MediaTalk | Season 3 | Ep. 11 - A Deep Dive into FinTech's Growth, Challenges, and Future Trends

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Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with S&P Global Market Intelligence's tech, media and telecom news team. Welcome to "MediaTalk," a podcast hosted by S&P Global, wherein the news and research staff explore issues in the ever-evolving media landscape. Today we're going to talk about all things fintech, everything from what it is, for those of us who still sometimes use paper checks, God forbid, to how it has matured in recent years. I'm joined by Sophia Furber from 451 Research's fintech research and gonsulting group within S&P Global Market Intelligence. Sophia, how are you doing today?

Sophia Furber: I'm very well, thanks. Thank you so much for having me on the show.

Reynolds: All right. Also in the "MediaTalk" house is my colleague, Iuri Struta. Iuri is an S&P Global Market Intelligence reporter covering tech, M&A, and capital markets. Iuri, what's going on?

Iuri Struta: Hey, Mike. Nice to join again.

Reynolds: All right, this is "MediaTalk" first: both of our guests are across the pond in London talking to this New Yorker here. Let's do it. Sophia, for those of us who remember visiting local bank branches and getting money from ATMs, can you explain what fintechs are? Are there some different types?

Furber: Yeah, absolutely. So, for everyone who still uses checks or maybe grew up having a piggy bank for coins at home, I'm going to give a quick recap of fintech. Fintech is a portmanteau of finance and technology, and it refers to the integration of technology into the design and delivery of financial services. So what does that mean in practice? Fintech covers a wide range of applications and services. Some of those are things that you or I might use on a daily basis as a consumer. Things like mobile banking, investment apps like Robinhood Markets Inc., digital payments like PayPal Holdings Inc. or Venmo LLC. It also covers companies that basically make payments for e-commerce possible. So that would be companies like Stripe Inc. or Adyen NV if you are purchasing online, say from Amazon.com Inc.; or maybe if you're tapping to pay on a point-of-sale terminal in a shop, buying a coffee from companies like Ingenico Corp.

Fintech can also refer to technologies that work behind the scenes at financial institutions to help them work in a more efficient or secure way, or to help provide a better experience for the customers. So you've got fintech selling services like blockchain, fraud prevention, capital markets tech, AI-based solutions to help banks manage huge books of mortgages and consumer loans, and more. So even if you are someone who is old school and still uses checks and ATMs, or even goes into the branch in-person, fintech has probably touched your financial life at some point without you even knowing it.

Reynolds: Another first today. First-ever use of "portmanteau" on "MediaTalk." Thank you, Sophia. Okay, fintech has been around for quite some time now, but they're no longer the new kids on the tech block, so to speak. On the other hand, there's plenty of revenue share ahead for them to grab. How do you think, Sophia, about the maturity of the sector at this juncture? What are some of the things working against it and what may be holding it back?

Furber: Yeah, absolutely. I'm going to dive in with the revenue opportunity. You are right, it's there. It is absolutely there. The question is how easy is it for fintechs to realize? So to put it really crudely, there are sort of low-volume but high-value activities that fintechs can do. And that's mainly fintechs that are selling solutions to big financial institutions. Banks over here in Europe have had a pretty good run of profitability in the last couple of years, with interest rates being on the high side and other factors. They've also got some pretty old and creaky legacy infrastructure and outdated tech stacks, which they're under pressure to upgrade so that the lights stay on at the banks that we use in our daily lives. So when faced with a build or buy decision, a lot of banks decide to procure the services of a fintech. So yeah, banks are doing pretty well. They have got money to spend on this kind of thing. So there's a big revenue opportunity for what I like to call the fintech enablers that make the magic happen. Then there's consumer fintech, which is more of a high-volume but low-margin opportunity. Case in point is digital payment. So as more and more people from the world shift from analog to digital payments, there is potentially a great revenue opportunity there. I think you're absolutely right when you say that fintech is no longer the new kid on the block. I think both consumer fintech and B2B fintech have evolved hugely over the past decade, and they are a lot more trusted by consumers than probably they were even a decade ago. In terms of what is holding fintech back, one thing is falling venture capital volumes going into fintech. Iuri is our expert on that, and I'm going to leave him to pick up this question a little bit later in the conversation. Another thing I want to flag is just regulation. So if you are a fintech carrying out certain regulated financial activities, whether that's kind of payments, moving money from A to B, or whether it's providing a full-service bank account, you are going to need to have the relevant license for those activities, and those licenses are not always easy to get. To give an example, the wildly popular fintech Revolut Ltd., which was founded right here in London, famously took years and years to finally clinch a full banking license. They have got it now, but it was a lot of work to get that, probably quite a lot of money as well, in terms of getting them ready for that bank license. You're also on the hook as a fintech for complying with regulations around pretty heavy things like money laundering, international sanctions, and consumer fraud. If you make a mistake in one of those areas, you could run the risk of a huge fine from the regulator. So the cost of being compliant, knowing who your customers are, constantly screening transactions, that's really high. And at the end, I think those overheads do really have an impact on how profitable you can be, how quickly you can be profitable, how fast you can scale. And I think that's just the point that regulation will always be with us, but I think that's something that makes fintech a little bit different from maybe some other emerging tech sectors.

