What is fintech (financial technology)? | McKinsey

These days, you’re almost more likely to see the inside of a bank branch in an old movie than you are in real life. But take a look at your phone: there are probably at least two money apps on your home screen—maybe more. According to McKinsey research, this is just one sign of a new era in payments. What’s one major development behind this shift? Short word, big concept: fintech.

Max Flötotto is a senior partner in McKinsey’s Munich office; Brian Ledbetter is a senior partner in the London office, where Tunde Olanrewaju is the managing partner of McKinsey’s UK, Ireland, and Israel offices; Alexis Krivkovich and Marie-Claude Nadeau are senior partners in the Bay Area office; and Eckart Windhagen is a senior partner in the Frankfurt office.

Fintechs—short for financial technology—are companies that rely primarily on technology to conduct fundamental functions provided by financial services, affecting how users store, save, borrow, invest, move, pay, and protect money. Most fintechs were launched after 2000, have raised funding since 2010, and have not yet reached maturity. They make it not only possible but also easy to move money between accounts, people, countries, and organizations. There’s no typical fintech company: fintechs include start-ups, growth companies, banks, nonbank financial institutions, and even cross-sector firms. Examples range from peer-to-peer payment services such as Venmo and Zelle to automated portfolio managers and stock- or cryptocurrency-trading apps such as Robinhood and Coinbase.

Fintech came to prominence around 2010, primarily in the payments space. Square, for instance, which was founded in 2009, enabled small companies or sellers to accept credit cards via a mobile device. Today, fintech disruptions have expanded to every corner of finance—even areas once assumed to be safe from digital threat. Fintech is spreading fast: in the United States, for example, almost one in two consumers in 2021 used a fintech product—primarily peer-to-peer payment products and nonbank money transfers. Fintechs also raised record capital in the second half of the 2010s: venture capital funding grew from $19.4 billion in 2015 to $33.3 billion in 2020.

But recently, the luster has worn off a bit: in 2022, a market correction caused a slowdown in fintech’s explosive growth momentum. As a result, fintechs have had to adjust to lower valuations and decreased willingness on the part of venture capital firms to fund companies with low margins. Rather than sprinting toward the hockey stick of old, fintechs today are focused on sustainable, profitable growth. Banks, in response, have seized the opportunity, developing their own fintech-informed digital products and services. In the future, competition for client deposits and balances will likely intensify.

But before we look into the future, let’s first explore the past and present. What is fintech, what kinds of convenience does it offer, and where in the world is it being used? Read on to find out.

Banking is in its second era of digitization, according to McKinsey senior partner Brian Ledbetter. Traditionally, banks were anchored on a customer service arrangement that relied on branches and call centers. He says, “If you needed something, you’d either ring on the phone or go into the branch and get it done. Then, with the advent of smartphones, we discovered that mobile and digital technology was the primary way to engage with customers. . . . And so we had a boom in apps and automated journeys, which banks hooked up to their existing systems.”

This has led to a problem of technical debt: When banks set up this first phase of digitization, they did so with the technology they had at the time. Over time, these older systems have become obsolete. This created an opportunity for more agile fintech companies to disrupt business as usual, offering customers less clunky, more convenient ways of doing business. Today, banks are at an upgrade point for both the front and back ends. And their institutional capacity may be a benefit when it comes to adopting and deploying solutions based on rapidly advancing new technologies.

According to our research, three trends will shape the next phase of fintech growth. First, fintechs will continue to benefit from the radical digital transformation of the banking industry and e-commerce growth around the world, particularly in developing countries. About 73 percent of the world’s interactions with banks now take place through digital channels. B2B firms are also demanding more fintech solutions than ever. To capitalize on the demand, fintechs will need to keep up with evolving regulations and ensure they have adequate resources to comply.

Second, despite short-term pressures, fintechs still have room to achieve further growth in an expanding financial-services ecosystem. McKinsey estimates that fintechs will grow at roughly three times the overall banking industry’s growth rate between 2022 and 2028. Emerging markets will fuel much of this growth, particularly in Africa, Asia–Pacific (excluding China), Latin America, and the Middle East.

Finally, some fintechs are proving more resilient during the current market correction than others. Companies in the growth stage (series C and beyond) showed the highest sensitivity to 2022’s downturn. Fintechs in the early and pre-seed stages were more resilient. Funding for B2B fintechs was more resilient than that for B2C ones. Banking as a service (BaaS) and embedded finance, and small and medium-size enterprises (SMEs) and corporate value-added services were the verticals least affected by the downturn.

