Financial Services Practice

Fintechs:
A new paradigm
of growth
October 2023
After decades of hypergrowth,
fintechs have entered a new era
of value creation, where the focus is
on sustainable, profitable growth.
This report examines how fintechs
can win in these disruptive times.
This report is a collaborative effort by Lindsay Anan, Diego Castellanos Isaza, Fernando Figueiredo,
Max Flötotto, André Jerenz, Alexis Krivkovich, Marie-Claude Nadeau, Tunde Olanrewaju, Zaccaria
Orlando, and Alessia Vassallo, representing views from McKinsey’s Financial Services Practice.

Contents
Executive summary 1
Chapter 1: Fintech growth then and now 2
Chapter 2: The path to sustainable growth 8

Fintechs: A new paradigm of growth ii

Executive summary
Over the past decade, technological progress and innovation have catapulted the fintech
sector from the fringes to the forefront of financial services. And the growth has been fast and
furious, buoyed by the robust growth of the banking sector, rapid digitization, changing customer
preferences, and increasing support of investors and regulators. During this decade, fintechs
have profoundly reshaped certain areas of financial services with their innovative, differentiated,
and customer-centric value propositions, collaborative business models, and cross-skilled and
agile teams.

As of July 2023, publicly traded fintechs represented a market capitalization of $550 billion, a two-
times increase versus 2019.1 In addition, as of the same period, there were more than 272 fintech
unicorns, with a combined valuation of $936 billion, a sevenfold increase from 39 firms valued at
$1 billion or more five years ago.2

In 2022, a market correction triggered a slowdown in this explosive growth momentum. The impact
continues to be felt today. Funding and deal activity have declined across the board, and there
are fewer IPOs and SPAC (special purpose acquisition company) listings, as well as a decline in
new unicorn creation. The macro environment also remains challenging and uncertain. In such a
scenario, fintechs are entering a new era of value creation. The last era was all about firms being
experimental—taking risks and pursuing growth at all costs. In the new era, a challenged funding
environment means fintechs can no longer afford to sprint. To remain competitive, they must run at a
slower and steadier pace.

In this report, we examine how fintechs can continue to grow in strength and relevance for customers,
the overall financial ecosystem, and the world economy, even in disruptive times. Based on research
and interviews with more than 100 founders, fintech and banking executives, investors, and senior
ecosystem stakeholders, we have identified key themes shaping the future of fintechs. To help
fintechs capitalize on these themes, we also provide a framework for sustainable growth, based on an
analysis of the strategies used by long-established public companies that have weathered previous
economic cycles.

1
F-Prime Fintech Index.
2
Dealroom.co; McKinsey analysis.

Fintechs: A new paradigm of growth 1

 Chapter 1: Fintech
growth then and now
The fintech industry raised record capital in the second half of the last decade. Venture capital (VC)
funding grew from $19.4 billion in 2015 to $33.3 billion in 2020, a 17 percent year-over-year increase
(see sidebar “What are fintechs?”). Deal activity increased in tandem, with the number of deals
growing 1.2 times over this period.

The industry fared even better in 2021, thriving on the backs of the pandemic-triggered acceleration
in digitization and a financial system awash with liquidity. Funding increased by 177 percent year over
year to $92.3 billion, and the number of deals grew by 19 percent.

The funding surge proved to be a one-off event. Funding levels in 2022 returned to long-term trend levels
as inflated growth expectations from the 2021 extraordinary results were reanchored to business-as-
usual levels, and as deteriorating macroeconomic conditions and geopolitical shocks destabilized the
business environment. The correction caused fintech valuations to plummet. Many private firms faced
down rounds, and publicly traded fintechs lost billions of dollars in market capitalization. VC funding was
hit hard globally and across sectors, dropping to $459.6 billion in 2022 from $683.1 billion in 2021. Fintech
funding faced a 40 percent year-over-year funding decline, down from $92 billion to $55 billion. Yet, when
analyzed over a five-year period, fintech funding as a proportion of total VC funding remained fairly stable
at 12 percent, registering only a 0.5 percentage point decline in 2022.

Looking ahead, the fintech industry continues to face a challenging future, but there are several
opportunities yet to be unlocked. Investors are adapting to a new financial paradigm with higher
interest rates and inflation, which has altered their assessment of risk and reward. At the same
time, the once-in-a-generation technology revolution under way is generating more value creation
opportunities. Our research shows that revenues in the fintech industry are expected to grow almost
three times faster than those in the traditional banking sector between 2022 and 2028. Compared
with the 6 percent annual revenue growth for traditional banking, fintechs could post annual revenue
growth of 15 percent over the next five years.