Reynolds: A lot of dynamics to consider there. Iuri, you recently published a report about fintechs that included some recently released headcount data from CapIQ Pro. What does this headcount data show?

Struta: Yeah, Mike, I think it shows some very interesting trends. Broadly speaking, in private companies, you don't have a lot of data to operate with, and the headcount data basically can provide additional insight into what the company is doing. Is the company growing, or is the growth stagnating, or is it actually going down, or whether there are some deeper problems? So you can get a lot of this from the recently released headcount data on CapIQ Pro. We did some analysis on the fintech sector, and what we've noticed is some things surprising, some may not be as surprising. So up until mid-2022, fintech headcount was growing at a frenetic pace, about 80% to 90% per year. And I'm talking about some of the leaders in the industry, companies like Stripe, Monzo, and many others, including Revolut. So a lot of these companies at the time were not thinking too much about profits. They were mostly thinking about growth, which was financed with VC money. And VCs were happy to put money into that kind of growth until 2022. As the interest rates started to rise and VC money ended in a drought, we noted a significant slowdown in hiring. If you look at companies like Stripe, their headcount declined. And this was a time when most of the companies were trying to get leaner. So since that devastating event, the interesting thing is that fintechs appear to be increasing headcount again, but they're doing it much more slowly and more judiciously, I would say. You have headcount growth that fell from about 80% in 2021 to about 10% now.

Reynolds: Interesting in the sense that there's still growth, which is a good thing. We'll keep our eye on that going forward. Your report also looked at rounds of funding raised by fintech. Are VCs backing down from this sector? And if that's the case, why?

Struta: Yeah, I think they are backing down a little bit. And I'd like to provide some broader context here. Fintech was, for many years, one of the sectors that saw the most VC investment dollars compared to any other sectors up until I'd say 2022, 2023. And the reason for that, I think, Sophia delved a lot into those reasons. But it's a very large, growing market that did not see a lot of innovation up until 2010 or so. Obviously, it was ripe for innovation, and you had companies like Stripe founded in 2010, which made it very easy for small merchants to accept payments. You had the buy now, pay later innovation by Klarna and then others following suit. You had all sorts of easy cross-border transfer technology and so on. And VCs are typically looking to invest in innovation. And fintech has, for a very long time, been one of the best areas for that. And that, I would say, ended in about 2021 with this sort of a bubble in tech names overall, and especially for fintech. Since then, VC funding in fintech has only trended down. This is due to, first, I think the innovation cycle in the sector is running its course. You just don't have a lot of innovation happening anymore. And a lot of the VCs, they've moved to the next big thing, which is now artificial intelligence, where you still have a lot of innovation happening. And this cycle has just begun. Just to give you an example, if you look at SoftBank Group Corp. and Masayoshi Son, these are perhaps one of the largest and most famous VC investors out there. They're known for taking very large bets, and they were investing heavily in fintech up until 2021. Now they're only focused on GenAI, they're not doing anything else.

Reynolds: Yeah, it is a GenAI world for so many of us these days. Iuri, if you're a fintech, how difficult is it to attract outside investors currently?

Struta: We've spoken with investment bankers, and only the most compelling fintechs are getting funding now. So it should be those that still have solid growth rates and are profitable or at least have a clear path to profitability. Only the best fintechs are funded now, and we're not in the period where it's easy to raise money if you don't have anything to show, like strong growth and profitability metrics.

Reynolds: Not all fintechs are created equally, though, right? Some areas are hotter than others. Sophia, I think in your 2025 outlook, you said account-to-account or A2A payments are projected to soar. Can you please tell us what A2A payments are and how they're being used?

