Financial and Monetary Systems

Fintechs are an economic and social success. Here are 4 ways to keep up the momentum

Financial and business concepts. 3D render; fintech funding

Fintech funding is entering a new era of searching for smart, sustainable growth. Image: iStockphoto/BlackJack3D

Max Floetotto
Senior Partner, McKinsey & Company
  • Financial technology companies (fintechs) have shaken up the banking industry and played a significant role in boosting financial inclusion around the world.
  • The traditional “growth at almost any cost” model has fallen out of favour; investors now want to see that fintechs have a clear path to profitability.
  • A recent World Economic Forum report, Fuelling Innovation: Closing Fintech Funding Gaps, looks at how fintechs can promote more sustainable growth.

In the 30 years since financial technology companies (fintechs) first emerged, they have come a long way. Many of these companies have built services that consumers love and some have even pushed incumbent institutions to innovate – both through partnerships and by keeping them on their toes through direct competition.

The expansion of access to banking services has been another important outcome of the fintech success story. The rise of digital banking driven by fintechs means almost three-quarters of people in developing countries now have a bank account, according to the World Bank, up from 42% in 2011. The number of people without a bank account fell by 1.1 billion over that period.

Of course, fintechs have benefited as well. They now account for about 5% of revenue in the financial services sector. At the end of 2023, listed fintechs had a market capitalization of $573 billion – twice as much as in 2019. By 2023, there were 362 fintech “unicorns” – startups with a valuation of at least $1 billion – compared to just 38 in 2017. And fintechs are a truly global trend. Kenya has one of the world’s highest rates of fintech penetration, while fintech funding is also growing fast in the Middle East and North Africa.

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But times are changing. In 2021, fintech funding surged to $92 billion and valuations of listed fintech companies reached $1.3 trillion. Since then, funding and exits (when a founder successfully sells their company) have both fallen sharply, although the first three quarters of 2024 have brought some optimism back into the sector.

Despite falling interest rates in 2024, inflation and geopolitical tensions continue to create a challenging macroeconomic environment, constraining liquidity for all businesses looking for funding, including fintechs.

As a result, the fintech industry is now moving beyond the giddy days of 2020-2021, but also well away from the ensuing slump. In this new era, slow and steady progress will be the guiding principle for fintech funding. Specifically, fintechs that refine their business models while continuing to invest in innovation are likely to achieve competitive success.

In this new era, recent research shows there are four major ways fintechs can clear a pathway to profitability:

1. Focus on cost discipline and smart budgeting

In 2022, only about half of listed fintechs were profitable. As a result, investors are now scrutinizing the sector more, with the time between funding rounds rising and the average value of fintech funding rounds falling. The implication is that fintechs need to steward their resources more carefully than in the past, when they were rewarded for growth at almost any cost.

The key differentiator between profitable and nonprofitable fintechs is typically cost management, not revenue growth. A 2021-2022 McKinsey study found that profitable fintechs cut costs by a median of 3%, while costs rose by 27% at unprofitable ones, even though the revenue gains were identical at 13%.

2. Promote measured growth

In the current liquidity-constrained environment, investors are demanding that fintechs emphasize profitability. This means building a strong core business that is well-suited to the market. When fintechs get the core right, they earn trust from customers and investors, and that enables them to get more funding.

Expansion comes later – initially to adjacent segments and geographies. But companies that focus on their core business and develop a strong home market are 1.6 times more likely to generate above-average returns.

3. Find the right M&A partners

For two decades, McKinsey research has found that programmatic mergers and acquisitions (M&As) – doing a series of small- and medium-sized deals around a specific business case, rather than dramatic big bangs – are more successful and lower risk for firms.

Fintechs are no exception to this rule and, in fact, present considerable potential. Many start-ups have narrow portfolios of one or two products. They could find the path to profitability difficult and may not be able to get the funding to expand their offerings. In this context, M&As with an emphasis on selecting the right partners and post-deal integration are a natural strategy.

4. Continue to innovate

Fintechs typically succeed because they do things differently. Unencumbered by legacy systems, they reimagine how to deliver what customers want to become an established part of the banking and finance landscape.

Embedded finance, for example – integrating online banking capabilities into non-financial platforms, such as when an airline website offers travel insurance – enables seamless customer journeys. It allows consumers to find financial services when and where they need them.

Digital-native fintechs are releasing new products and services much faster than traditional financial companies. The use of application programme interfaces and cloud-based systems is giving rise to a new group of fintechs: banking-as-a-service, which sees banking services provided by third parties. Generative artificial intelligence (GenAI) also promises substantial gains to those who figure out how to use it well.

The AI-inflected technology revolution is producing value creation opportunities that fintechs are well positioned to capture – and they have room to grow. McKinsey projects that fintech revenues could rise by 15% per year between now and 2028 – three times faster than those in the traditional banking sector.

Have you read?

Fintech funding potential

Fintechs are already a success story, but in the decade to come they should prioritize consolidating their strengths to fulfill their potential. Think smart, sustainable growth, not hyper-growth.

Fintechs have changed banking for the better. Now the challenge for fintech funding is to keep the momentum going – for their own sake, and for the financial and social value fintechs can bring to the consumers they serve.

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