Fintechs are companies that rely primarily on technology and cloud services—and less so on physical locations—to provide financial services to customers.
These days, you’re almost more likely to see the inside of a bank branch in an old movie than you are in real life. But take a look at your phone: there are probably at least two money apps on your home screen—maybe more. According to McKinsey research, this is just one sign of a new era in payments. What’s one major development behind this shift? Short word, big concept: fintech.
Max Flötotto is a senior partner in McKinsey’s Munich office; Brian Ledbetter is a senior partner in the London office, where Tunde Olanrewaju is the managing partner of McKinsey’s UK, Ireland, and Israel offices; Alexis Krivkovich and Marie-Claude Nadeau are senior partners in the Bay Area office; and Eckart Windhagen is a senior partner in the Frankfurt office.
Fintechs—short for financial technology—are companies that rely primarily on technology to conduct fundamental functions provided by financial services, affecting how users store, save, borrow, invest, move, pay, and protect money. Most fintechs were launched after 2000, have raised funding since 2010, and have not yet reached maturity. They make it not only possible but also easy to move money between accounts, people, countries, and organizations. There’s no typical fintech company: fintechs include start-ups, growth companies, banks, nonbank financial institutions, and even cross-sector firms. Examples range from peer-to-peer payment services such as Venmo and Zelle to automated portfolio managers and stock- or cryptocurrency-trading apps such as Robinhood and Coinbase.
Fintech came to prominence around 2010, primarily in the payments space. Square, for instance, which was founded in 2009, enabled small companies or sellers to accept credit cards via a mobile device. Today, fintech disruptions have expanded to every corner of finance—even areas once assumed to be safe from digital threat. Fintech is spreading fast: in the United States, for example, almost one in two consumers in 2021 used a fintech product—primarily peer-to-peer payment products and nonbank money transfers. Fintechs also raised record capital in the second half of the 2010s: venture capital funding grew from $19.4 billion in 2015 to $33.3 billion in 2020.
But recently, the luster has worn off a bit: in 2022, a market correction caused a slowdown in fintech’s explosive growth momentum. As a result, fintechs have had to adjust to lower valuations and decreased willingness on the part of venture capital firms to fund companies with low margins. Rather than sprinting toward the hockey stick of old, fintechs today are focused on sustainable, profitable growth. Banks, in response, have seized the opportunity, developing their own fintech-informed digital products and services. In the future, competition for client deposits and balances will likely intensify.
But before we look into the future, let’s first explore the past and present. What is fintech, what kinds of convenience does it offer, and where in the world is it being used? Read on to find out.
Banking is in its second era of digitization, according to McKinsey senior partner Brian Ledbetter. Traditionally, banks were anchored on a customer service arrangement that relied on branches and call centers. He says, “If you needed something, you’d either ring on the phone or go into the branch and get it done. Then, with the advent of smartphones, we discovered that mobile and digital technology was the primary way to engage with customers. . . . And so we had a boom in apps and automated journeys, which banks hooked up to their existing systems.”
This has led to a problem of technical debt: When banks set up this first phase of digitization, they did so with the technology they had at the time. Over time, these older systems have become obsolete. This created an opportunity for more agile fintech companies to disrupt business as usual, offering customers less clunky, more convenient ways of doing business. Today, banks are at an upgrade point for both the front and back ends. And their institutional capacity may be a benefit when it comes to adopting and deploying solutions based on rapidly advancing new technologies.
According to our research, three trends will shape the next phase of fintech growth. First, fintechs will continue to benefit from the radical digital transformation of the banking industry and e-commerce growth around the world, particularly in developing countries. About 73 percent of the world’s interactions with banks now take place through digital channels. B2B firms are also demanding more fintech solutions than ever. To capitalize on the demand, fintechs will need to keep up with evolving regulations and ensure they have adequate resources to comply.
