As in many other sectors, the global fintech market has also experienced its challenges in 2023. The total amount of fintech funding worldwide fell from USD 63.2 billion in H2’22 to USD 52.4 billion in H1’23 (KPMG). However, sentiment among fintech investors is still robust and has simply shifted to highly selective fintech sectors that are increasingly focused on operational efficiency, sustainable cash flows and profitability (KPMG), (McKinsey).
Despite the decline in fintech funding in 2023, the industry will not become obsolete and will remain essential in the global market for several reasons:
Large untapped market share and financial inclusion
The seasonal decline in financing is not a final judgment on the strength of the fintech sector. This is due to the extent of the underserved financial market. Although 76% of adults now have a bank or mobile phone account (up from just 51% in 2011), a large proportion of adults in developing countries remained unbanked until recently (The World Bank). The World Bank estimates that around 1.4 billion adults worldwide are still unbanked, meaning they do not have an account with a financial institution or mobile money provider.
Around 740 million people, or 54 percent of the unbanked, live in just seven economies: China and India claim a large share of the global unbanked population (130 million and 230 million respectively), followed by Pakistan (115 million) and Indonesia (100 million). These four economies — together with Bangladesh, Egypt, and Nigeria — are home to more than half of the world’s unbanked population. The data reveals that while the number of account ownership continues to increase, women, poor adults and less educated adults continue to make up the majority of those excluded from the formal financial sector.
This data shows just how much potential there is in the global fintech market that needs to be harnessed. Financial inclusion will not only positively impact access to financial services for underserved populations, but also potentially create new jobs and lucrative investments in the fintech industry.
There are always ways for customers to get better services
There will be two distinct customer groups for fintechs in the coming years.
The first one is the newly served customer who is gaining access to comprehensive financial services for the first time (previously unbanked or underbanked). The Findex report found that about two-thirds of unbanked adults would need help using an account (excluding mobile money) if they opened one with a financial institution. Fintech platforms that provide users with a user-friendly experience could tap into this large market potential, ranging from payments to deposits to customized-fraction wealth management services.
The second customer group consists of existing customers who already have access to banking and financial services but want to improve their customer experience. They are looking for a more efficient interface, cost-effective services and better returns. Both segments will benefit from the following fintech services:
- Gen AI – The role of GenAI in the future of financial services
- Digital banking and BaaS – Banking as a Service, explained: what it is, why it’s important and how to play
- Payment – BCG-QED Investors report: payments will remain the largest fintech segment in 2030
- Embedded finance – BCG-QED Investors report: embedded finance will see promising new use cases in adjacent industries, e.g., transportation, healthcare, new hardware innovation linked to the IOTs, biometric authentication methods, point-of-sale-embedded lending, embedded insurance, and cross-sell rates
Green finance and sustainability
As the world moves towards a decarbonized and sustainable economy, the fintech industry’s transition to green finance is inevitable. A recent paper of Mirza et.al., 2023 cites that Green FinTech connects all the essential people in the value chain, such as consumers, (central) banks, insurers, non-banks. The application may vary, but the following definition can serve as an early foundation:
A sustainable financial system is… one that creates, values and transacts financial assets in ways that shape real wealth to serve the long-term needs of an inclusive, environmentally sustainable economy.
UNEP 2016
The ADB outlines three broad areas for the possible application of fintech to green finance: (a) blockchain applications for sustainable development; (b) blockchain use-cases for renewable energy, decentralized electricity market, carbon credits, and climate finance; and (c) innovation in financial instruments, including green bonds.
The bright future of the global fintech market
According to the BCG-QED Investors report, fintech revenues are expected to increase six-fold by 2030. It mentioned that there is still plenty of room for fintech growth, as the industry is still at a very early stage of development and accounts for less than 2% of annual financial services revenues worldwide (around USD 245 billion out of USD 12.5 trillion).
The map of the fintech future will also transform in interesting ways. BCG-QED Investors report predicted that, outpacing even the US with a 27% growth rate, Asia-Pacific is poised to become the world’s top fintech market by 2030. While North America will continue to be an important fintech market and innovation hub, Europe will grow supported by regional expansion. Finally, Latin America will see accelerated fintech penetration and Africa and the Middle East can leapfrog incumbents by adopting new technologies.
Emerging financial technologies with potential impacts
Many new technologies are emerging in finance. However, their impact is yet to be optimized, as can be seen with generative AI, API-based open connectivity, DLT, quantum and edge computing, embedded-hardware Internet of Things (IoT) and biometrics (BCG-QED Investors report). Other emerging technologies include cloud computing, artificial intelligence, big data, cryptography, smart contracts, machine learning, Web3, DeFi, etc. These technologies will become increasingly relevant to meet the growing demand for fintech solutions. Fintech companies will continue to explore new financial technologies to attain an optimal impact — not just to meet customer demand but also to push for greater levels of efficiency and returns.
Conclusion
The fintech sector is occasionally confronted with disruptive challenges. Nevertheless, its fundamentals remain robust for several reasons. First, the industry holds significant untapped market potential, particularly in extending financial access to unbanked and underbanked populations. Second, the market potential extends to communities finally gaining (comprehensive) access to finance for the first time. Fintech companies always have huge potential to improve services and enhance the customer experience. Third, the transition to a decarbonized economy offers new opportunities for fintechs to engage in green finance and sustainable initiatives. Fourth, the future of the global fintech market is promising. It is heralding a new market landscape, creating opportunities for both incumbents and new entrants in the developed world and in the developing world. However, this resilience of the fintech industry will only manifest itself if the financial services industry fosters an environment that is conducive to innovation and change and embraces the fifth key argument: emerging financial technologies have the potential to positively impact customers, investors and the fintech landscape.
After all, fintech is very much about intermediation. As long as there are people processing transactions through intermediation, the ground for fintech is fertile. Even in the case of a decentralized financial world where people forgo third-party intermediation, infrastructures are needed to facilitate these transactions. Suffice it to say, fintech is never obsolete.
