We all love Fintech

It used to be we were more likely to get divorced than change our bank. Much like the very institution of marriage, the attachment we once had to our ‘one and only’ provider of all things financial has gone.

With the near ubiquitous ownership of smart phones and universality of internet access, two of the necessary conditions for Fintech adoption, we appear to have embraced Fintech products without reservation.

How and why has this happened?

The digitisation of finance

The groundwork was undertaken in the early 1990’s by the legacy banks who began digitising financial data. This is considered the first era of digitisation. Spurring on a period of product innovation and cost reduction. Now, unfortunately for the legacy banks, the technology they used is largely technically obsolete and has created a technology debt that the new Fintech companies are able to exploit.

Fintechs can harness the benefits newer technologies offering seamless integration and better data storage and processing capabilities provide. The combination of technology and data analysis, particularly provided by cloud computing, removes a significant barrier to entry that existed previously. This in turn enables smaller and more inventive entities access to the market. Delivering to users more appealing, more specialised, more embedded, less costly services and products has resulted in these dynamic Fintechs capturing an ever greater share. 

Growth

The Fintech industry has grown substantially from its origins in 2010.

Using the World Bank’s definition of Fintech “advances in technology that have the potential to transform the provision of financial services, spurring the development of new business models, applications, and processes, and products.” investment into Fintech’s worldwide rose from under $US10 bn per year prior to 2013 to $US122 bn per year in 2020. A market correction in 2022 has caused a slowdown in fintech’s phenomenal growth trajectory, but meaningful growth is still being recorded. Boston Consulting Group estimates Fintech will grow from a current 2% share of the $US12.5 tn global financial service revenue to 7% by 2030. 

Venture capital is however more cautious about investing in companies with low margins.

Lower valuations and increased focus on profitability has meant Fintech’s have had to look closely at their cost base.

McKinsey has identified three themes that will shape growth for Fintechs over the coming few years.

First, the digital transformation of banking services and processes will continue. An area that is likely to rise more in prominence is regulation. As more and more actors enter the market and these actors become more critical in the financial infrastructure, Fintechs will need to adequately resource this activity to comply.

Second, atomisation and unbundling of products and services will continue to deliver solid growth. Indeed it is expected that between 2022 and 2028, Fintechs will grow three times faster than the legacy banking sector.

Third, B2B Fintechs and those in the early stage of growth are better positioned for growth than those in the B2C sector or who have exited the early growth phase and are positioned in their consolidation period.