The fintech industry is undergoing a sea of change according to a new information from McKinsey.
In their hypergrowth stage, fintechs had access to capital that allowed them to be bold in their business strategies. But in 2022, the time between funding rounds for fintechs increased by more than five months from the first to the fourth quarter, and the average value of funding rounds decreased by 50 percent over the same period. How can fintechs get on a path of sustainable, profitable growth?
“Approaches will vary, depending on each fintech’s maturity level and its vertical and geographic focus,” write McKinsey’s Alexis Krivkovich, Marie-Claude Nadeau, Tunde Olanrewaju, Max Flötotto, and Fernando Figueiredo.
McKinsey saysthat after decades of hypergrowth, fintechs have entered a new era of value creation, where the focus is on sustainable, profitable growth. This report examines how fintechs can win in these disruptive times.
Over the past decade, technological progress and innovation have catapulted the fintech sector from the fringes to the forefront of financial services. And the growth has been fast and furious, buoyed by the robust growth of the banking sector, rapid digitisation, changing customer preferences, and increasing support of investors and regulators. During this decade, fintechs have profoundly reshaped certain areas of financial services with their innovative, differentiated, and customer-centric value propositions, collaborative business models, and cross-skilled and agile teams.
As of July 2023, publicly traded fintechs represented a market capitalization of US$550 billion, a two-times increase versus 2019. In addition, as of the same period, there were more than 272 fintech unicorns, with a combined valuation of US$936 billion, a sevenfold increase from 39 firms valued at US$1 billion or more five years ago.
In 2022, a market correction triggered a slowdown in this explosive growth momentum. The impact continues to be felt today. Funding and deal activity have declined across the board, and there are fewer IPOs and SPAC (special purpose acquisition company) listings, as well as a decline in new unicorn creation. The macro environment also remains challenging and uncertain. In such a scenario, fintechs are entering a new era of value creation. The last era was all about firms being experimental—taking risks and pursuing growth at all costs. In the new era, a challenged funding environment means fintechs can no longer afford to sprint.
McKinsey’s research shows that revenues in the fintech industry are expected to grow almost three times faster than those in the traditional banking sector between 2023 and 2028.
These trends are also coinciding with—and in many ways catalysing—the maturation of the fintech industry. Based on our research and interviews, three themes will shape the next chapter of fintech growth.
First, fintechs will continue to benefit from the radical transformation of the banking industry, rapid digital adoption, and e-commerce growth around the world, particularly in developing economies.
Second, despite short-term pressures, fintechs still have room to achieve further growth in an expanding financial-services ecosystem.
And finally, not all fintechs are being hit equally hard during the market correction: fintechs in certain verticals and at particular stages of growth are more resilient than their peers.
