A new era of value creation: No longer sprinting, now running slowly

Cost reduction, simplification of transactions, and easier access to financial services. These three features have catapulted the fintech sector to unimaginable levels over the past decade. Its rapid and fierce development, driven by strong growth in the banking sector, rapid digitalization, and changing customer preferences, has also resulted in enormous investor interest in this segment. It is estimated that around 20 percent of global venture capital has flowed into the fintech industry since 2019, and 272 fintech unicorns have been created, with a total value of 936 billion dollars, representing a sevenfold increase from 39 companies valued at over a billion dollars five years ago. However, the market correction in 2022 due to worsening macroeconomic conditions and geopolitical shocks caused a slowdown in explosive growth momentum, and fintech has entered a new era of value creation: instead of sprinting and taking risks at all costs, the focus today is on sustainable, profitable growth.

What does this turnaround mean for the future of the fintech industry and what trends can we expect in this exceptionally dynamic sector? We spoke with several experts in the field.

Two trends

– In 2022, a correction occurred for two reasons: first, because many fintech companies emerged from the pandemic years inflated, and second, due to the drying up of cheap money. This affected the entire economy, but young fintechs and those with yet unproven profitability suffered the most. The fintech market has thus strongly consolidated, and those companies that still stand are truly growing or struggling to grow. This is evidenced by two trends. The first is a change in strategy. Companies are no longer growing at all costs but are targeting profitability. For most fintechs, this means converting users who are currently using the free version of their services into users of exclusive services. This also means expanding their offerings, which increasingly include more profitable products such as insurance or mortgage loans. Secondly, among fintechs, there is an increasing belief that they must also adhere to the rules governing financial services. Regulators are becoming more involved, sometimes even limiting the number of clients that fintechs are allowed to require (e.g., N26), they have been denied banking licenses (e.g., Revolut from the UK FCA), they pay huge fines, and are placed under strict supervision (e.g., Binance in the USA). Moreover, many fraudsters have been completely removed from the market (e.g., FTX) – explained fintech expert Igor Pejić.

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According to him, there are two more important reasons why VC funds are more cautious about investing more money in fintech. On one hand, governments are considering new laws to protect consumers, such as the upcoming EU regulation on BNPL. This will make it harder for fintech companies to differentiate themselves from banks. On the other hand, tech giants are increasingly adding classic fintech products to their offerings, primarily Apple. Whether it is a personal finance manager (UK), a pay-later function, BNPL, or simply a savings account (USA) – every entry forces VCs to think twice about whether they really want to invest more money in such a fintech segment.

There is money, but…

Of course, all this does not mean that the fintech industry does not have a bright future. A McKinsey study shows that the fintech industry is expected to grow by 15 percent per year by 2028, significantly faster than the traditional banking sector.

– The vast majority of industries (except, probably, only defense) have experienced a slowdown in growth in recent years, which has also reflected in reduced availability of financing. There is money, but investors are much more cautious, less risk-prone, and no longer easily believe the promises of startup companies. Unlike the investment period just a few years ago, today, positive results at the end of the year are valued more than promises of future earnings. I can only say that I am pleased that the understanding of the need for a solid or at least positive bottom line has normalized, as empty promises from the past caused inflated valuations, which posed a barrier for serious fintech companies with tangible and clear business models in attracting capital – explains Božidar Pavlović, a fintech expert and CEO of Jackie Agency.

That fintech is definitely entering a more mature phase is confirmed by Aircash CFO Jože Rant.

– There is always enough capital in the market, especially for quality projects. However, there is a trend that VC funds are increasingly emphasizing profitability. This means that companies that have so far been financed by VC funds as startups, and have not yet reached the break-even point, will have greater difficulties in securing capital and will find it harder to access new rounds of financing – noted Rant.

Revenue and profit growth

Despite this, it is estimated that the fintech industry will double its revenues from 2022 to 2028 – from 200 to 400 million dollars.

– Despite gloomy estimates, fintech is not dead. Moreover, we are witnessing a renewed interest in it, new IPOs are being announced, and the largest companies like Nubank, Klarna, or Revolut (it is worth mentioning the super successful domestic Aircash) are achieving better results with revenue and profit growth. It is very popular in the industry to say that fintech is only at one percent of its potential, so we can expect new companies, products, and services that will continue to successfully complement the already notoriously slow and sluggish banks, both in the B2C and B2B segments. Although derived crypto services like NFTs or DeFi have not survived the months-long crypto winter, crypto as a technology will certainly survive through stablecoins and CBDCs (e.g., the digital euro that is in the pipeline), and bitcoin and similar currencies will simply be treated, it seems, as a store of value, something like digital gold – believes Božidar Pavlović.

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One of the trends that will contribute to further growth of fintech is certainly the application of artificial intelligence.

– The main trends currently emerging include further digitalization and automation, emphasizing the role of artificial intelligence. AI has definitely given a new impetus to the fintech industry and has become a main trend. AI technologies can provide advanced analytical capabilities, improve decision-making processes, and personalize the user experience. Therefore, fintech projects that integrate AI technologies often attract investor attention and have the potential for success in the market. Additionally, fintech is increasingly turning towards the B2B segment, i.e., doing business with other companies or through B2B2C models, where part of the fintech services is provided to companies rather than end users. This trend is likely to continue to grow and develop, meaning that fintech has not yet reached its peak and is expected to continue booming – announces Rant.

For entrepreneurs and bankers

In the B2B segment, it is necessary to distinguish between companies that serve small and medium-sized enterprises (SMEs) and those that serve banks.

– Both groups still have potential, but their approach is different. When collaborating with banks, fintechs play a role as facilitators. Regarding small and medium-sized enterprises, fintechs sometimes target end clients themselves. Small and medium-sized enterprises globally have estimated unmet credit needs of about five trillion dollars per year – noted Igor Pejić, adding that the main trends currently emerging include artificial intelligence (AI), crypto assets, embedded finance, which already accounts for 25% of all fintech revenues and is expected to become increasingly relevant in meeting the growing demand for fintech solutions, and open banking. Accordingly, digital payments (B2B like Adyen and B2C like PayPal) will continue to dominate fintech investments, but some new fintech groups will also be particularly attractive to investors in the foreseeable future.

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– In addition to the aforementioned, three more groups of investments will be interesting to investors. The first is B2C – cryptocurrencies. Bitcoin is at an all-time high – around 70,000 USD per piece. Other cryptocurrencies follow. This is the result of increasing regulatory clarity. The European Union has regulation on crypto asset markets MiCa (Markets in Crypto Assets), and in the USA, numerous crypto ETFs have been approved this year. Then there is B2B – analytical artificial intelligence. Despite all the noise around generative artificial intelligence since the rise of ChatGPT, the fintech and banking sectors still benefit more from analytical applications (e.g., better risk assessment, better compliance checks). And the third group from the B2B segment – blockchain and DLT. Although blockchain is also the technology that powers all cryptocurrencies, this group of fintech is completely different. They enable banks (and other corporations) to implement more efficient, centralized blockchain networks, which brings improvements in speed and cost reduction – believes Pejić.

In any case, the fintech market will be extremely dynamic in the upcoming period. Some players will have to evolve to survive, and their approaches will differ depending on the level of maturity, vertical, and geographical focus. Despite challenging times, fintech certainly has much more to offer and will continue to reshape many areas of financial services with its innovative solutions.