These trends are also coinciding with—and in many ways catalyzing—the maturation of the fintech
industry. Based on our research and interviews, three themes will shape the next chapter of fintech
growth. First, fintechs will continue to benefit from the radical transformation of the banking
industry, rapid digital adoption, and e-commerce growth around the world, particularly in developing
economies. Second, despite short-term pressures, fintechs still have room to achieve further growth
in an expanding financial-services ecosystem. And finally, not all fintechs are being hit equally hard
during the market correction: fintechs in certain verticals and at particular stages of growth are more
resilient than their peers.

What are fintechs?

We define fintech players as start-ups move, pay, and protect money. For the analysis enterprise (SME) and corporate services;
and growth companies that rely primarily on of this report, we included the following operations; and infrastructure (including
technology to conduct fundamental functions fintech sectors: daily banking; lending; wealth embedded finance, and banking as a service).
provided by financial services, thereby management; payments; investment banking The analysis excluded cryptocurrency,
affecting how users store, save, borrow, invest, and capital markets; small and medium-size decentralized finance, and insurtech.

Fintechs: A new paradigm of growth 2

McKinsey’s research shows that
revenues in the fintech industry are
expected to grow almost three times
faster than those in the traditional
banking sector between 2023 and 2028.

Radical transformation of the banking industry

Banking is facing a future marked by fundamental restructuring. As our colleagues wrote recently,
banks and nonbanks are competing to fulfill distinct customer needs in five cross-industry arenas
in this new era: everyday banking, investment advisory, complex financing, mass wholesale
intermediation, and banking as a service (BaaS).3

At the same time, macro tailwinds are powering the growth of fintechs and the broader financial-
services ecosystem. Digital adoption is no longer a question but a reality: around 73 percent of the
world’s interactions with banks now take place through digital channels.

Moreover, retail consumers globally now have the same level of satisfaction and trust in fintechs as
they have with incumbent banks.4 In fact, 41 percent of retail consumers surveyed by McKinsey in
2021 said they planned to increase their fintech product exposure. The demand—and need—for
fintech products is higher across developing economies. In 2022, for example, Africa had almost
800 million mobile accounts, almost half of the whole world’s total.5

B2B firms’ demand for fintech solutions also is growing. In 2022, 35 percent of the small and
medium-size enterprises (SMEs) in the United States considered using fintechs for lending, better
pricing, and integration with their existing platforms. And in Asia, 20 percent of SMEs leveraged
fintechs for payments and lending.6

To capitalize on this demand, fintechs will need to keep up with fast-evolving regulations and ensure
they have adequate resources and capacity to comply. Some European Union member states,
such as Ireland, are bringing buy-now-pay-later providers under the scope of financial regulation.7
Meanwhile, the US Consumer Financial Protection Bureau aims to issue a proposed rule around open
banking this year that would require financial institutions to share consumer data upon consumers’
requests.8 This would make it necessary for fintechs to ensure they have the available resources and
capacity to respond to these requests.

A nascent industry in an expanding ecosystem

The banking industry generated more than $6.5 trillion in revenues in 2022, with year-over-year
growth in volume and revenue margins.9 Given the fintech market dynamics, this suggests there is
still plenty of room for further growth in both public and private markets.

3
Balázs Czímer, Miklós Dietz, Valéria László, and Joydeep Sengupta, “The future of banks: A $20 trillion breakup opportunity,”
McKinsey Quarterly, December 20, 2022.
4
McKinsey Retail Banking Consumer Survey, 2021.
5
The state of the industry report on mobile money, GSM Association, April 2023.
6
McKinsey 2022 US SMB Banking Survey, 2022 (n = 955).
7
Miroslav Đurić and Verena Ritter-Döring, “Regulation of buy-now-pay-later in the EU: New regime on the horizon,” Law Business
Research, February 8, 2023.
8
Farouk Ferchichi, “The US is one step closer to making open banking a reality,” Finextra, January 19, 2023.
9
“McKinsey’s Global Banking Annual Review,” McKinsey, December 1, 2022.

Fintechs: A new paradigm of growth 3

 In 2022, fintechs accounted for 5 percent (or $150 billion to $205 billion) of the global banking
sector’s net revenue,10 according to our analysis. We estimate this share could increase to more than
$400 billion by 2028,11 representing a 15 percent annual growth rate of fintech revenue between
2022 and 2028, three times the overall banking industry’s growth rate of roughly 6 percent (Exhibit 1).

