Where are Fintech companies heading?

Fintech companies have come of age. This is one of the main conclusions drawn from Global Fintech 2023: Reimagining the Future of Finance, a report prepared by Boston Consulting Group in collaboration with QED Investors. In it, thirteen consultants analyze the prospects of these companies, which have raised more than $500 billion in financing over the last decade.

The landing of these organizations has wholly transformed the financial landscape. Not only did they make it more accessible to all players, but they also accelerated the digital transformation and forced conventional entities to adapt to this new context. For this reason, they achieved a grand reception at both the social and business level, and it did not take long for them to start rising like wildfire.

Although in the past they were perceived as a complement, the pandemic brought to light the need to carry out transactions over the Internet without relying on physical branches or face-to-face procedures. This gave them a significant role, which continues to this day.

Currently, there are more than 32,000 Fintech companies worldwide, including Inversa Invoice Market. And for all of them, the study paints a positive outlook, with many possibilities for long-term growth. The report, therefore, endorses Inversa's value proposition, showing an environment that is receptive to this type of initiative.

But what does Fintech mean, what challenges do these companies face, and in which markets do they have more growth projections? The report published by the U.S. consulting firm sheds light on some of the unknowns surrounding this sector.

The pairing of technology and finance

The translation of Fintech, a term from English, leaves little to the imagination. This concept, born from the union of finances and technology, literally means "financial technology." And it brings together all companies in the financial sector that take advantage of technological innovations to automate and optimize their processes and services, boosting efficiency and improving the customer experience.

Take investment, for example. Decades ago, if you wanted to invest, you had to go to a broker. Even today, citizens who wish to buy or sell stocks can only do so during business hours. But the emergence of Fintech companies has made investing a more comfortable and simple process, which adapts to the needs of practically any profile.

With Inversa Invoice Market, investors who wish to increase their savings can do so from their cell phones, financing the invoices of all kinds of companies from the comfort of their homes and at the time they consider most appropriate.

The Internet is the key to the success of Fintech companies, which have been propelled by digitalization. If people did not have a telephone or a computer at their fingertips, they would not even have taken off. After all, these devices give people unprecedented autonomy since they allow them to make investment decisions independently without relying on intermediaries.

The cryptocurrency boom highlighted this trend. Savers were demanding decision-making power, and these products gave this to them. Regardless of their speculative nature, cryptos responded perfectly to this social demand.

But how did Fintech companies become what they are today?

Take a look at the past…

The first chapter in the history of Fintech companies was written 25 years ago. The Boston Consulting Group report distinguishes four phases in their evolution, with the first, dubbed Digital Disruption, beginning in 1998. During this stage, the incipient democratization of internet-connected devices acted as a catalyst for financial services to take their first steps in the digital environment, thus giving birth to online payments.

The financial crisis marked the beginning of the second phase: Mobile and Social Adoption. Innovation stepped on the accelerator, and smartphones and cloud technology allowed users to access financial services in real-time. At the same time, focus began to be placed on the potential of data to personalize the customer experience.

In 2015, the third stage, called Relevance and Scale, began. Neobanks became popular, and thousands of companies were founded, whose valuations skyrocketed, increasing competitiveness. This period was also marked by the outbreak of the pandemic, during which financial services were required to be available online without interruption.

The current and last phase, Looking Ahead, started in 2022. It expects more proactivity in regulation, a boost in innovation in less advanced regions, and an increase in the salience of artificial intelligence and distributed ledger technology (DLT).

…to understand the present…

Two years ago, the valuations of Fintech companies reached 20 times their revenues. But since 2022, they have plummeted globally, regardless of the company's activity or origin. Nevertheless, their revenues have not stopped growing, albeit at a more moderate rate. So, is this drop a cause for concern?

Boston Consulting Group analysts believe this downturn is simply "a short-term correction in an otherwise positive long-term trajectory, as the fundamental drivers of industry growth have not changed."

However, many experts are already discussing the "winter of funding" in Fintech companies. New financing has fallen by 43%. A decline caused by the rise in interest rates and inflation that mainly affects firms at a more advanced stage, which no longer receive as much support in the financing rounds. How to survive this frost?

To get through this slump and emerge more robust and resilient, many companies have stopped trying to increase their revenues at all costs. Instead, they focus on the bottom line, paying attention to their business's most profitable economic units and investing time and money to innovate in those key areas. In addition, the report highlights that some lending platforms are betting on acquiring banking licenses.

Despite this glacial period, the financial services industry is still one of the most significant segments of the global economy, totaling more than $12.5 trillion in annual revenue, which translates into a net profit of more than $2.3 trillion.

And the Fintech sector is still taking off. Analysts at the strategic consulting firm point out that this industry is still at a very early stage since it only represents 2% of past revenues (around $245 billion).

The margin for growth is, therefore, abysmal. Especially considering that there are still more than a billion and a half adults who do not have a bank and that, although payments have been the leading players so far, B2B and B2B2X solutions are the ones that will grow the most over the next few years.

The environment, in short, is favorable for the development of companies like Inversa Invoice Market, in whose invoice marketplace it is possible to finance sustainable businesses while enjoying good short-term returns.

The Boston Consulting Group report stresses that all Fintech companies, from neo-banks to lending platforms, will face challenges in more developed countries. Challenges, such as customer acquisition, that is the main challenge and top short-term priority for six out of ten CEOs. But, at the same time, these companies are set to play a crucial role in emerging markets, where they have many expansion opportunities. And this landing will be vital for their growth: it is estimated that, by 2030, their annual revenues will increase sixfold, reaching $1.5 trillion. This, in turn, means an average annual growth rate of around 22%. By then, Fintech companies will already account for 13% of bank revenues and 25% of bank valuations. By the end of the decade, the Asian market will likely become the worlds largest. And the European market, which is set to grow fivefold, will be marked by regional expansion. Although the penetration of Fintech companies in Europe is not yet very significant, regulators are open to new forms of open finance, and new products and services are expected to emerge as levers for development. This scenario will favor the emergence of what experts call local champions: organizations that import successful business models from more developed countries to less advanced regions, adapting them to the circumstances of each territory. A pioneer that will set the pace and offer, for example, crowdlending or crowdfactoring services in countries where these alternative financing systems are still in their infancy. In addition, the omnipresence inherent to the Internet allows investors and companies worldwide to bet on these solutions. This is the case of Inversa Invoice Market, which was born in Galicia, but has a large number of companies from different countries on its platform. What awaits todays Fintech companies?

While it is true that the breeding ground is fertile, Fintech companies will have to face several challenges related to regulation, data privacy, and competition from the bigger fish if they want to lead the finance of the future.

To begin with, the lack of oversight by authorities may generate uncertainty and distrust among consumers of financial services. After the widespread crash of cryptocurrencies, many may find it difficult to move to new investment methods.

As there is no trust without transparency, Inversa shows the risk level of each invoice. A rating that is determined by third parties to ensure neutrality and independence.

Fintech companies work with a very sensitive asset: their customers' personal and financial data. If this information is stolen or lost, the consequences can be catastrophic. Not only at a legal and reputational level but also economically, as it can lead to user leakage. To avoid this type of incident, it is essential to shore up the protection of platforms.

Finally, more and more large multinationals are entering the game, convinced of the growth potential of the Fintech sector. If they acquire a dominant position, they could eliminate competition to the point of creating a monopoly, which would be detrimental to the business fabric, consumers, and even innovation.

For these reasons, Fintech companies must be on their guard against these threats. According to Boston Consulting Group, the success of this sector will depend on its leading players (companies, investors, incumbents, and regulators) interacting and collaborating with each other.