Furber: Yeah, sure. So I think this is a really interesting area because when you think about payments, a lot of them travel along what I'm just going to call the infrastructure of Visa Inc. or Mastercard Inc. or another big payment network. Account-to-account payments are basically when money moves between bank accounts without going along those rails. How that actually works is via an API, a consumer can initiate a payment directly from their account to the merchant's account and cut out the middleman, whether they're paying a tax bill, utility bill, or paying for a piece of furniture. Uptake of that has been faster in some markets than others. The concept really comes from something that we call open banking, which is basically this kind of a concept of sharing data with customer permission from one bank account to another bank account. That can be used to facilitate an instant payment, to analyze a customer's spending patterns and suggest suitable products for them, or to do an instant credit check. So momentum around open banking is definitely starting to build in a lot of different countries in the world. I think the really interesting thing, just to go back to something that Iuri mentioned just now about the innovation cycle—we're not really getting that many sort of new ideas in fintech at the moment — open banking and A2A payments have been with us for a while. So actually, open banking regulations came into force in the UK in 2017, and that's quite a while ago now. We've only got about, I think, 10 million people using open banking, which includes A2A payments in the UK. So I think when we think about fintech and tech and innovation, we often think, oh, things move really fast, and often they do, but open banking and A2A payments, this is an area where it's actually taken a bit of time for that tech to mature and to catch on and for the killer use case to become apparent. But I think we felt, all of my team actually in the fintech, we felt the mood music was starting to change at the moment around open banking, and we think it is going to be used a lot more as a payment method in certain markets. Card networks are always going to be with us, right? We have a card network monitor, and we forecast that globally, with all the card networks, the volumes annually of payments going through them is going to be $86 trillion. So that's mainly Visa/MasterCard. But yeah, we reckon this new method of payment is going to start to gain traction. It's like the kind of hockey stick moment in adoption.

Reynolds: What about in the States overall? And more importantly, does A2A mean my boss Sarah and "MediaTalk" editor will be able to wait until the very last day to pay her utility bill?

Furber: Actually, yes. So this is one of the things that open banking and A2A payment methods have as an advantage over card and other payment methods, which don't always settle immediately. You do an account-to-account transaction, and that is going to clear immediately. So if you're someone that leaves their bill payments to the last moment, then yes, this absolutely will work for you. Interestingly, we see utility companies and also things like tax bills as being an area where open banking payments could really catch on. Check back in with us in a year, and we'll see if that hypothesis is correct.

Reynolds: Iuri, are there any interesting trends across fintech sectors and geographies that you'd like to talk about?

Struta: Yeah, I think if you look at geographies, the data shows that regions like Latin America and EMEA, or Europe and the Middle East, have actually seen VC funding in fintech increase in 2024 over last year. The decline was most severe in North America, which is mostly the US. And as I said previously, I think most VCs in the US have now moved on to the next technology shift, which is in artificial intelligence. If you look at some of the largest rounds in 2024, a good chunk of them happened in Europe or Latin America or APAC/Asia Pacific. Another important thing that we've noticed, which basically confirms that the innovation cycle in fintech has run its course, is if you look at the funding stages. Early-stage funding is down dramatically in 2024. I think the earlier you go, from seed to angel, the fewer funding rounds you see in fintech. If you go up to growth stages from Series A onwards, then funding there is definitely more robust. This indicates to me that investors are backing existing fintech companies, the leaders, and are generally avoiding plowing money into new fintech ventures.

Reynolds: So established companies are still getting support, companies trying to enter the field, not so much.

Struta: Exactly, yes.

Reynolds: Okay. What can you tell us about alternative and local payment methods? What are they? And I think you believe they're ready for a "local renaissance" in Europe.

Furber: Yeah, that's right. Now, this is a really fun topic, which I think is interesting for people who are looking into Europe from other continents or across the pond. To just give you a little whistle-stop tour of these local payment methods, because a lot of countries in Europe have their own kind of homegrown method of paying for things. It's almost like a very localized little kind of PayPal or Venmo type app, Apple Wallet that folks can use. So there's one called Bizum S.L. in Spain, which is super popular. There's TWINT AG in Switzerland. There's something called Blik in Poland. Most of them were actually set up by consortiums of banks who realized that the digital payment experiences they were able to provide just were not very good, and they were basically going to get made irrelevant by the likes of Google Pay, Apple Pay, Samsung Pay. I guess they wanted to stay relevant, so these banks have clubbed together and created these funky local payment methods. Like all the different countries of Europe with their different cultures, people have very different payment habits and financial services preferences. So they're all a little bit different from each other, but I've been doing a lot of research on studying the different ones in each country. Some of them you can do a lot of things with. In Twint in Switzerland, you can pay for your parking, get your insurance, get all kinds of loyalty points. It's quite a geeky and fascinating topic. But again, I think you've got this theme of banks wanting to compete with non-European companies. Actually, there's an element of them wanting to have an alternative to Visa and Mastercard, which are North American. Nothing wrong with them, but I think there's a feeling in Europe that we've got to have something of our own in case Visa or Mastercard fall over. That sentiment's been around for quite some years, by the way. It's not a recent thing, and it's not got anything to do with any recent political events across the pond, just to make that clear. Yeah, so I think one thing we really like to do in our team is understand the different cultural nuances of how people use fintech in their different markets. With my coverage spanning the Middle East and Europe, there's a lot of difference, and it's so fascinating.