Emerging markets will fuel much of this revenue growth. Fintech revenues in Africa, Asia–Pacific
(excluding China), Latin America, and the Middle East represented 15 percent of fintech’s global

Web <2023>
<HyperSG>
Exhibit
Exhibit <1>1 of <5>

Emerging markets are expected to play a growing role in fintech revenue

growth.
2022–28, CAGR, %
Fintech net revenues by region,¹ $ billion
North America Europe Asia–Pacific Global

130–190 325–463

110–130
70–100
40–70 55–65

+12 15–25 +18 +12 +15

2022 2028 2022 2028 2022 2028

150–205

Latin America Africa Middle East

+27 +30 +35

25–45
15–20
6–10 3–4 <1 5–8

2022 2028 2022 2028 2022 2028 2022 2028

Global fintech net revenue share by region, level of development, %

2022 <1
48 11 34 5 2
2028
41 14 30 9 4 2
North Europe Asia– Latin Africa Middle
America Pacific America East
2022
85 15
2028
71 29

Developed Emerging²

1
Net revenue is defined as revenue after risk minus direct costs.
²Latin America, Africa, Middle East, and Asia, excluding China.
Source: Dealroom.co; McKinsey analysis

McKinsey & Company

10
Net revenue equals revenue after risk minus direct costs.
11
Estimate based on historical growth at regional level and expert inputs from regional leaders in the banking industry (for example,
forecast of roughly 80 percent 2021–22 revenue increase in Latin America).

Fintechs: A new paradigm of growth 4

 revenues last year. We estimate that they will increase to 29 percent in aggregate by 2028. On the
other hand, North America, currently accounting for 48 percent of worldwide fintech revenues, is
expected to decrease its share to 41 percent by 2028.

While fintech penetration in emerging markets is already the highest in the world, its growth potential
is underscored by a few trends. Many of these economies lack access to traditional banking services
and have a high share of underbanked population. Fintechs have had some success in addressing
these unmet needs. In Brazil, for example, 46 percent of the adult population is said to be using
Nubank, a fintech bank in Latin America—double the share two years ago.12

Moreover, while the market cap of private fintech companies has increased substantially over the
past decade, the sector’s penetration of the public market remains small.13 In the eight years leading
up to October 2022, 44 modern fintechs (those that were founded in 1999 or later and went public
after 2014) did an IPO, creating a combined market cap of $0.3 trillion. In contrast, during the same
period, there were more than 2,500 legacy public financial-services companies (whose average year
of founding was 1926) with a combined market cap of $11.1 trillion.14

Not all fintech businesses are created (or funded) equal

Last year was turbulent for fintechs, but there were differences in the fundraising performance of
firms based on maturity and segments.

Maturity stage
Companies in the growth stage (series C and beyond) showed the highest sensitivity to last year’s
funding downturn, with a sharp year-over-year funding decline of 50 percent. Meanwhile, fintechs
in the early seed and pre-seed stages were more resilient and increased funding by 26 percent year
over year (Exhibit 2). This funding outperformance of firms in the early and pre-seed stages was a

Web <2023>
<HyperSG>
Exhibit 2 of <5>
Exhibit <2>

Fintechs in seed, angel, and early venture capital stages posted funding
growth in 2022.

Total fintech funding by round, Share of VC funding in fintech companies,

$ billion %
92 13.5
Series C+ 12.5
12.0 Average
Series A–B 11.8
2018–22, 2021–22, 10.9
Seed, angel, early CAGR, % CAGR, % 10.3
venture capital (VC)
+16 –40
55

+18 –48
36 33
31

+10 –30

+22 +26
2018 2019 2020 2021 2022 2018 2019 2020 2021 2022
Source: Dealroom.com; McKinsey analysis

McKinsey & Company

12
Oliver Smith, “Nubank turns $141m profit in Q1 as Brazilian market share nears 50%,” AltFi, May 16, 2023.
13
Michael Gilroy, Chase Packard, and Leslie Wang, Fintech and the pursuit of the prize: Who stands to win over the next decade?,
Coatue, October 24, 2022.
14
Ibid.

Fintechs: A new paradigm of growth 5

 consequence of the longer time to maturity, which gives start-ups more time to get through periods
of economic uncertainty and recover any losses before an eventual sale.

Verticals
Funding for B2B fintech segments last year was more resilient than for those in B2C, with smaller
funding declines (Exhibit 3). The two B2B verticals that were least affected were (1) BaaS and
embedded finance and (2) SME and corporate value-added services. These two verticals recorded
year-over-year funding declines of 24 and 26 percent, respectively. In contrast, funding for
payments-focused fintechs dropped 50 percent. Even then, payments and lending received the
largest shares of total fintech funding.

Funding for B2B segments grew at more than 25 percent annually between 2018 and 2022, driven by
an increasing number of businesses adopting off-the-shelf solutions provided by digital-native firms
(including payments, open banking, and core banking technology) to address challenges arising from
using legacy banking infrastructure—for example, limited flexibility, slower speed, and high costs.

