McKinsey Fintech Study: A New Paradigm of Growth

McKinsey Fintech Study: A New Paradigm of Growth

by November 8, 2023

After decades of exponential growth, the fintech sector is now facing a notable slowdown that can be attributed to several factors, including market correction, challenging macroeconomic conditions and changing investor sentiment. Looking ahead, McKinsey predicts that although the fintech industry will continue facing challenges, several massive opportunities still exist and are up for grabs.

In a new report titled “Fintechs: A new paradigm of growth”, the global consultancy firm provides an in-depth analysis of the fintech industry, delving into the sector’s evolution and exploring its trajectory towards a more sustainable and profitable future.

According to the report, in the latter half of the 2010s, the global fintech industry recorded substantial growth with venture capital (VC) funding increasing 17% year-over-year (YoY) from US$19.4 billion in 2015 to US$33.3 billion in 2020. This growth accelerated in 2021 driven by the COVID-19 pandemic, with fintech funding reaching US$92.3 billion that year, representing a 177% YoY increase.

Startup Competition venture

However, in 2022, a market correction and a challenging business environment triggered a slowdown in the sector’s explosive growth momentum, prompting a decline in funding and deal activity, a decrease in new unicorn creation, and a slowdown in initial public offerings (IPOs) and special purpose acquisition company (SPAC) listings. In 2022, fintech funding dropped by 40% YoY in 2022 to US$55 billion, the data show.

Growth opportunities in the fintech sector

Despite these challenges, fintech companies have opportunities for growth, with revenues in the fintech industry expected to grow almost three times faster than those in the traditional banking sector between 2022 and 2028, McKinsey claims.

In 2022, fintech companies accounted for 5% (or US$150 billion to US$205 billion) of the global banking sector’s net revenue, according to the firm’s estimates. By 2028, this share could increase to more than US$400 billion, representing a 15% annual growth rate of fintech revenue between 2022 and 2028, or three times the overall banking industry’s growth rate of roughly 6%.

McKinsey expects emerging markets to fuel much of this revenue growth. In Africa, Asia-Pacific (excluding China), Latin America, and the Middle East, fintech revenues represented 15% of fintech’s global revenue last year. This share is set to increase to 29% in aggregate by 2028. On the other hand, North America, which accounted for 48% of worldwide fintech revenues in 2022, is expected to decrease its share to 41% by 2028.

Fintech net revenues by region, US$ billion, Source: Fintechs: A new paradigm of growth, McKinsey, October 2023

Fintech net revenues by region, US$ billion, Source: Fintechs: A new paradigm of growth, McKinsey, October 2023

This growth will be driven by the profound digital transformation that the banking sector is currently undergoing. McKinsey highlights that digital adoption is no longer a question but a reality with around 73% of the world’s interactions with banks now taking place through digital channels.

Globally, retail consumers are recording the same level of satisfaction and trust in fintech companies as they have with incumbent banks, the report says. In fact, 41% of retail consumers surveyed by McKinsey in 2021 said that they planned to increase their fintech product exposure.

Business-to-business (B2B) firms’ demand for fintech solutions is also growing. In 2022, 35% of the small and medium-size enterprises (SMEs) in the US considered using fintech companies for lending, better pricing, and integration with their existing platforms. And in Asia, 20% of SMEs leveraged fintech companies for payments and lending.

Two verticals in the B2B fintech sector are expected to continue seeing strong traction: banking-as-a-service (BaaS) and embedded finance, as well as small and medium-sized enterprise (SME) and corporate value-added services.

In the BaaS and embedded finance area, demand will be led by customer-facing businesses looking to control their users’ end-to-end experience and create new revenue streams, the report says. Meanwhile, demand for fintech solutions targeting SMEs will continue to grow as smaller-sized businesses remain a vastly underserved segment by the traditional financial sector.

A new market reality

McKinsey notes that amid a more challenging funding environment, fintech companies must adapt to the new market reality by emphasizing revenue generation and profitability.

This should be done by following a set of rules and changing their areas of focus, the report says. These include ensuring that there is a strong and stable core business with a targeted and proven market fit before expanding, rather than trying to grow while strengthening the core; implementing strict cost management efforts; and ensuring that the profitability view is embedded across the business.

Fintech companies must also maintain the agility, innovation and culture that have been the bedrock of disruption so far, by, for example, embracing technologies such as generative artificial intelligence (AI), as well as adjusting their operating models to become for agile and flexible.

Finally, some businesses will continue to pursue acquisition opportunities, capitalizing on the VC slowdown and the global markets turmoil to snap up smaller companies at a discount. These companies are viewing mergers and acquisitions (M&A) as a means to consolidate their market position, acquire new technologies or expand into new customer segments.

A recent study by international law firm White and Case revealed that more than 55 consolidation deals have been recorded in the previous 15 months in Europe’s fintech sector, showcasing a dynamic M&A landscape. In addition, over 20 significant partnerships have been announced in the past 12 months to tap new niches and access tech capabilities.


Featured image credit: edited from freepik