators. During these times, fintechs have reshaped various aspects of financial services with their creative, customer-focused value propositions and cross-skilled and agile teams.
As of 2023, publicly traded fintechs represented a market capital value of $550 billion, a two-times increase compared to 2019. Furthermore, there were 272 fintech businesses with a total valuation of $936 billion, seven times the value of $1 billion or more five years ago.
Looking ahead, the fintech industry faces a challenging future, but numerous opportunities could appear. Research from McKinsey shows that revenues in the fintech industry could increase nearly three times faster than those in the traditional finance industry between 2023 and 2028.
Several themes will shape the next phase of fintech developments. Fintechs will continue to benefit from the significant transformation of the finance industry, accelerated digital adoption and e-commerce growth worldwide, especially in developing economies. Secondly, despite current pressures, fintechs still can create growth in an expanding financial services industry.
Significant transformation in the banking industry
Banking is facing a future involving considerable restructuring. Digital adoption isn’t just a question but a reality, with over 70% of global interactions with banks taking place via digital channels. Furthermore, global consumers have similar satisfaction and trust in fintechs compared to traditional banks. The demand and requirement for fintech products are even higher within developing economies. In 2022, Africa, for example, consisted of 800 million mobile accounts, nearly half of the world’s total.
To harness this demand fintechs must maintain pace with evolving regulations and ensure they have the necessary resources and the capacity to comply. For example, some EU members are introducing buy-now-pay-later provisions within financial regulation.
What has caused fintechs to be so disruptive over recent years? A large part of this is due to their ability to innovate and differentiate. Since fintechs aren’t dependent on legacy systems and processes, they are capable of being more agile with emerging technologies to determine and solve customer needs. Generally, they have a customer-centric approach to delivering innovation with cross-skilled teams.
New companies have disrupted the traditional wealth management industry by providing affordable, accessible alternatives to individuals who lack access to custom financial support. Incumbents are catching up with these innovations by accelerating their investments in new technologies. A recent survey suggested that 94% of banks plan to invest more in modern payment technologies to support end-user demand for better payment services over the next few years. Many incumbents are also partnering with BaaS platforms to transform their digital solutions.
To maintain their competitive edge fintechs must continue to innovate. The next big disruptor is always coming. Technologies like generative AI are likely to transform the competitive landscape of finance over the next few years. For example, Arthur Wang, the CFO of WeBank, explains that even though their business is well established, he considers them to be a start-up continually exploring better fintech technology. The strategy of WeBank is to provide better, more inclusive financial services, to the mass population, as well as SME enterprises with leading technology.
A tighter labour market has made it more challenging for fintechs to attract and retain tech talent. Recent surveys have suggested a slight shift in the perception of fintechs as potential riskier employers. Fintechs are less appealing to some compared with more established institutions, but on the other hand, large fintechs are laying off, which can generate a new pool of talent to attract.
The fintech industry is experiencing a significant change, so businesses must evolve to survive. The report suggests the following foundation for sustainable growth:
Measured growth established on a stable core – ensure there is a strong core business with a targeted and proven market.
Programmatic M&A – pursue M&A strategically and create a mutually beneficial partnership based on a programmatic strategy focusing on value sharing (between incumbent and other fintechs), rather than pursuing M&A, as a response to low-valuation conditions.
Cost discipline – control costs to manage new funding conditions while remaining flexible, agile and compliant.
Keep focused on the culture – maintain a strong level of agility, innovation and culture that has been predominant in the era of disruption so far.