Web <year>
<Title>
Exhibit 3 of <5>
Exhibit <3>

Business-to-business segments recorded smaller funding declines from

2021 to 2022 than did business-to-consumer-focused fintechs.
Global funding by fintech segment total value, $ billion Top 2 for funding growth

Embedded SME² and Investment Wealth Payments Daily Lending Operations and
finance/ corporate banking and management banking infrastructure³
BaaS¹ services capital markets

2018 1.2 2.5 1.3 3.5 5.2 3.1 9.9 3.9

2022 4.0 7.6 3.4 8.2 11.0 6.0 11.6 3.5

Global funding growth by fintech segment, % Top 2 for funding growth

Embedded SME and Investment Wealth Payments Daily Lending Operations and
finance/ corporate banking and management banking infrastructure
BaaS services capital markets

36
32
27 24 21 18 4 –3
2018–22

Global funding change by fintech segment, % Top 2 for limited funding loss

Embedded SME and Investment Wealth Payments Daily Lending Operations and
finance/ corporate banking and management banking infrastructure
BaaS services capital markets

2021–22
–24 –26
–36 –34 –36
–50 –47
–53

1
Banking as a service.
²Small and medium-size enterprises.
³Includes core banking technology, regtech, and open banking.
Source: Dealroom.co, 2023

McKinsey & Company

Fintechs: A new paradigm of growth 6

Many businesses continue to rely on legacy banking infrastructure that limits flexibility and speed
and can often be more costly. To address these challenges, businesses are benefiting from using off-
the-shelf solutions provided by digital natives for services such as payments, open banking, and core
banking technology.

For BaaS and embedded finance, demand is led by customer-facing businesses looking to control
their users’ end-to-end experience. Meanwhile, SMEs have been underserved by traditional
financial-services providers, despite the fact they represent about 90 percent of businesses and
more than 50 percent of employment worldwide.15 And in developing countries, the finance gap for
micro, small, and medium-size enterprises (MSME) is estimated to be approximately $5 trillion, or 1.3
times the current level of MSME lending.16 Fintech firms have successfully addressed some of SMEs’
needs worldwide, especially in developing countries.

15
“Small and medium enterprises (SMEs) finance,” The World Bank, accessed October 10, 2023.
16
“MSME finance gap,” IFC, accessed October 10, 2023.

Fintechs: A new paradigm of growth 7

 Chapter 2: The path to
sustainable growth
The current churn in the markets makes it prudent for fintechs to define their next move carefully.
After all, they are operating in a much different environment than in years past. In their hypergrowth
stage, fintechs had access to capital that allowed them to be bold in their business strategy. They
could make revenue generation their foremost objective; profits were expected to follow.

The narrative has shifted since last year. The time between funding rounds for fintechs increased
by more than five months from the first to the fourth quarter of 2022. The average value of funding
rounds decreased by 50 percent over the same period.17 These changes are forcing fintechs to find
newer ways to extend runways and adjust their operating models to make decreasing amounts of
cash last longer.

The days of growth at any cost are behind the industry, for now at least. In a liquidity-constrained
environment, fintechs and their investors are emphasizing profitability, not just growth in customer
adoption numbers or total revenues. “In the past, the reward went to fintechs that showed growth at
all costs, which led to healthy valuations,” said one Africa-based growth equity investor. “Now it is
about the sustainability of the business, the addressable market, and profitability.”

So how can fintechs get on a path of sustainable, profitable growth?

In 2019, McKinsey conducted an in-depth study of the growth patterns and performance of the
world’s 5,000 largest public companies over the preceding 15 years. The researchers’ analysis
identified ten rules for value-creating growth.18 According to the research, companies that set growth
strategies addressing all available pathways to growth were 97 percent more likely to achieve above-
peer profitable growth.19

This set of rules adopted by public companies that have lived through economic cycles and periods of
uncertainty can also be useful for fintechs as they transition to a sustainable growth model. Based on
our analysis of these rules and interviews with more than 40 fintech industry leaders, we expect four
pathways to deliver the most impact for fintechs.

In a liquidity-constrained environment,
fintechs and their investors are
emphasizing profitability, not
just growth in customer adoption
numbers or total revenues.

17
“SVB’s challenges will accelerate valuation down rounds, startup mortality, and layoffs,” CB Information Services, March 15, 2023.
18
Chris Bradley, Rebecca Doherty, Nicholas Northcote, and Tido Röder, “The ten rules of growth,” McKinsey, August 12, 2022.
19
“Choosing to grow: The leader’s blueprint,” McKinsey, July 7, 2022.

