Fintech could be a $1.5 trillion industry by 2030
As we go through months of falling valuations and funding rounds, the mood can be bleak in the fintech community.
According to a new report conducted by QED Investors and Boston Consultancy Group (BCG), since April 2022, valuations have fallen by 60% around the world.
Although early-stage companies still see some funding, the more mature the business, the more challenging it has become to raise money. Rising interest rates have taken their toll, and with Federal Reserve Chairman Jerome Powell announcing further hikes yesterday, concern is rippling through the industry.
However, the report dedicated only a few paragraphs to last year’s blip, stating that it could only represent a short-term correction.
“Essentially, we are witnessing a shakeout and tempering of enthusiasm for growth-stage companies that have unclear product and/or market fits…Some of this filtering is good for the industry, as weaker business models are stressed and effectively weeded out,” it said that in the report.
The challenging environment has prompted fintech leaders to shift their focus, moving from growth at any cost to strengthening fundamentals – a move that could do wonders in the years ahead, growing sixfold from $245 billion to $1.5 trillion by 2030.
Still ripe for disruption
Fintech became a disruptor for the financial services industry, an area that QED and BCG feel remains fertile for disruption.
“This report highlights something that, anecdotally, QED has witnessed first-hand: that the story of fintech is in Chapter 2, not Chapter 8, and that much of this powerful narrative still remains to be written,” said Nigel Morris, Managing Partner of QED Investors and co-author of the report.
“Fintech sits within financial services, which is a massive, profitable industry, and the opportunity before us to democratize access to these services on a global scale is huge.”
The report stated that the financial services industry is one of the most profitable segments of the global economy. It represents $12.5 trillion in annual revenue pools and creates an estimated $2.3 trillion in annual net income.
However, many issues still exist where fintech can have a significant impact.
“The fintech journey is still in its early stages and will continue to revolutionize the financial services industry as we know it,” said Deepak Goyal, managing director and senior partner at BCG and co-author of the report.
“The customer experience is still bad. Over half the world’s population remains unbanked or underbanked, and technology continues to unlock new use cases by leaps and bounds. All stakeholders must therefore seize the moment. Regulators must be proactive and lead from the front. The incumbents should partner with fintechs to accelerate their digital journeys.”
New technology has not yet had its full effect
To solve persistent problems, technology has been constantly evolving. Emerging technologies, filled with potential, have entered the fintech space to spark new approaches or strengthen existing ones.
The report pointed to generative AI; API-based open connectivity; DLT; quantum and edge computing; and embedded hardware Internet of Things (IoT) and biometrics that have the most potential in the fintech space.
Generative AI is a buzzword that is now known to many. While currently making headlines as a toy for dystopian science fiction, the technology is seen by QED and BCG as a tool that can go far beyond customer service supercharging. According to the report, it will “assist incumbents by helping them leapfrog their technical limitations”, fight fraud, increase security, facilitate “financial gatekeepers” and streamline labour-intensive industries.
API-based open connection, or “open banking 2.0,” can also have significant results. Already the benefits of opening up access to financial information have influenced fintech. The continued development could strengthen the global interaction between financial institutions and improve their approach to fraud, guarantees and risk assessment.
Blockchain and Distributed Ledger Technology (DLT) is already making waves in financial institutions, with many building infrastructure despite a cooldown in crypto. Worldwide, the technology can be used in international settlements and creates a platform that is predicted to be fast, cheap and secure, eliminating middlemen using smart contracts. These capabilities can lead to new and streamlined services and financial tools. The tokenization of complex real-world assets and the regulation of digital assets continue to be key to unlocking their potential.
Quantum and Edge Computing, while the “next big thing” for quite some time, they maintain their potential as formidable tools when applied to financial services. With the ability to process significant amounts of data, the technology can optimize processes and greatly influence approaches to fraud and underwriting.
Embedded hardware IoT and biometrics can be used to streamline and adapt financial products. IoT’s networking capability allows information to be sent to and received from internet devices, such as kitchen appliances and smart watches. It can be used to affect insurance and personal loans. Facial recognition can make payment experiences more efficient.
Onwards and upwards
Given the potential of new technologies, financial institutions may find ways to serve customers far beyond their current scope.
Fintech has been uniquely positioned to target poor customer service. In financial services, a sector that continues to have low online promoter rankings, the average score for fintechs more than triples that of banking.
In addition, over three quarters of the world’s population remains unbanked or underbanked. While levels in North America are the lowest, Asia, LatAm, the Middle East and Africa all show significant potential that is yet to be addressed.
North America, the forerunner for now, generates much of fintech’s global revenue, closely followed by Asia-Pacific (APAC). However, APAC continues to be an underpenetrated market for fintech, with nearly $4 trillion in financial services revenue.
The report predicted that by 2030, APAC would have overtaken North America as the most prominent fintech market, with a projected annual growth rate of 27%. They felt that much of this growth would be driven by local entities, addressing access issues and driving financial inclusion.
Much of the growth is expected to come from China, India and Indonesia, addressing the huge volumes of underbanked populations and a high number of SMEs. Already leaders in the development of super apps, China is expected to lead APAC’s growth in fintech. India’s significant fintech activity, sympathetic regulatory regime and changes in demographics and GDP make it a formidable player.
North America is still forecast to grow significantly, accounting for 32% of global fintech revenue through 2030. This is expected to be driven mainly by B2B and B2BX solutions, the expansion of fintech to include more services and the country’s exchange pool. Open banking has yet to take hold, potentially fully triggering increased innovation.
Europe will also see continued growth, supported by regional expansion. The report highlighted the impact of supportive regulation, which increases revenues by 21% between 2023 and 2030. Here, too, open banking is expected to have a significant impact.
Additionally, LatAm and Africa are likely to see the fastest growth. While now fintech penetration is already increasing; it is predicted to accelerate, attracting international investment while experiencing increasing use by unbanked and underbanked populations.
Brazil in particular, with its production of industry players such as Nubank and Creditas and systems such as the PIX instant payment system, is likely to stimulate this growth.
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The report predicted a “surge” of African and Middle Eastern start-ups, innovating to attract a tech-savvy population, particularly in smartphone-based solutions.
Not without demands
However, this expected growth is conditional, and the report warns that risks and uncertainties remain.
Regulation is seen as a sticking point where a balance must be struck to promote ongoing innovation and adoption. The report read: “The future growth of fintech will require regulators to act with urgency and thoughtfulness more holistically,” moving away from the reactionary approach of the past.
Trust is also a significant factor, and it was stated that the industry faces reputational risks that could intensify. Data leaks were an area in particular that could cause damage to customer loyalty and ongoing adoption.
In addition to this, the risk for larger established companies with deep pockets in the face of a challenging financing environment can inhibit growth through anti-competitive practices. “There are essentially four groups of stakeholders in the fintech universe: regulators, fintechs themselves, incumbents and investors,” the report said.
“The growth and success of the fintech sector will largely depend on how these four stakeholders can work together for the long-term benefit of the global financial sector and the billions of customers it serves.”
