NEW YORK, N.Y. —The fintech world has been through months of turbulence, with funding rounds depleting and valuations with them. You’d be forgiven for feeling less than optimistic.
However, QED Investors and Boston Consulting Group (BCG) published a report last week that could show the light at the end of the tunnel – maintaining that the past year’s downturn is a bump in the road.
“When we were having conversations with our investors, one of the questions that they asked and were wrestling with was, Where are we in this fintech evolution,” said Nigel Morris, Co-Founder and Managing Director at QED.
He addressed the crowd today as one of the first keynotes on Day One of Fintech Nexus USA, outlining we are only at Chapter Two, not Chapter Eight of fintech’s evolutionary story.
Related:
Recent crash – a normalization
“Fintech has had an amazing journey since the onset of QED 15 years ago,” he continued. “Fintechs were growing, they were capturing share, they were satisfying customers, they were working on the unit economics, and valuations were going up.”
He explained that fintech had grown so much that companies were soon seen in the top ten of most valuable financial institutions. The onset of the global pandemic accelerated the opportunity for further evolution of digital solutions.
“We were all predicting a recession,” he continued. “The government stimuli put us in a position where that did not happen. What did happen was a step change function into digital. “
“Businesses that previously were delivered analog, face-to-face, were now being cannibalized by digital business models, and they were emerging really fast.”
While the past year had seen dropping valuations, Morris said that he believed this to be simply a correction from the initial hype.
“When that started to happen, we saw a huge amount of FOMO in the market,” he said. “And we saw a huge number of firms; hedge funds come rushing into fintech and betting on the future, from an investment perspective.”
“Now it’s come crashing down as we move to a normalization for an old equal equilibrium.”
The outlook is bright
Despite the “normalization,” Morris remained optimistic for the future.
“When people crossed that Rubicon, towards digital, they don’t go back to analog,” he said.
He explained that financial services continued to be significantly profitable globally, with an estimated profit margin of 18% on $12.5 trillion of revenue. “If you use that 18% margin number, the profitability of financial services worldwide is over $2 trillion—around $2.3 trillion, which is higher than Italy’s GDP. And just behind the GDP of France,” he said.
Of this, fintech makes up 2% of the worldwide financial services revenue, currently around $245 billion, and 9% of financial services valuation. As the financial services sector grows a projected 6% CAGR by 2030, fintech’s share is predicted to grow with it, increasing its penetration significantly.
Within the financial services sector, both large and profitable worldwide, fintechs fared exceptionally well in customers’ eyes.
“You see net promoter scores (for fintechs) in the 80s. And above, pretty much all of QED’s portfolio companies were above 70, whereas the incumbents are at 23…fintechs are really liked at a much greater level. They may not be trusted in the same way, but that’s a different issue that is wrapped up in it.”
He explained that fintech’s strength lies in its approach to products. “Fintechs start with what’s the problem that the customer has and work backward to provide a solution for them…Banks have historically started with a distribution-oriented ethos rather than solving an underlying problem.”
This approach is likely to be supercharged with cutting-edge innovation. Morris highlighted that the innovation QED saw driving this growth included generative AI, Distributed ledger Technology, and particularly embedded finance.
There could still be roadblocks
While the general take-away is a glowing future for the global fintech industry, Morris warned of possible risks that could stunt growth.
“It’s not a shoo-in; it’s not going to happen automatically,” he said.
He explained that any new technology and business model is directly influenced by the regulation surrounding it. While he said that many regulators embrace digital financial services, a proactive approach could nurture the fintech environment.
“What was really clear in the study was the role, that regulators have, to bring more clarity to the guide rails of innovation, and companies can be within those guidelines, rather than waiting for a fintech to do something that the regulators don’t like, and then have to go back and, and punish people for decisions that they made when they were doing it in the best of intentions.”
In addition, he outlined that reputational damage and questions around the roles of particular stakeholders in the governance of that space could greatly influence further growth.
A key to navigating these risks could be cooperation between incumbents and banks.
“The incumbents must embrace the fintechs,” he said. “Fintechs have verve, energy, and unit economic focus with focusing on a problem and the ability to be really native and aggressive with building out apps, they can test and learn and really rapidly, and they can get really spiky talent into their organization that’s incentivized through equity.”
“The banks have regulatory and compliance expertise. They have deep pockets possibility. They have brands that have proprietary data. And indeed, they can mobilize vast infrastructure.”
However, the two areas of financial services are yet to engage efficiently.
“Today, they are talking past each other often. Banks are reticent to engage with fintechs and don’t know how…My advice to the C suite and the banks is that you’ve you cannot put your head in the sand here. You’ve got to be engaging, and you’ve got to be focusing on how you partner and how you learn.”
On cracking collaboration, the value of the relatively nascent fintech industry could be fully embraced.
RELATED: Fintech Nexus USA 2023
