Over the past decade, the fintech sector has surged from the fringes to the forefront of financial services, fueled by rapid digitization, evolving customer preferences, and robust investor and regulatory support. This unprecedented growth has profoundly reshaped financial services, driven by fintechs’ innovative, customer-centric approaches, collaborative business models, and agile teams.

As of July 2023, publicly traded fintechs boasted a market capitalisation of $550 billion—double that of 2019. The number of fintech unicorns soared to 272, with a combined valuation of $936 billion, a sevenfold increase from just five years ago. However, a market correction in 2022 slowed this explosive momentum. Funding and deal activity have declined, with fewer IPOs and SPAC listings and a downturn in new unicorn creation. The challenging macroeconomic environment has ushered fintechs into a new era of value creation, where sustainable growth supersedes hypergrowth.

Fintech Growth: Past and Present

The fintech industry experienced a capital influx in the latter half of the last decade, with venture capital (VC) funding rising from $19.4 billion in 2015 to $33.3 billion in 2020, marking a 17 percent year-over-year increase. The pandemic further accelerated this trend, with funding skyrocketing to $92.3 billion in 2021. However, 2022 saw a reversion to long-term funding trends amid deteriorating economic conditions, resulting in a 40 percent year-over-year decline in fintech funding to $55 billion. Despite this, fintech funding as a proportion of total VC funding remained relatively stable.

Looking forward, the fintech sector faces a challenging yet opportunity-laden future. Our research predicts fintech revenues will grow almost three times faster than traditional banking revenues between 2022 and 2028, driven by radical transformations in the banking industry, rapid digital adoption, and the growth of e-commerce, especially in developing economies. Three key themes will shape fintech's future: continued benefits from banking transformation, growth opportunities within an expanding financial-services ecosystem, and varying resilience across fintech verticals and growth stages.

The Next Chapter of Fintech Growth: Radical Transformation in Banking

Banking is undergoing a fundamental restructuring, with banks and nonbanks competing across five cross-industry arenas: everyday banking, investment advisory, complex financing, mass wholesale intermediation, and banking as a service (BaaS). Digital adoption is now a given, with 73 percent of global interactions with banks happening through digital channels. Consumers globally trust fintechs as much as traditional banks, with 41 percent planning to increase their use of fintech products.

A Nascent Industry in an Expanding Ecosystem

The banking industry generated over $6.5 trillion in revenues in 2022, with fintechs accounting for 5 percent of the global banking sector's net revenue. This share could grow to over $400 billion by 2028, representing a 15 percent annual growth rate, three times the overall banking industry's growth rate. Emerging markets, with their underbanked populations, will fuel much of this growth.

Not All Fintechs Are Created Equal

Funding performance varied significantly across fintechs based on their maturity and segments. Growth-stage companies (series C and beyond) saw a 50 percent funding decline, while early-stage firms saw a 26 percent increase. B2B fintech segments were more resilient, particularly BaaS, embedded finance, and SME services, which saw smaller funding declines compared to B2C segments.

Strategies for Sustainable Growth

In the current environment, fintechs must transition from hypergrowth to sustainable growth. This involves a greater focus on profitability, cost discipline, measured growth, and programmatic M&A. Achieving sustainable growth requires fintechs to refine their business models to prioritize long-term profitability over rapid expansion. This means carefully managing costs and ensuring that each dollar spent contributes to the bottom line. Fintechs need to adopt stringent cost discipline, scrutinising their expenditures and optimising their operations to eliminate inefficiencies and reduce overhead.

Measured growth, as opposed to reckless scaling, is crucial. Fintechs should aim for steady, incremental progress that aligns with their strategic goals, ensuring that growth is manageable and sustainable. This approach involves setting realistic targets, continuously monitoring performance, and being agile enough to adjust strategies as market conditions evolve.

Programmatic mergers and acquisitions (M&A) play a significant role in this new phase. Instead of pursuing aggressive and potentially risky acquisitions, fintechs should engage in thoughtful, strategic M&A activities. This means identifying and acquiring companies that provide clear synergies, such as complementary technologies, new customer segments, or enhanced operational capabilities. These acquisitions should be integrated in a manner that preserves the acquired company’s value while enhancing the acquirer’s overall business model.

In addition to these strategies, fintechs must invest in building robust governance frameworks and risk management practices. As they grow, maintaining compliance with regulatory requirements becomes increasingly important to avoid legal pitfalls and build trust with stakeholders. By focusing on these elements, fintechs can navigate the current environment more effectively, ensuring that their growth is not only rapid but also sustainable and resilient in the face of market fluctuations.

Cost Discipline

With the days of abundant capital behind, fintechs are prioritizing cost management to achieve profitability. Successful cost management, rather than revenue growth, differentiates profitable fintechs from nonprofitable ones. For instance, Paytm achieved breakeven ahead of schedule through disciplined cost management and revenue growth across its businesses.

Measured Growth

Sustainable growth strategies involve building a strong core, expanding into adjacent segments and geographies, and occasionally shrinking to grow. For example, focusing on the local market and developing a healthy core business can drive significant growth, as seen with OPay, which expanded across financial services after establishing a strong presence in Nigeria.

Programmatic M&A

Thoughtful acquisitions and partnerships can help fintechs swiftly build new capabilities and pivot towards new revenue streams. By acquiring or partnering with complementary businesses, fintech companies can enhance their product offerings, enter new markets, and leverage synergies to drive growth. For example, Block’s acquisition of Afterpay in 2022 exemplifies how a strategic acquisition can accelerate a company's objectives. This acquisition allowed Block to integrate Afterpay’s buy-now-pay-later (BNPL) services into its existing ecosystem, thereby expanding its consumer base and providing a seamless experience for both merchants and customers. Moreover, the move positioned Block to better compete in the fast-growing BNPL market, demonstrating how strategic acquisitions can align with broader business goals and fuel innovation. Similarly, partnerships with established financial institutions or technology providers can enable fintechs to tap into new technologies, enhance operational efficiencies, and deliver more comprehensive solutions to their customers.

Keeping the Culture Alive

Fintechs have thrived on innovation and differentiation, leveraging emerging technologies to anticipate and solve customer needs. To maintain their competitive edge, fintechs must continue to innovate and adapt to technological advancements, such as generative AI. Additionally, attracting and retaining top tech talent remains crucial, especially as fintechs navigate a tighter labor market and shifting perceptions of risk.

In conclusion, the fintech sector stands at a critical juncture. By focusing on cost discipline, measured growth, and continuous innovation, fintechs can navigate the current economic challenges and emerge stronger, continuing to redefine the financial services landscape for the future.