One of the driving forces behind two decades of fintech’s success has been their ability to mitigate inefficiencies in customers’ relationships with traditional financial institutions: provide access to financial services to those who were previously unbanked,
simplify transactions that used to be arduous, and decrease transactions costs.
The pandemic gave yet another boost to the fintech industry, accelerating consumer adoption of digital finance worldwide. As a result, BCG
estimates they have attracted around 20% of global venture capital since 2019 , and were valued at 20 times their annual revenue at their peak in 2021 – over three times the
pre-2018 level.
Household names as PayPal and Ant Financial made it to the top-10 financial services companies by market capitalisation. The rate hike cycle that followed reversed these striking dynamics, bringing valuations closer to historical levels, but that might be
a temporary setback considering that the market forces that have shaped the fintech industry’s recent rise to glory are not as easily reversed, and there is room for further development and broader penetration.
Despite some progress on the part of traditional financial institutions, they still lag behind fintechs in terms of customer experience in many markets: the gap between average US Net Promoter Scores, which is estimated on a 100-point scale, for banks and
fintechs stands at 60 points.
There is considerable scope for user acquisition: as per the World Bank, 24% of adults globally are
unbanked, despite a 50%increase in account ownership over the past decade. For some countries this share
exceeds half of their population, even though internet penetration there is fairly high.
BCG expects annual fintech revenues to grow more than sixfold from 2021 to 2030, reaching $1.5 trillion or an equivalent of around 7% of global banking and insurance revenue pools. In particular, fintechs in banking, those providing lending, deposits, payments,
trading, and investment services, are forecasted to account for 13% of banking revenue pool penetration by 2030.
What trends will emerge within the subsectors of fintech in 2024?
To understand the trends and the evolution of the fintech products we can review the fintech product banking disintermediation from the standpoint of a banking balance sheet, in particular its assymetry between the assets and liabilities.
A significant portion, and often the majority, of a bank’s income is generated on liability products which do not bear credit risk, do not require neither much capital nor even a banking license, and thereby can be delivered under lighter supervision such
as EMI. That gave rise to exponential growth of fintech companies providing payment services, FX conversions, pre-paid debit cards, current accounts, and more.
In 2021, 40% of all fintech revenue was generated by payments. Payments companies essentially led the way in fintech development, and they are expected to retain their position as the largest fintech segment in the nearest decade. In the first half of 2023,
as per KPMG
estimation, despite the overall decline in investment volumes and the number of deal, payments still accounted for the largest share of global fintech investment.
Instant payments were the main priority for investors and governments in the US and Americas, while in EMEA they focused more on digital currencies.
Cross-border payments are an example of a segment where there is significant room for growth. It has already produced such players as Remitly (targeting, as the brand name suggests, cross-border remittances), which
reported that last year both its customer base and send volume increased by around 40%, reaching $5.9 million people and $11.1 billion, respectively.
Other solutions are developed too, including those based on digital ledger technologies, or DLT; for example, Ripple’s
expansion of its Ripple Payments, a crypto-enabled cross-border payments solution, as well as its
plans to extensively cover the US market by acquiring money transmitter licenses.
There is also considerable potential for growth in the B2B2X sector, meaning companies that enable other financial institutions (usually traditional financial intermediaries) to provide better services either to consumers or to businesses. Their success
is driven, among other things, by the inability of some incumbents to innovate at a sufficiently rapid pace, be it due to their own ponderous legacy systems or lack of resources intended for these purposes.
This model means lower risk for investors, and thus better access to funding for such projects. BCG expects this market segment to grow at 25% CAGR, which would translate into annual revenues of $440 billion by 2030. One sub-segment here would be mortgage-tech
companies aiming to reduce the cost and cycle time per loan, ensure compliance, and automate decision making.
Trust Engine in the US is an example; they offer a number of tools, including sales alerts and borrower education, to propose optimal loan scenarios based on borrower characteristics and thus optimise lender and borrower success. Other players include Indecomm,
Brace, and Molo in the UK.
B2B2X also creates massive opportunities for insuretech, especially when it comes to tackling particular pain points within the insurance value chain, for instance, using AI tools for underwriting, claims, and distribution.
Reserv, for instance, strives to reduce the time necessary for property and car insurance claims processing. In autumn it
secured $20 million in Series A funding, with its investors calling it “one of the fastest growing insuretech startups”. Another segment to potentially
thrive by turning to B2B2X opportunities in wealthtech, where catering to affluent individuals directly is quite challenging, but providing solutions to incumbents who already serve this customer population might be the way to go.
BCG expects even faster growth for fintechs catering to small and medium enterprises – 32% CAGR, implying revenues of $283 billion in 2030. Fintech companies that provide services for SMEs include, among others, Revolut, Wise, and Paddle.