Fintechs: A new paradigm of growth 8

 Cost discipline
When fintechs had access to abundant cash and funding was easy, they placed more emphasis
on growing rapidly than on managing costs. Targeted cost savings have become a bigger priority
today, as fintechs seek ways to lower expenses and achieve profitability while maintaining customer
satisfaction and pursuing customer growth and acquisition. Our research has found that 50 percent
of public fintechs (following their IPO) were profitable in 2022. And the key differentiator between
profitable and nonprofitable fintechs was cost management, not revenue growth (Exhibit 4). While
both categories recorded year-over-year revenue growth of 13 percent, profitable fintechs posted a
median 3 percent decrease in costs. Nonprofitable fintechs, in contrast, saw costs rise by 27 percent,
which affected their profit margins.

Successful implementation of cost management efforts is the key for fintechs in their next phase of
evolution. Several leaders are already making moves: 60 percent of our survey respondents said their
firms are significantly managing costs. An executive at an African mobile payments firm said they are
now negotiating every cost and making sure the firm is thinking for the long run.

Consider the example of the Indian fintech company Paytm, which specializes in digital payments and
financial services. The firm had had a target of achieving breakeven by September 2023 but was able
to achieve this six months ahead of schedule. It did so through disciplined cost management, revenue
growth across businesses, and a business model with strong operating leverage.20

While fintechs establish a clear focus on costs, they should also consider adjusting how they operate,
thereby creating a more agile and flexible organization that can deal with the current environment.
Around 80 percent of the interviewed fintechs report that they are currently making changes to
their operating models. Of these, 66 percent cite a focus on profitability and a sustainable cost
structure as being among their top three reasons. Such adjustments to the operating model are most
sustainable when institutions also reinforce the control functions to protect customers and stay on
top of regulatory changes.

A shift from hypergrowth to sustainable growth would also result in a greater focus on strong unit
economics. To do this, fintechs ensure that the profitability view is embedded across the business.
For example, assessment of the value of adding new customers would evolve from efficiency-only
metrics such as the customer acquisition cost (CAC) to a more holistic approach. In this example, one

Web <2023>
<HypereSG>
Exhibit 4
Exhibit <4> of <5>

Strict cost management, not revenue growth, is the key differentiator for
fintech profitability.
+27
Profitable and Profitable Unprofitable
unprofitable fintechs fintechs
fintechs in
2022, %
+13 +13

–3

Revenue delta Cost delta Revenue delta Cost delta

2021–22 2021–22 2021–22 2021–22

Source: McKinsey analysis, based on a sample of 120+ public fintechs around the world

McKinsey & Company

20
“Our discipline in cost management sustains and grows profitability,” Paytm, February 20, 2023.

Fintechs: A new paradigm of growth 9

way to embed profitability into acquisition investment and decision making is to compare the CAC
with the projected lifetime value (LTV) of a customer, using the LTV/CAC ratio to assess the marginal
return on investment for acquiring every new customer. In Latin America, for example, 68 percent
of fintechs self-reported an LTV/CAC greater than five, which indicates a potential for fintechs to
increase spending and further fuel growth without sacrificing profitability.

Measured growth
As leaders develop growth strategies, an important question is where growth should come from.
Fintechs can grow sustainably by taking three steps: building a strong core, expanding into adjacent
industries and geographies, and shrinking to grow. Identifying which steps will be most accretive to
growth will depend on the unique circumstances of each fintech; some might find value in pursuing
all three steps, while others could choose to focus on one. Regardless of the circumstances, this
decision will have greater longer-term consequences in the current environment, compared with the
earlier high-funding phase.

Focus on building a strong core as a precursor for expansion

The first step in cracking the growth code involves focusing on the local market and developing a
healthy core business. According to our research, companies that focus on their core business and
have a strong home market are 1.6 times more likely to generate peer-beating returns.21

For fintechs, the key will be to relentlessly focus on growth in their core business. As a North
American fintech executive told us: “It’s a bit of back to basics. On a core product or offering, 18 to 24
months ago, you would have built additional pieces on it to upsell and cross-sell. Now, we’re looking to
double down on the core business and make sure it’s a stable, viable operation.”

To do this, fintechs must tailor their value propositions to their focus markets. Let’s take the
example of B2C fintechs. Our recent research (McKinsey’s Retail Banking Consumer Survey and
Global Banking Pools) quantified the potential drivers for growth at B2C fintechs. Cross-selling
will likely drive growth for fintechs in emerging economies, while those in developed countries will
likely see greater growth from capturing new customers. Around 72 percent of revenue growth for
companies in Brazil, for example, is expected to come from cross-selling, in contrast with 25 percent
and 30 percent for the United Kingdom and the United States, respectively, with the remaining
growth coming from new customers (Exhibit 5). There is arguably less potential for new-customer
development in developing economies, given their high fintech penetration.

