Growth Of Fintech: Evolution Of Finance Industry

In the last few years, the growth of fintech companies has taken the world by storm. As per McKinsey and Co., the market capitalization of fintech companies grew by 200% from  2019 to 2023; in July 2023, the market capitalization of financial technology companies like  Visa, Paypal, etc., reached $550 billion. The report further mentioned that the combined valuation of more than 272 fintech unicorns was around $936 billion during the same period.

As we move ahead in time, innovative financial technologies are reshaping the finance industry and have propelled fintech companies from the tassels to the forefront.  

Growth Of Fintech: Then And Now

The fintech industry saw phenomenal growth in the second half of the last decade, with Venture Capital funding growing from $19.4 billion in 2015 to $33.3 billion in 2020, marking a striking rate of 17% Y-O-Y (year on year) basis.  The global pandemic accelerated digitalization in various sectors, and investors have become more bullish about fintech solutions. They increased their investments by 177%, and the fintech companies received an investment of $92.3 billion. However, in 2022, the growth of fintech industry faced a setback because of the geopolitical conditions and the worsening condition of the world economy.  In 2022, publicly traded companies lost billions of dollars in market valuation, and VC funding also hit the down road. VC funding in financial technologies companies dropped by an astounding 40% from $92 billion to $55 billion. 

Many people thought this might be the beginning of the downfall of thriving fintech companies, but this is not true. If we look at the average growth of the fintech industry and the funding it has received in the last five years with the proportion to other sectors. There has been a drop of only 0.5%, and funding has remained stable at 12% of the total VC funding across different sectors. However, not every fintech startup receives the same amount of funding. 

How Funding Differs For Every Fintech Business?

Every fintech startup didn’t receive the same level of funding. It majorly depends on 2 factors – maturity stage and verticals. Let’s look at the factors closely:

Maturity Stage

In the past few years, it has been seen that relatively younger startups have received more funding than startups that were ahead on the maturity scale. It was the common belief among investors that young startups (seed or pre-seed stage startups) have more time and resilience to deal with economic downturns and recover losses before reaching the maturity stage. As per McKinsey and Company, the funding for fintech companies who are on series c or beyond fell by 50%, while it increased by 26% for the companies who were in their pre-seed or seed stage, therefore accelerating the growth of fintech companies that are at pre-seed level. 

Verticals 

From the period of 2018-2022, funding for the B2B segment grew by 25% yearly! These fintech companies provide innovative solutions to the problems posed by legacy banks, such as limited flexibility, slower speed, and high costs. This drove businesses to adopt these off-the-shelf solutions provided by digital natives for services such as payments, open banking, and core banking technology.

Even if we look at the data from the last few years, the growth of fintech startups in the B2B segment witnessed a lesser decline than that of startups in the B2C segment. Especially two verticals, BaaS and embedded finance, and (2) SME and corporate value-added services, which had the least decline in funding. 

These two verticals recorded 24 and 26 percent year-over-year funding declines, which is far less than a 50% drop in the funding for payments-focused fintechs. However, startups based on payments and lending still received the largest shares of total fintech funding.

Revenue Growth Of Fintech Companies

In its report, McKinsey & Company mentioned that revenue growth in the fintech space will grow three times faster than banking financial revenue in the coming six years, from 2022 to 2028. In 2022, fintech generated $150 billion to $205 billion, which is equivalent to 5% of the total global banking net revenue. This revenue is anticipated to reach $400 billion by 2028, showing a remarkable growth of 15% yearly!

The emerging economies will play a significant role in the growth of fintech in the coming years, and it is also believed that North America accounts for 48% of the total revenues of fintech around the globe, which will fall to 41% in 2028 due to growth of fintech in emerging markets. While this is a good thing, the growth of these fintech companies can receive a backlash from these economies due to a lack of access to traditional banking services. 

Ending Note

Looking at the market trends and economic factors, the growth of fintech companies largely depends on the sustainable growth mechanism they adopt. Previously, fintech startups were rewarded for doing anything for growth; however, the dynamics have changed. For fintech companies to grow and thrive, they must focus more on sustainability, the addressable market, and profitability. 

Leave a Reply