Why Fintech is the key to the future of banking

In just two short decades, fintech – a blend of “finance” and “technology” – has exploded onto the scene and revolutionized the financial services industry as we know it. This dynamic sector has been fueled by the various innovations that have shaped a generation, each seemingly more game-changing than the last.

Despite the sector’s rapid rise, fintechs on average lost more than half of their market capitalization in 2022 – a drop we believe is a short-term correction in an otherwise long-term positive trajectory, as the industry’s fundamental growth drivers have not changed. The general financial industry is huge and very profitable, but struggles with innovation and customer experience. More than half of the world’s population remains unbanked or underbanked, and technology continues to unlock new uses by leaps and bounds.

The fintech sector, which currently accounts for just 2% of global financial services, is projected to reach $1.5 trillion in annual revenue by 2030, accounting for nearly 25% of all bank valuations worldwide. With 42% of all incremental revenue, the largest market is estimated to be Asia-Pacific (APAC), especially emerging Asia (China, India and Southeast Asia), where fintechs will help expand financial inclusion. North America, the largest fintech market, will follow APAC and remain a critical hub for innovation. Europe and Latin America will continue to experience strong growth – driven by supportive regulators – and Africa can jump on the path to a new financial ecosystem, unencumbered by legacy infrastructure.

While payments led recently, we expect B2b (serving small businesses) and B2B2X (B2B to any user) to lead next. Fintechs serving B2b have plenty of room to disrupt, as small and medium-sized enterprises (SMEs) worldwide have an estimated $5 trillion in annual unmet credit needs. As companies across industries offer more financial services and incumbents struggle to keep up with the pace of innovation, B2B2X (including embedded finance) – which already accounts for 25% of all fintech revenues – is expected to become increasingly relevant to meet the growing the demand for fintech solutions. Dispersed businesses (e.g. lending platforms and neobanks), disruptors that offer apps and software that streamline online and mobile banking services, are most likely to be seriously challenged in developed markets, where they will need access to stable and affordable sources of deposits in order to reduce capital costs theirs (e.g. by acquiring a banking licence).

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In contrast, emerging markets are expected to continue to see disruptive full-stack models reign as they expand financial inclusion. Large, under-penetrated segments such as insurance and wealth management will continue to see disrupter models challenged, but B2B2X (enablers) will be able to seize significant opportunities. This expectation of growth is of course not without risks – particularly regulatory, reputational and macroeconomic.

All stakeholders must therefore seize the moment. Regulators must be proactive and lead from the front to develop policies that create a collaborative, safe and open financial ecosystem. Among many potential actions are creating a pathway to intermediate financial licenses (eg the e-money license in the UK) and developing digital infrastructure for public goods (eg the Unified Payments Interface, or UPI, in India). The incumbents should work with fintechs to accelerate their own digital journeys and keep pace with consumer expectations. Fintechs may find that there is no better time than now, during the “fintech winter”, to play offensive – as they tighten their belts to stay in the game. Some investors are choosing to build long-term positions within the sector as fintech valuations have undergone a correction.

This report, co-authored by BCG and QED Investors, is a unique and comprehensive study that aims to provide a deep understanding of fintech’s future landscape globally, including data-driven projections by segment and region. We explore the latest trends, challenges and opportunities in the global fintech market, focusing on key regions such as APAC, North America, Europe, Latin America and the Middle East and Africa. The report analyzes the growth of fintech companies across various subsectors, including payments, lending, deposits (including neobanking), insurance, wealth management and financial infrastructure. We also examine the regulatory environment for fintech companies and the impact of new technologies such as artificial intelligence (AI), API-based (application programming interface) open connectivity and distributed ledger technology (DLT). We believe that the insights presented in the report – which is based on extensive research and interviews with industry experts, fintech startups, investors and regulators – will provide valuable information for entrepreneurs, investors, decision makers and incumbents in both the fintech sector and the overall financial industry.

One of the key questions being asked by stakeholders in the financial ecosystem concerns the state of fintech evolution: have most of the major breakthroughs in fintech happened to date, or are we just at the beginning of the fintech journey? While we at BCG and QED do not profess to have a crystal ball, we strongly believe that fintech is not just a passing trend, but a fundamental force that will continue to transform the financial landscape for years to come. So buckle up – the fintech journey has just begun.