Across the competitive landscape, as markets are highly heterogenous, a dedicated strategy for each
region is recommended. For example, our analysis found that in the United Kingdom and the United
States, fintech revenue share is split almost equally between incumbent digital banks and pure
fintech players. In contrast, digital incumbents in Germany and pure fintech players in Brazil could
dominate banking’s revenue share in their respective markets.

Expand into adjacent segments and geographies

After building a strong core, fintechs can consider expanding into other segments and geographies
as a second source of growth. According to our previously published research, companies that do so
are 1.2 to 1.3 times more likely to generate sizable returns than peers that focus solely on their core.22

Today, however, expansion is no longer a must-do strategy. It may be most advantageous for
companies that have strong footholds in their core markets and can use some competitive or
ownership advantage to expand elsewhere. The key is to pursue measured, value-creating growth.
A case in point is OPay, which started as a mobile money platform in Nigeria and has since expanded
across financial-services verticals. OPay now offers peer-to-peer payments and merchant and
card services.

21
Chris Bradley, Rebecca Doherty, Tido Röder, and Jill Zucker, “Growth rules: Which matter most?,” McKinsey, March 6, 2023.
22
Ibid.

Fintechs: A new paradigm of growth 10

Web <2023>
<HypereSG>
Exhibit 5 of <5>
Exhibit <5>

Fintech’s value proposition should be tailored to the specifics of the local

market.
Share of retail banking revenue pool held by innovative players, % 2022–25, CAGR, %
Digital brands linked to traditional players Neobanks, fintechs, digital brokers, and robo-advisers

Germany 16.6 Brazil US UK

3.3

12.7 +29 13.1

2.0
9.6

9.8 7.3
4.3
+17 13.3 6.3
10.7 +17
4.5 +64 2.8 3.9
3.9 +30
3.3 5.3 2.1
+17 3.5
3.3 3.5 +34
+60 1.8
1.2
2022 2025 2022 2025 2022 2025 2022 2025

Share of retail banking revenue pool held by traditional players, %

Germany Brazil US UK

87.3 83.4 95.5 86.9 93.7 90.4 96.1 92.7

2022 2025 2022 2025 2022 2025 2022 2025

Fintech growth by customer type, % New customers Cross-sell to existing customer

26 74 72 28 30 70 25 75

Germany Brazil US UK

Source: Based on McKinsey’s Retail Banking Consumer Survey, 2021

McKinsey & Company

Shrink to grow
Fintechs are moving from hypergrowth to sustainable growth, but that growth may not necessarily
be consistent across all parts of the business. If fintechs divest from underperforming parts of their
portfolios and scale back from regions recording limited growth, they can reinvest that capital into
high-performing segments—a strategy we call “shrinking to grow.” In our research, companies that
use this approach are 1.4 times more likely to outperform their peers.

“In the past, many fintechs expanded geographically, even if it didn’t make much sense,” an executive
at a Latin American fintech told us. “Now they will have to focus on their profitable segment and
geography and stop expanding where they are not.”

Some fintechs have been deliberate about using a shrink-to-grow strategy, changing track if an
expansion strategy did not materialize as expected or the local market had more potential for
growth. German robo-adviser Scalable Capital, for example, announced plans to discontinue

Fintechs: A new paradigm of growth 11

its Swiss operations as of 2020 to focus on other markets because the implementation of the
Financial Services Act in Switzerland would have required the company to manage two regulatory
frameworks simultaneously. Meanwhile, Wealthsimple, a Canadian online investment platform,
exited from the United Kingdom and the United States in 2021 to concentrate on its local retail
market and expand its product portfolio into new financial-services areas. Similarly, in late 2020,
San Francisco–based fintech LendingClub shut down its retail peer-to-peer platform called Notes
to focus on other products.

Programmatic M&A
Many companies will conclude they can achieve the steps outlined in this report—launching new
features, building new capabilities, and pivoting toward new revenue streams and segments—
more swiftly through thoughtful acquisitions and partnerships than by relying on pure organic
development. Fintech firm Block, for example, completed its acquisition of the buy-now-pay-later
platform Afterpay in January 2022 to accelerate its strategic priorities for its seller and cash app
ecosystems.23 Nearly 60 percent of fintech executives in our survey told us they are considering an
acquisition in the next 18 months.

