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 Investors, fintechs are focusing more 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 the pillars of fintech success today,” he says Deepak GoyalCEO and senior partner of BCG and co-author of the report. “They are essential to attracting ongoing investment, scaling operations and building lasting, valuable businesses.”

Nigel Morris, managing partner, QED Investors

“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.

“Fintechs are growing faster than incumbents, and while the $320 billion in fintech revenue represents less than 3% today, exponential advances in genAI and continued growth in embedded finance mean we are still early in the fintech journey , 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: by 14% over the past two years across the board and by 21% excluding fintechs exposed to cryptocurrencies and China (both with an annual growth rate composed). ).

Governments, especially in countries like Brazil AND Indiaare reaping the benefits of investments in integrated public digital infrastructure, spurring exponential growth in digital payments and innovation. Perhaps even more notable is that the industry has begun to shift from a “growth at all costs” model to one focused on profitable growth, with margins improving by an average of nine percentage points.

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-overdue killer app for banks, creating a new revenue stream, increasing customer loyalty and allowing banks to offer a marketing channel to their SMB and corporate customers. Using granular customer data, banks present 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 their “digital-first” cost structures are heavily skewed toward areas where the technology is delivering huge gains (coding, customer service, and digital marketing), the impact is likely to be even more pronounced in the near term. GenAI’s use in product innovation will lag behind its productivity uses, but is expected to eventually follow.

To thrive in this new environment, players will need to focus on the following:

• Caution. View risk and compliance as a competitive advantage
• Profit. Aim to improve profitability by 25 percentage points
• Growth. Establish conditions for sustainable growth throughout 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?

Laurent Descout, founder and CEO of Neo

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 Merrett, Head of Technology PR, The PHA Group

Rhys Merretthead of technological PR, The PHA Group, the public relations and crisis management firm, commented on the current state of fintech and its nature saying: “There has been a negative narrative underlying much of the recent coverage of the UK fintech scene. Challenges related to valuations, funding rounds, IPOs, customer acquisition and scaling are regularly cited. Yes, the last 12 months have been a challenging time for fintech, but no sector has been untouched by inflation, instability and volatility.

“BCG 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 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 won’t happen overnight, but the industry’s success is the result of its agility in responding to new market conditions. There’s nothing to say he won’t recover.”

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