International Finance Corporation
estimates that globally unmet financial credit needs for this customer base total $5.2 trillion annually, or 1.3 times the current level
of lending received by micro, small, and medium enterprises.
According to McKinsey, 35% of SMEs in the US
considered fintech solutions for lending, better pricing, and integration with platforms they already use in 2022, while in Asia 20% of SMEs
used opportunities provided by fintech companies for payments and lending. This fairly unoccupied market space did not go unnoticed by the investors: in 2022, B2B fintech
attracted more than 4 times the investment in comparison with B2C, and overall
experienced smaller funding declines. For insuretech providers this is also a potential growth opportunity since this market has been largely
overlooked by these providers before.
One more trend that could create space for the development of fintech services is the green transition. ESG-fintech providers attracted $2.3 billion in investment last year, a figure second only to their 2021 records. Rubicon Carbon, a carbon sales and custody
platform, and Xpansiv, a carbon environmental commodities marketplace, were the top-2 deals in the sector.
The expansion of ESG regulations across the globe creates opportunities in terms of working with reporting standards, exchanges, and indices – this is the reason why KPMG forecasts that this particular fintech subsegment will grow faster compared to the
broader group, at least over the next year.
What challenges will fintechs face in the future?
As it happens, opportunities do not come without risks. Those come from a few sources. One is regulation: new regulation can disrupt current business models for some firms, increasing costs and slowing adoption, while lack thereof undermines customer trust.
As do data protection issues: the more data companies manage, the higher the costs of breaches.
Fintechs are poised to become increasingly multinational, especially since projects are being developed in segments that are, by design, targeted at clients “across the board”, such as cross-border payments and wealthtech. But this means that they will have
to navigate between various regulatory environments and regional data standards.
Rising rates could be a factor to consider as well. Although it could give a profit boost for fintechs monetising client balances it may be an obstacle for others. A service that, in the past few years, has seen a surge in popularity is “buy now, pay later”
(BNPL), a scheme allowing customers to divide their payments into a series of interest-free installments.
According to the Bank for International Settlements (BIS), from 2019 to 2023 the volume of sales that were performed through BNPL platforms
increased more than sixfold – to over $350 billion. The scheme is in particular demand in those countries where e-commerce penetration and inflation are high, as is the population’s debt burden,
limiting people’s access to traditional credit. But providers in this segment face high costs compared to their revenues, and their margins are low due to significant competition and high loan losses, Riksbank
notes. Higher interest
rates, raising the cost of funding for these providers, make matters even worse for them. In particular, one provider, Australian OpenPay,
went into receivership last year at the backdrop of worsening macroeconomic conditions.
Financial technology companies should also be ready to face increasing competition from bigtechs. Back in 2020, the BIS
reported that, even before the pandemic, bigtech credit was overtaking fintech credit by a significant margin. The effect was mostly driven by Asian countries, where such tech giants as Alibaba and Tencent
have by now
entered all the major segments of the financial services market, including lending, insurance, and investments.
Big tech in other regions benefit from the same effects as their Asian counterparts, mostly stemming from the amount of user data they acquire from nonfinancial activities, such as social media, which, combined with big data and machine learning technologies,
can then be used for more efficient decision making, notably better scoring and tailoring products to consumer preferences.
They also utilise cross-subsidisation, economies of scale, and network externalities (meaning the more users enter a platform, the more attractive it eventually becomes for others). These features of their business model allow bigtechs to expand their presence
in financial services very quickly.
Western big tech ise catching up: Apple, Google, and Amazon already provide payment services, lending (including BNPL schemes), and insurance; Meta’s “financial line”, at this point, is limited to payments. Big tech can also sometimes partner with incumbent
financial firms to roll out new services to their vast client base – as was the case with Apple’s savings account they launched on Apple Card’s platform in collaboration with Goldman Sachs.
A consumer survey
conducted by BankingHub (a project of the consulting firm zeb) in Europe revealed that 75% of respondent already use digital financial solutions from bigtechs,
and levels of trust they place in big tech providers are similar to those received by incumbent players in the financial services market.
Six out of ten consumers – especially younger and more technically adept ones – showed propensity to open a deposit or a savings account with bigtechs. In addition, big tech is developing its proprietary generative AI solutions, which can potentially enable
them to enhance user experience and personalisation of their services in an even more profound way, further cementing their position as major financial service providers.
The last but not least of the challenges could be the fintech firms longer term strategy and its ambitions. A desire to cover more of the spectrum of the financial services and product will inadvertently push them to face the above mentioned banking balance
sheet asymmetry dilemma, such as to stay a niche player in one area, for example payments or pre-paid cards, or to branch out into asset side and client credit products. The latter implies increased pressure on capital, more demanding (bank) licensing and
regulatory oversight, more sophisticated internal controls and infrastructure.
Putting all of the above in place will take time and resources, and may somewhat blur the line between a fintech and a bank both for clients and investors.