Moreover, with IPO and SPAC (special purpose acquisition company) activity slowing considerably
since last year, many fintechs that might otherwise go public are turning to private markets for
funding. Take the example of the British fintech Zopa, which intended to list by 2022 but eventually
decided to put IPO plans on hold in response to challenging market conditions. In the interim, the firm
has been raising capital from its shareholders, including $92 million in February.24

M&A transactions increase significantly during periods of economic uncertainty, when they also
tend to deliver higher returns. During the global financial crisis, around 45 percent of banking M&A
deals showed positive excess two-year total shareholder returns (TSR) between 2007 and 2009.25
In comparison, less than 30 percent of banking deals posted positive excess two-year TSR between
2010 and 2020.26 Across industries, companies actively making acquisitions worth 10 percent or
more of their market cap in total had an average TSR of 6.4 percent between January 2007 and
January 2008, compared with −3.4 percent for the less active companies.27

However, not all M&As are successful. Many fail to create value due to contrasting values and
cultures, mismatched product–market fit, and inflated revenue forecasts in the pursuit of customer
engagement and growth at all costs.

Keeping the culture alive

What has made fintechs so disruptive over the years? The answer lies largely in their ability to
innovate and differentiate. Since fintechs are not as encumbered by legacy systems and processes,
they can be more agile in using emerging technologies to anticipate and solve customer needs.
Typically, they also have a customer-centric and collaborative approach to deliver innovation with
cross-skilled teams.

Innovations have happened across fintech verticals. Neobanks like Chime and Monzo, designed
around a simple and intuitive user experience, have changed assumptions about the role of branches
in traditional retail banking. In the United Kingdom, for example, the total number of bank and building
society branches fell by 40 percent between 2012 and 2022.28 Robo-advisers such as Wealthfront
and Nutmeg disrupted the traditional wealth management industry by offering low-cost, accessible
alternatives to individuals lacking access to personalized financial advice. Funding Circle introduced
the peer-to-peer lending concept to the financial sector, bypassing traditional banks (which had
owned this relationship) and enabling direct lending between parties.

23
“Block, Inc. completes acquisition of Afterpay,” Block, January 31, 2022.
24
“Zopa raises £75 million,” Zopa Bank Limited, February 1, 2023.
25
As of the year of the deal’s announcement.
26
McKinsey Fintech Quarterly Radar, Q1 2023.
27
Brian Salsberg, “The case for M&A in a downturn,” Harvard Business Review, May 2020.
28
Lorna Booth, Statistics on access to cash, bank branches and ATMs, House of Commons, September 1, 2023.

Fintechs: A new paradigm of growth 12

 Incumbents are fast catching up with these innovations by ramping up investments in new
technologies. Around 94 percent of banks in a recent survey said they plan to invest more in
modern payments technology to support end user demand for better payment capabilities over
the next two to three years. Of these, 65 percent said they intend to make significant or moderate
levels of investment.29 Many incumbents are also partnering with BaaS platforms to overhaul their
digital capabilities. Examples include Fifth Third Bank’s acquisition of Rize Money in May 2023
and NatWest Group’s partnership with Vodeno Group in October 2022 to create a BaaS business
in the United Kingdom.

To retain their competitive advantage, fintechs must continue to innovate. The next big disruptor
is always around the corner. Technologies like generative AI are predicted to revolutionize the
competitive landscape of finance over the next decade (see sidebar “Generative AI and the future
of banking”). WeBank’s CFO Arthur Wang is one executive who appreciates the urgency. He told
us, “Even though our bank has been around for almost eight years, we consider ourselves a start-
up. We’re always exploring better fintech technology. WeBank’s strategy is to provide better, more

29
“94% of banks eyeing investment in modern payment tech, to keep pace with fintech innovation,” Finastra press release,
March 8, 2023.