Over the next few years, we predict that the following seven technologies will advance fintech development while shaping the competitive landscape of finance:

Fintechs today are operating in a new environment. They can no longer afford to focus on growth at any cost. Given new liquidity constraints, fintechs are emphasizing profitability, not just growth in customer adoption numbers or total revenues. In 2019, McKinsey conducted a study of the growth patterns and performance of the world’s 5,000 largest public companies over the preceding 15 years. Based on our analysis, we expect four pathways to deliver the most impact for fintechs:

Financial data is pretty self-explanatory. It’s records of what we spend, save, and borrow, from mortgage payments to what we paid for this morning’s latte. In the past, banks have been the keepers of our financial data, and the idea of sharing it with anyone probably made us a little uncomfortable. Now, some of that data is being shared with third parties. This is a trend called open financial data or open banking.

Let’s make one thing clear: none of this happens without consumer consent. But when consumers do consent, they allow a new and growing set of actors—both financial and nonfinancial—to access their accounts and data to offer new products and services based on what they might need. This movement is still in its infancy but has big potential to reshape our bank accounts, credit cards, payments, mortgages, loans, and even insurance policies.

The adoption of new digital-banking habits, in part as a result of fintech disruptions, appears to have accelerated open banking.

Fintechs have successfully highlighted existing financial institutions’ weaknesses—in digital user experiences as well as in operational efficiency. It almost doesn’t matter how much market share fintechs take from incumbents when they have so successfully recast customer expectations. At this point, it’s imperative for incumbents to transform to meet the new reality informed by fintechs. Here are seven actions for incumbents to consider:

The right answer is probably a combination of the above, implemented after careful planning.

Kenya has one of the highest levels of fintech penetration in the world, propelled largely by the explosive success of one fintech: M-Pesa. Launched in 2007, M-Pesa made it easier for Kenyans—and later, people in other countries—to use their mobile phones to reliably and quickly pay one another. It was quickly adopted by most Kenyans.1 William Jack and Tavneet Suri, “The long-run poverty and gender impacts of mobile money,” Science, December 2016, Volume 354, Number 6,317.

Between 2020 and 2021, the number of tech start-ups in Africa tripled to about 5,200 companies—and just under half of these are fintechs. Cash is used in about 90 percent of transactions in Africa, which means there is huge room for growth. If the sector overall can reach similar levels of penetration to those seen in Kenya, we’ve estimated that African fintech revenues could reach eight times their 2022 value by 2025.

Looking ahead, we anticipate that the growth opportunity in African fintech will likely be concentrated in 11 key markets: Cameroon, Côte d’Ivoire, Egypt, Ghana, Kenya, Morocco, Nigeria, Senegal, South Africa (home to the continent’s most mature banking system), Tanzania, and Uganda. Together, these markets account for 70 percent of Africa’s GDP and half its population.

We don’t predict the path ahead to be smooth. But if stakeholders can work together to build on the momentum of recent years, the prospects for African fintechs are good.

Fintech in Europe was hit hard by COVID-19 and the resulting economic uncertainty. But in the long term, fintechs continue to gain in strength and relevance for customers and the economy. In each of the seven largest European economies, as measured by GDP, at least one fintech ranks among the top five banking institutions.

But fintech has not progressed in each European market at the same speed. There’s a wide divergence of maturity and performance among countries, with a substantial gap between the top one-third and the rest. Two countries in particular stand out for their superior fintech ecosystem performance: Sweden and the United Kingdom. If fintech ecosystems in all European countries were to perform as well as the best in the region, the upside would be substantial: the number of fintech jobs would grow to more than 364,000, the volume of funding would more than double to almost €150 billion, and valuations would balloon to almost €1 trillion.

For the European financial system to achieve the potential made possible by fintech, stakeholders such as public institutions, incumbents, and fintech upstarts will need to combine their strengths by setting up appropriate enabling structures and mechanisms.

Fintech has boomed in the Middle East, North Africa, and Pakistan (MENAP) in recent years: investor backing increased by around 36 percent annually from 2017 to 2022.

While 2022 brought with it a global drop in fintech valuations, we believe the market in MENAP is likely to continue growing. By 2025, we estimate that fintech revenue in MENAP could be up to $4.5 billion.

Realizing this potential is another story. For fintechs to continue to expand their roles in the daily lives of consumers and businesses in MENAP, they’ll need to invest capital, work with regulators, and cultivate talent and partnerships.

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