Fintechs had a tough time of it in 2023, operating in a challenging macroeconomic context with subdued funding forcing them to focus on accelerating their path to profitability while honing cost controls. That macroeconomic context is likely to remain constant for the near future, with elevated interest rates and heightened regulatory scrutiny around capitalization and risk management policies having a strong influence on 2024 Fintech activity.
While there will still be those that will access significant funding to turbocharge their offerings, it’s a busier marketplace where the competition for capital is likely to be fierce.
Looking to the future, it’s possible to roughly group Fintechs into two cohorts: those that are established, and those that are still building towards that status.
Established Fintechs have already implemented cost control measures and have either achieved profitability or they’re well on their way to it. Their strategy for 2024 is likely to be led by shifting their focus back to growth, from just being on cost control and profitability. Growth strategies could be focused on new client acquisitions in core areas, diversification into new product categories, and identifying and executing ways to monetize their existing client bases further.
Fintechs that are still establishing themselves are still in the process of implementing cost controls, and their path to profitability is still some time away. In this category, there are few Fintechs with proven business models – they’re likely to be more niche-focused or have hero products with a sizeable base. This will be the year that they will need to consolidate their operations, tighten their risk policies and focus more on streamlining operations and cost bases. Fintechs with proven business models may even attract funding at lower valuations if their founders are willing to accept more conservative valuations for their offering during the fund-raising process.
There are likely to be three core areas of focus for Fintechs seeking to achieve or maintain sustainability during 2024: cost discipline, measured growth and regulatory and corporate governance.
1. Cost discipline
According to McKinsey, strict cost management, and not revenue growth, is a key differentiator for Fintech profitability, and key priorities should include shifting focus from signing up more customers, to signing up the right customers.
Make marketing dollars as effective as possible by identifying high-value prospects and doubling down on keeping brand promises once they’re made. It’s also worth noting that good customers are low-risk customers, and investing in solutions that can quickly separate these from their high-risk counterparts is a potential path to profitable growth. It is also imperative to filter out fraudulent profiles at the top of the funnel, while providing a friction-right experience to those who remain.
Access to robust data – whether internal or external – is key to successfully adopting the above areas of focus.
2. Measured growth
Sustainable, profitable growth, without compromising on growth plans altogether is going to be key to value creation in 2024. This can be achieved by ensuring that the core business is viable, prioritizing existing customers and maximizing customer lifetime value. There is meaningful opportunity for Fintechs (especially those who are established in their core areas) to again explore new adjacent segments or geographies. It will be even better if these ideas are self-funded rather than turning to external capital.
3. Regulatory and corporate governance
Innovating on the right side of regulatory frameworks is fundamental, and product and solution design should focus on regulatory compliance from Day One. It has always made good business sense to do so, but as Fintechs become more mainstream, more regulatory scrutiny is likely.
Business models must comply with the prevailing regulatory environment, and it’s worth investing in and adhering to risk, compliance and security standards. Even more important is to actively engage with the regulator in each operational environment with a view to supporting and shaping the policy narrative.
There is robust scope for Fintechs to further disrupt the financial services sector – if they focus on these priorities.
With 27% of the world’s population remaining unbanked and a further 50% being underbanked according to the World Bank Financial Inclusion Project, addressing these consumer needs remains a growth opportunity.
The increased proliferation of smartphones is expanding digital channels and is generating volumes of valuable data. Telcos in many developing countries are leveraging this data to roll out financial services solutions themselves, or they are helping Fintech businesses better understand their customers.
Recent TransUnion forecasts suggest continued robust demand for consumer credit, including BNPL, embedded finance, and wealth management. It’s essential to factor in these consumers’ increasing demands for personalized services. Fintechs can leverage emerging technologies such as artificial intelligence (AI) and artificial generative intelligence (AGI) to gain further insights into current and prospective customers and provide more personalized services. However, it’s important that they invest in robust fraud detection and prevention capabilities, as fraudsters also take advantage of new technologies.
It’s more important than ever for Fintechs to deeply understand how their customers spend, save, and invest, and how they manage their risk profile. With this in mind, there’s a good chance that Open Banking will continue to gain traction in 2024.
There’s a strong possibility that 2024 is a year of evolution rather than of revolution – a year of consolidation, mergers and acquisitions, and even of down-rounds (when a company sells shares of its capital stock at a price per share less than earlier financing), with established Fintechs growing robustly to gain further market share. Some of those still focused on establishing themselves will reach a firm footing if they focus on the right priorities – but some will continue to struggle and may even perish. This will result in a healthier Fintech ecosystem – and a more solid grounding for the future.
