Prudence, Profits, and Growth: A New Formula for Winning in Fintech

• Global Fintech Revenues Grew Robustly in 2023; Valuations and Funding Remain Depressed but Have Stabilized Recently
• Themes Shaping the Industry Include Embedded Finance, Connected Commerce, Open Banking, and Generative AI’s Impact on Productivity

BOSTON—While the fintech industry has navigated choppy waters in recent years, there is vast potential for future growth. As the sector matures, the rules of the game are changing, with a greater focus on unit economics and profitability over growth at all costs. From 2021 to 2023, global fintech revenues grew by 14% (at a compounded annual growth rate) while both funding and valuations plummeted. Key fintech players have achieved profitability and are scaling rapidly.

This is according to a new report released today by Boston Consulting Group (BCG) and QED Investors. The report, Global Fintech 2024: Prudence, Profits, and Growth, draws on insights from interviews with more than 60 global fintech CEOs and investors to outline the key forces shaping the industry and the trends that will drive innovation.

“Profitability and compliance are now the cornerstones of fintech success,” says Deepak Goyal, BCG managing director and senior partner and co-author of the report. “They are essential for attracting continued investment, scaling operations, and building lasting, valuable companies.”

“With an annual global profit pool of $3.2 trillion on a base of $14 trillion of total revenue, the financial services industry is both massive and ripe for innovation,” says QED Investors Managing Partner Nigel Morris. “Fintechs are growing faster than incumbents and, while the $320 billion of fintech revenue represents less than 3% today, the exponential advances in GenAI and continued growth in embedded finance means we’re still in the early innings of fintech’s journey, where the separation of winners and losers is becoming apparent.”

A New Fintech Ecosystem Is Emerging

Coming off the highs of 2021, fintech revenue valuation multiples have fallen from 20x to 4x on average, and funding is down by 70%—and almost 50% in the last year. However, the global fintech market has continued to grow revenues at a robust pace: 14% over the past two years across the board, and 21% when crypto- and China-exposed fintechs are excluded (both at a compounded annual growth rate). Governments, especially in countries such as Brazil and India, are reaping the benefits of investment in integrated digital public infrastructure, spurring dramatic growth in digital payments and innovation on top. Perhaps more notably, the industry has initiated a shift from a “growth at all costs” model to one focused on profitable growth, with margins improving by 9 percentage points on average.

Four Themes Will Shape the Future of Fintech

The report outlines four trends that will drive the industry in the coming years:

Embedded finance will be a $320 billion market by 2030. The small and medium-size business (SMB) segment will account for about half ($150 billion); the consumer segment—already humming with activity and adoption in payments, insurance, and lending—will be worth $120 billion 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 near-term benefits, while larger, more established banks will increasingly grow share over time.

Connected commerce is poised for liftoff. Connected commerce is emerging as a long-awaited killer app for banks, creating a new revenue stream, increasing customer loyalty, and enabling banks to offer a marketing channel to their SMB and enterprise customers. Using granular customer data, banks surface hyper-tailored ads to their customers; merchants then pay the bank based on either attributable sales or traffic. As core revenue streams continue to come under pressure, and as deposits risk becoming commoditized in a higher-yield environment, connected commerce hints at a future model for banks.

Open banking will have a modest impact on banking, but a greater impact on advertising. Open banking will continue to be relevant, but 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 case has emerged on the new service front. Of course, this is not to say that open banking will have no impact. But revenue pools in the connectivity layer will remain modest, with value accruing to the ultimate 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 now for productivity, with product innovation to follow. GenAI is already delivering tangible productivity gains in financial services. For GenAI in fintech, given their “digital-first” cost structures are heavily weighted toward areas where the technology is delivering huge gains—coding, customer support, and digital marketing—the impact is likely to be even more pronounced in the near term. The use of GenAI in product innovation will lag behind its uses for productivity, but is expected to follow eventually.

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

• Prudence. Seeing risk and compliance as competitive advantage
• Profit. Aiming to improve profitability by 25 percentage points
• Growth. Setting the conditions for sustainable growth across the ecosystem
  
  • For fintechs: Beginning the journey to IPO (or strategic sale) and beyond
  • For incumbents: Retail banks need to become digital engagement platforms
  • For governments: Support the creation of comprehensive and integrated digital public infrastructure

Download the publication here.

Media Contacts:

Boston Consulting Group
Eric Gregoire
+1 617 850 3783
gregoire.eric@bcg.com

QED Investors
Ashley Marshall
+1 518 577-9984
ashley@qedinvestors.com

About QED Investors

QED Investors is a global leading venture capital firm based in Alexandria, Va. Founded by Nigel Morris and Frank Rotman in 2007, QED Investors is focused on investing in disruptive financial services companies worldwide. QED Investors is dedicated to building great businesses and uses a unique, hands-on approach that leverages its partners’ decades of entrepreneurial and operational experience, helping companies achieve breakthrough growth. Notable investments include AvidXchange, Betterfly, Bitso, Caribou, ClearScore, Creditas, Credit Karma, Current, Flywire, Kavak, Klarna, Konfio, Loft, Mission Lane, Nubank, QuintoAndar, Remitly, SoFi, Wagestream and Wayflyer.