Generative AI and the future of banking

Artificial intelligence (AI) technologies are Generative AI’s impact—and resulting 3. Acceleration. Organizations can
increasingly integral to the world we live reinvention—will span three broad categories: use generative AI to extract and
in, and investors are taking notice. index knowledge to shorten
Generative AI is among the advanced 1. Automation. Half of today’s work
innovation cycles, thereby enabling
technologies for which investments activities could be automated between
continuous innovation.
are accelerating, thanks to its potential 2030 and 2060, according to McKinsey
to transform business. According to estimates.2 Fintech firm Intuit, for To capture these opportunities, fintechs
McKinsey research published in June 2023, example, has introduced a generative need an ecosystem of capabilities and
generative AI could add the equivalent of AI operating system on its platform. partners that will allow them to move
$2.6 trillion to $4.4 trillion annually across Its custom-trained large language fast. First movers will accrue competitive
as many as 63 use cases. financial models specialize in solving advantage as they build their capabilities and
tax, accounting, cash flow, and personal mobilize with a focus on value, rather than
Generative AI’s impact on the banking finance challenges, among others.3 rushing to deliver pilots. To do this, fintechs
industry will be significant, delivering should consider investing more in people and
benefits beyond existing applications of AI in 2. Augmenting and enhancing productivity
change management, given generative AI’s
areas such as marketing. As our colleagues to do work more effectively. Generative
unique potential to influence the future of
have written, this technology could generate AI could enable labor productivity
work. Fintechs could think about developing
an additional $200 billion to $340 billion growth of 0.1 to 0.6 percent annually
a medium- to longer-term talent strategy and
annually in value, arising from around 2.8 to through 2040, depending on the rate of
find ways to emphasize change management
4.7 percent increase in the productivity of technology adoption and redeployment
and adoption. Fintechs that delay building
banking’s annual revenues—if the use cases of workers’ time to other activities.
their capabilities risk becoming the disrupted
are fully implemented.1 For fintech, we expect Morgan Stanley is building an AI assistant
instead of the disruptors.
a commensurate impact, if not more, given using GPT-4 to help the organization’s
the already high exposure to tech. wealth managers quickly find and
synthesize answers from a massive
internal knowledge base.4

1
“The economic potential of generative AI: The next productivity frontier,” McKinsey, June 14, 2023.
2 Ibid.
3
“Intuit introduces generative AI operating system with custom trained financial large language models,” Intuit press release, June 6, 2023.
4
“Morgan Stanley Wealth Management announces key milestone in innovation journey with OpenAI,” Morgan Stanley press release, March 14, 2023.

Fintechs: A new paradigm of growth 13

inclusive financial services—to the mass population as well as small and medium-size enterprises—
with leading technology. We do business 100 percent online, so we rely on technology.”30

A tight labor market has also made it more challenging for fintechs to attract and hire tech talent.
Our survey uncovered a shift in the perception of fintechs as riskier employers. As a Europe-based
fintech executive told us: “Fintechs are less attractive now because it is clearer that it is a ‘high risk’
job compared with established institutions. On the other hand, large fintechs are laying off, which can
create a new pool of talents to attract.”

In such an environment, fintechs must work toward strengthening their culture and mission and,
consequently, their hiring strategy. One European payments fintech, for example, has differentiated
strategies based on the profile of open roles. An executive at the firm says it has been easier to
recruit people for junior roles, since these workers are more eager to join a growing organization. “It is
a different story with experienced profiles—for example, management team or 35-plus years—where
recruiting is more difficult and retention is crucial,” he said. To attract such people, the firm offers
stock options and other incentive packages. Meanwhile, an Africa-based payments and remittances
fintech casts a more global net: “We hire globally, regardless of location, gender, or race,” an
executive told us. “We have no quotas and try to just find the best person for each role.”

The fintech industry is undergoing a sea change, so players will have to evolve to survive. Approaches
will vary, depending on each fintech’s maturity level and its vertical and geographic focus. The
framework for sustainable growth, described in this report, provides a strong foundation:

1. Measured growth based on a stable core. Ensure there is a strong and stable core business with
a targeted and proven market fit before expanding, rather than trying to grow while strengthening
the core.

2. Programmatic M&A. Pursue M&A strategically and establish mutually beneficial partnerships
based on a programmatic strategy rooted in value sharing (with incumbents and other fintechs),
as opposed to pursuing M&A only as a response to a low-valuation environment.

3. Cost discipline. Control costs to withstand the new funding environment while remaining flexible,
nimble, and compliant.

4. Keep the culture alive. Maintain the agility, innovation, and culture that have been the bedrock of
disruption so far.

Decisions taken today will likely set the pace for fintechs over the mid to long term. The present
conditions therefore call for a careful evaluation and focused implementation.

Lindsay Anan is an alumna of McKinsey’s San Francisco office, where Alexis Krivkovich and Marie-Claude Nadeau
are senior partners; Diego Castellanos Isaza is a consultant in the London office, where Fernando Figueiredo
is a partner and Tunde Olanrewaju is a senior partner; Max Flötotto is a senior partner in the Munich office; André
Jerenz is a partner in the Hamburg office; and Zaccaria Orlando and Alessia Vassallo are associate partners in the
Milan office.
The authors wish to thank Sonia Barquin, François Dorléans, Carolyne Gathinji, Eitan Gold, Carolina Gracia, Sheinal
Jayantilal, Uzayr Jeenah, Yelda Kayik, Mayowa Kuyoro, Marina Mansur, Farid Minnikhanov, Bharath Sattanathan, Rinki
Singhvi, and Katharine Watson for their contributions to this report.

30
See “Making financial services available to the masses through AI,” McKinsey, August 9, 2022.

Fintechs: A new paradigm of growth 14

October 2023
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