Following an exciting period of hypergrowth, 2023 was widely recognised as being the year of consolidation for fintech, as the market matured and countless industry players pressed on with digital transformation efforts.
McKinsey & Company contends that fintech is now in the midst of a new era of value creation, where firms are scrambling to achieve sustainable, profitable growth.
So, just how can businesses sustain and enhance their influence on customers, the broader financial ecosystem and the global economy?
Based on its research, McKinsey & Co has come up with a number of key themes shaping the future of the sector.
Cost discipline key for fintechs
In its research, McKinsey highlights that fintech firms placed far more emphasis on rapid growth than they did managing costs during the aforementioned period of hypergrowth, when they had easier access to cash and funding opportunities came around more frequently.
Now, striking the right balance between cost savings, customer satisfaction and continued growth has risen to the top of priority lists, with leaders exploring various avenues in a bid to lower expenses and achieve profitability.
McKinsey’s research finds 50% of public fintechs were profitable in 2022, and the key differentiator between profitable and non-profitable fintechs was cost management, as opposed to revenue growth.
“Successful implementation of cost management efforts is the key for fintechs in their next phase of evolution,” write the authors.
“While fintechs establish a clear focus on costs, they should also consider adjusting how they operate, thereby creating a more agile and flexible organisation that can deal with the current environment.”
In fact, four in five fintechs interviewed by McKinsey reported making changes to their operating models, with two-thirds of those citing a focus on profitability and sustainable cost structure as a dominant factor.
Growth must be measured
McKinsey’s assertion is that today’s fintechs can grow sustainably by taking three steps:
- Build a strong core
- Expand into adjacent industries and geographies
- Shrink to grow
Determining which route – or routes – to take will, evidently, depend on the distinct circumstances of each business in the process of reshaping their growth strategy.
This choice, McKinsey points out, is underpinned by a need to focus on the local market and develop a healthy core business.
The consulting giant’s research indicates companies with a focus on core business and a strong home market are 1.6 times more likely to generate returns surpassing that of their industry peers.
“Fintechs must tailor their value propositions to their focus markets,” the researchers add.
“Cross-selling will likely drive growth for fintechs in emerging economies, while those in developed countries will likely see greater growth from capturing new customers.
“Across the competitive landscape, as markets are highly heterogeneous, a dedicated strategy for each region is recommended.”
Read the full report – Fintechs: A new paradigm of growth
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