Adaptation and Growth: The Road Ahead for the FinTech Sector

In 2023, the financing of the FinTech sector has faced some serious fluctuations. The latest KPMG report shows that in the first half of 2023, global financing of the FinTech sector decreased by 17 per-cent compared to the second half of 2022. Despite facing this and other recent challenges, FinTech is one of the most advanced and innovative sectors on a global scale, and finance experts remain positive about its future.

The numbers show that nearly every region in the world has felt the effects of the economic slowdown, with Latin America perhaps hit the hardest. Investments there have shrunk by as much as 85 percent from the USD 1 billion limit, reaching just USD 514 million in the first half of 2023.

Globally, the overall picture for the FinTech market has been significantly improved by the success of the big players. For instance, after becoming a flagship of the mobile payment revolution, the startup Stripe pulled in a whopping USD 6.87 billion on its own.

However, perhaps the most worrying sign is the declining number of FinTech deals. In the first half of 2023, the companies and startups in this sector completed 1,178 investment rounds, which is 64 percent less than during the same period in 2022.

Positive changes on the market could be achieved by stabilising interest rates and promoting the merger and acquisition activity, which has also declined significantly compared to last year. In 2022, there were more than 850 of these deals in the FinTech sector, while in 2023, this number has not even reached 300.

KPMG experts forecast that the improving market conditions will encourage more mergers and acquisitions. Due to lower valuations, such deals will be especially favourable to enterprises, private equity, and startups alike. In addition, the major companies are expected to increasingly invest in startups that help them operate more efficiently by providing solutions that range from cybersecurity to finance management optimization, supply chains, and payments.

Analysts also claim that FinTech investors will increasingly value companies that can demonstrate growing revenues and the ability to shorten the path to profitability. They will likely have the option to choose their investors, rather than having to actively seek them out.

Considering the current financial oscillations, the FinTech sector’s aptitude for innovation remains its cornerstone. The sector has continued to burgeon at the intersections of technology and finance, fostering a conducive ecosystem for groundbreaking solutions in the face of dwindling investment figures.

Sectors Poised for a Significant FinTech Expansion

The year 2024 beckons with promising FinTech trends, despite the challenges encountered this year. As identified by StartUs Insights, the top four FinTech trends are outlined below, accompanied by the growth figures, and are set to shape the industry landscape.

Artificial Intelligence (AI)

Artificial Intelligence continues to be a driving force in the FinTech sector, by automating processes, analyzing vast amounts of data, and enhancing decision-making. AI-powered solutions are helping financial institutions to provide personalized experiences, detect fraud, and optimize their operations.

Companies like Square, which utilizes machine learning to prevent fraud, and Kabbage that employs AI to streamline the lending process, are emblematic of the current AI trend within FinTech.

In terms of the Fintech market size, AI is projected to grow from an estimated USD 42.83 billion in 2023 to USD 49.43 billion by 2028.

Decentralized Finance (DeFi)

Decentralized Finance, or DeFi, is a blockchain-based form of finance that operates without the need for input from central financial intermediaries such as banks, brokerages, or exchanges. DeFi platforms enable users to borrow, lend, or invest their assets in a permissionless and transparent manner.

Aave and Compound are two noteworthy platforms in the DeFi space, facilitating peer-to-peer lending without a traditional financial intermediary.

The global decentralized finance market, which was valued at USD 13.61 billion in 2022, is expected to grow at a CAGR of 46.0 percent from 2023 to 2030.

However, the experts emphasize that the lack of clear regulatory frameworks could impede the adoption and growth of DeFi platforms.

Open Banking

Open Banking is revolutionizing the way that financial data is shared and accessed. By securely sharing financial information, with the customer’s consent, Open Banking facilitates the creation of new apps and services designed to help consumers manage their finances in a better way.

The number of open banking users worldwide is expected to grow at an average annual rate of nearly 50 percent between 2020 and 2024, meaning it will rise from 12.2 million to 63.8 million over this period. The value of global open banking transactions reached 57 billion U.S. dollars in 2023.

Digital Banks

The emergence of digital banks, which operate without physical branches, has already reshaped the banking landscape. By offering a range of financial services online, digital banks provide better convenience, lower fees, and an enhanced user experience.

The overall FinTech market, which includes digital banks among other FinTech services, attained a value of more than USD 194.1 billion in 2022 and is expected to reach over USD 492.81 billion by 2028.

Despite facing a myriad of challenges in 2023, the FinTech sector is faced with a promising outlook as it steps into 2024. The financial fluctuations and declining investment deals have underscored the sector’s resilience and its ability to continue innovating. As major players like Stripe have sustained the market’s momentum, the emerging trends of Artificial Intelligence, Decentralized Finance, Open Banking, and Digital Banks are set to further propel the sector into a new era of digital transformation. These trends, backed by robust growth projections, highlight the adaptive nature of the sector and its unyielding quest for innovation. Overall, it can be anticipated that the amalgamation of these elements, alongside positive economic conditions and a resurgence in investment activities, will steer the FinTech sector along a trajectory of sustainable growth and heightened technological advancements.

Ekmel Cilingir, Chairman of the Supervisory Board of European Merchant Bank

Ekmel Çilingir | Chairman of the Supervisory Board of European Merchant Bank UAB