The report: Prudence, Profits and Growth (Financial Institutions Global Fintech 2024)
Source: BCG + Qed Investors
Why we picked it: This report was built with the fintech audience in mind. However, in order for banks and credit unions to be prepared to take on the partnerships with these alternative players — and reduce the risk of their future monopolization of consumers in the younger generations — it’s critical that traditional financial institutions stay ahead of the trends impacting the industry. The juncture between fintech and licensed bank is closing, and only true partnership will mark the success of either group.
Executive Summary
While the days of easy funding and “growth at all costs” mentality may be behind us, the fintech revolution is far from over. Instead, it’s entering a new phase characterized by a focus on sustainable growth, profitability and prudent risk management.
The fintech industry — once the darling of investors and innovators alike, and the ultimate enemy of the legacy banking space — finds itself at a critical juncture. A recent report from Boston Consulting Group (BCG) and QED Investors sheds light on the current state of the sector, revealing a landscape that can weed out the weakest fintech players, and level up the ones dedicated to true innovation and collaboration.
Key Takeaways:
- Market growth: Despite funding challenges, the fintech market is expected to reach $1.5 trillion in revenue by 2030, up from $320 billion today, driven by the large population of unbanked and underbanked individuals globally and productivity boosts from technologies like generative AI.
- Profitability push: Only 47% of the top 70 public fintechs were profitable in 2023. The report suggests that fintechs need to improve EBITDA by more than 25 percentage points to achieve sustainable growth in 2024 and beyond.
- Digital challengers rising: Digital challenger banks are emerging as star performers — and the best hail from all over the world. Brazil’s Nubank has crossed the 100-million-user threshold on its way to becoming the largest bank in Latin America (and nearly most profitable), while Europe’s Monzo reached operational profitability in 2023 as the seventh largest bank in the region.
- GenAI impact: Generative AI is delivering significant productivity gains in areas crucial to fintech operations, such as coding, customer support and digital marketing, bolstering the fintechs still afloat as they address profitability challenges.
The Funding Winter and Revenue Resilience
The fintech sector has experienced a sobering reality check over the past three years. Coming off the highs of 2021, the industry has seen a dramatic shift in investor sentiment. Funding has plummeted by 70% from its peak, with a further 50% decline in just the last year. This downturn has been particularly severe for late-stage investments, which have seen drops from 81% to 89%.
Despite the funding chill, global fintech revenues have continued to grow at a robust 14% annual growth rate over the past two years, reaching $320 billion in 2023.
Even more impressively, when excluding crypto- and China-exposed fintechs, the growth rate jumps to 21%. This resilience in the face of adversity speaks to the fundamental value that fintech companies continue to provide to consumers and businesses alike.
All this being said, reaching sustainable profitability continues to plague fintechs in new ways. BCG’s report found that just under half of the top 70 public fintechs were profitable in 2023. While this represents an improvement from 2022, when funding hit some peak lows, it underscores the urgent need for many companies to reassess their business models and focus on unit economics.
The authors suggest that fintechs can improve EBITDA by focusing on a multipronged approach, including:
- Innovative sources of revenue growth: Fintechs should explore new pricing models, such as basis points or fees for payments, rather than relying solely on subscription-based models. They also need to focus on salesforce effectiveness and targeted commercialization efforts.
- Aggressive cost reduction: Areas for optimization include organizational redesign, front-to-back digitization of operations, procurement excellence, and streamlining of central, support, and technology functions.
- Targeted balance sheet improvements: Working capital optimization — particularly in accounts receivable and payable functions — can yield significant cost savings.
Perpetuating the Embedded Finance and Open Banking Revolution
While much of the fintech narrative has focused on disruption of traditional banking models, the report identifies an area where incumbent banks may have an advantage: connected commerce. Major banks are leveraging their vast stores of customer data to create new revenue streams and enhance customer loyalty.
By developing their own commerce platforms, banks can offer hyper-personalized offers and rewards to customers, creating a “win-win-win” scenario for consumers, merchants, and the banks themselves. This approach allows banks to monetize their data assets in a way that adds value for customers rather than simply selling their information to third parties.
The success of connected commerce initiatives will likely depend on the quality of partnerships between banks, fintechs and merchants — and this intersection of traditional institution and fintech is only expected to become more relevant in the years to come. By 2030, embedded finance is projected to account for $320 billion in global revenues. This market will be led by three key segments:
- Small and medium-sized businesses (SMBs): Expected to generate $150 billion in revenue,
- Consumer segment: Projected to reach $120 billion, and the
- Enterprise segment: Estimated at $50 billion.
The report takes a nuanced view of open banking, suggesting that while it continues to expand globally, its impact on competition in banking has been more modest than many predicted. In the UK, for example, open banking has been live for six years, but consumer adoption has plateaued at around 12% monthly active users.
However, the authors argue that open banking could have a more significant impact on advertising and connected commerce. As access to transaction-level data becomes more widespread, it could enable new and innovative use cases beyond traditional banking services.
What Are the Game-Changing Techs for Growth?
The report identifies genAI as a potential lifeline for many fintechs, especially those struggling with profitability in the current funding environment. GenAI is already delivering tangible productivity gains in key areas such as:
1. Software coding, testing, and documentation
2. Customer support and service
3. Regulatory filings and compliance
4. Digital marketing and targeting
The impact of GenAI is expected to be particularly pronounced for fintechs in the near term, given their “digital-first” cost structures that are heavily weighted towards areas where AI can deliver significant efficiencies.
While the immediate benefits of GenAI are centered on productivity, the report suggests that product innovation through AI is on the horizon. Future applications could include enhanced personal financial management tools and more sophisticated risk assessment models.
However, potentially even more exciting — and one of the most intriguing developments highlighted in the report — is the role of digital public infrastructure (DPI) in fostering fintech innovation and financial inclusion. Countries like India and Brazil have led the way in implementing comprehensive DPI systems, consisting of three key layers: digital identity, payments infrastructure and data exchange protocols.
The success of India’s Unified Payments Interface (UPI) and Brazil’s Pix system demonstrates the transformative potential of well-designed DPI. In India, for example, the number of monthly real-time payments has grown fivefold in just three years, from 2.6 billion to 13.3 billion.
The report argues that governments, particularly in emerging markets, should prioritize the development of comprehensive and integrated DPI to spur innovation and broaden access to financial services.
Five Calls to Action
Based on their analysis of the current fintech landscape, the report’s authors outline five key imperatives for players in the ecosystem:
1. Embrace prudence: Fintechs must view risk and compliance as competitive advantages rather than obligations. This means taking an end-to-end approach to regulatory readiness and implementing robust controls, particularly in areas like anti-money laundering (AML) and cybersecurity.
2. Focus on profitability: The days of growth at all costs are over. Fintechs need to improve EBITDA by more than 25 percentage points through a combination of revenue growth, cost optimization, and balance sheet improvements.
3. Prepare for public markets: As the IPO market thaws, fintechs must be ready to tell a comprehensive equity story that addresses not just growth potential but also sustainable profitability and regulatory compliance.
4. Banks as digital platforms: Incumbent banks should leverage their customer data and high engagement levels to build digital platforms offering value-added services, including connected commerce solutions.
5. Government support for DPI: Policymakers, especially in emerging markets, should focus on creating comprehensive and integrated digital public infrastructure to foster innovation and financial inclusion.
Editor’s note: This article was prepared with AI language software and edited for clarity and accuracy by The Financial Brand editorial team.