By Sameer Danave
With technology taking centre stage, FinTech (an acronym for financial technology) is increasingly becoming mainstream in the financial sector. While the adoption of FinTech got the decisive push during the pandemic, many enabling factors such as widening internet connectivity, increasing smartphone adoption, and supportive policies have contributed enormously to the steady rise of the sector in the last couple of years.
The global FinTech industry today boasts more than 32,000 names which are revolutionising the very face of the financial sector. Various research reports predict that FinTech will rake in annual revenue of $1.5 trillion by 2030 although the picture on the profitability of FinTech firms is not as rosy. A study conducted by BCG found that only 45% of FinTech firms reported a profit in 2022 while the rest of the organisations struggled with their revenue generation capabilities.
While there’s little doubt about the long-term potential of the FinTech sector, the concerns about their profitability and operating margins continue to pose a concern for investors. To address these business challenges, FinTech firms are now focusing on sustainable revenues, innovative investments, and exploring new categories while enhancing the lifetime value of their existing customers. Here’s a deep look into new investment and business principles that FinTechs are embracing to turn the tide on profitability in 2023 and onwards:
1) Focus on Emerging Markets: Venturing into new territories, FinTechs are now looking beyond the developed economies and are focusing on regions such as Asia-Pacific, Latin America, and Africa among others. The countries in these continents offer enormous growth opportunities and with low levels of penetration levels, FinTech firms can earn handsomely in these regions to boost their balance sheets and operating profitability.
2) Personalized and Embedded Finance: By offering personalized products in the insurance, wealth management, and investment domains, FinTechs can garner more market share and increase their profitability. The new-age technologies such as AI, ML, and NLP are helping FinTech firms to offer new disruptive models. In addition, Robo-advisors, Smart Algorithms, and Cloud-computing are enabling FinTech firms to offer personalized services, thereby helping them in pulling more customers into their fold. The unprecedented rise of embedded finance (with estimates pegging its annual growth at 40.4%) is a testimony to how combining financial services and bringing them on one platform can enrich the user experience. Further, the popularity of “Buy Now Pay Later” (BNPL) points towards the growing consumption appetite of customers with the category expected to reach $95 Billion with an annual growth rate of 25.5%.
3) B2B and B2B2X Models: By bridging the financial gaps that small businesses (B2B) face globally, the FinTech industry can tap into an important avenue of growth and profitability. The gulf between credit needs and money supply is huge and the disparity is specifically significant in the case of small and mid-size enterprises (SMEs). FinTechs are coming forward to meet this demand and by leveraging innovative models such as business-to-business-to-any-user (B2B2X), these firms are contributing to the economic progress, employment generation, and per capita income of the countries as well.
4) Evolving Regulations and Business Landscape: In response to the constantly changing business landscape, the regulatory mechanisms related to the FinTech sector are also evolving in a rather quick fashion. Especially when it comes to the integration of distributed ledger, decentralized finance, and API protocols, the supportive stance from legislators can prove to be of enormous help to the FinTech sector. FinTech players are investing in innovative business models and by taking financial services to the doorsteps of the customers, these firms are creating a win-win situation for all stakeholders involved in the global financial ecosystem. 5) Potential of Generative AI: In a recent survey conducted by Gartner, 70% of the leaders in financial services acknowledged the transformative potential of Generative AI. Generative AI tools like ChatGPT and Bard can significantly benefit firms in banking, insurance, and investment management. From generating content, distributing information, and specifying reports to maintaining compliance, Generative AI can equip FinTech firms with multidimensional capabilities. Leading tech giants such as Intel, Azure, AWS, and Nvidia are investing significantly in the field and are coming up with novel solutions that are likely to prove a game-changer for the segment in the coming years.
The author is senior director marketing, MSys Technologies