Reynolds: Yeah, it sounds like it's really cool with lots of different factors working in the individual nations. And then, as you suggested, a consortium of sorts. Sounds pretty cool. Alright, Iuri, you talked earlier about VC funding. What about fintech M&A? Is it in bad shape at this point?

Struta: No, I don't think so. I think M&A is actually pretty good. A lot of investment bankers we spoke to typically do both VC and M&A, and they are pretty busy with M&A these days. Our numbers also show fintech M&A in 2024 is actually up compared to last year. It's not at the same level as in 2021 and 2022, but still. I think a lot of companies that cannot raise money anymore, given that VCs moved somewhere else, are now forced to find an exit. One of these is, of course, M&A. They can do consolidation with competitors and some other transactions that involve wholesale changes. Second, why M&A is pretty robust in the fintech space is that valuations have come down pretty significantly compared to 2021, 2023, which everyone was saying those valuations were not sustainable. But they are much more realistic now. If you look at the public equity valuations, most fintech names are still down like 70%, 80% compared to 2021, and low valuations, of course, make them attractive to outright acquisitions for all sorts of players. This could be strategic acquirers or private equity firms.

Reynolds: That makes sense. So it's got a lower valuation, so that again will attract more people, perhaps coming into the space. Do you think fintech VC and M&A, what's your sensibility for where it is today and maybe looking out over the next couple of years?

Struta: Yeah, I think we're probably going to continue to see good M&A activity. There is consolidation in many of the fintech sectors, there's a lack of VC funding. At the same time, low valuations make them more attractive for a broad range of buyers. I don't think M&A activity is going away. M&A transactions typically come in greater numbers when industries reach a certain level of maturity. VC funding is usually for when an industry is just at the beginning of being created. This is what we're witnessing basically: less innovation, less VC funding, more maturity, more M&A. I don't think M&A is going away, and it's probably exactly what many legacy financial institutions have been waiting for. They can now buy fintech assets, they can buy talented tech teams on the cheap.

Reynolds: Sophia, you've published a series on emerging fraud typologies. What were the three types of fraud you focused on and why those in particular? And how are fintechs looking to combat fraud more broadly speaking?

Furber: Oh, goodness. Fraud. This is really the dark side of the digital payments and e-commerce boom. The three types of fraud I focused on, the first one was friendly fraud. This basically is a category of sort of, it's not necessarily illegal activity that consumers engage in when they try to manipulate merchants' return policies. Ordering excessive amounts of clothes and then only buying one item, sending the rest back. Wardrobing is when people buy items, wear them once for a wedding or something, and then send them back to the store. So there's stuff like that. The thing is, at scale, this kind of adds up to huge losses for merchants, or it's abusing coupon and loyalty programs. Or it's doing a fraudulent chargeback. If you order an item, like a laptop, and then you call your credit card company and say, "Hey, this didn't arrive. Can I get a refund?" But it actually has arrived, and you've got it and you're about to sell it on the internet. I guess that probably is criminal activity, but friendly fraud also covers some categories, which are gray areas. Yeah, we've got a lot of people mucking about with chargebacks. A lot of that is going on, and it's a big sort of drag.

Reynolds: How can the fintech companies battle back?

Furber: So actually, one way they can fight back is with AI. Because there tend to be repeat offenders, if you can add certain markers or very subtle red flags around customers, repeat offenders can be picked up in the payment journey. Maybe not necessarily that they're going to be banned if they're just ordering excessive amounts of clothes and returning most of them, but some friction could be added into their consumer journey to maybe make them think twice about what they're doing. AI can be really helpful with that. I could go into this for hours and hours about stuff like neural networks and things that could indicate that odd behavior is afoot. If someone is making a transaction in one country and they're ordering it to a different country, sometimes that can be a sign that something is amiss. But AI's are some very clever ways. There's a very cool company called Ravelin, actually. Speaking of M&A, Worldpay just bought them, and they have some very cool technology for ratting out suspicious behavior among online shoppers.

Reynolds: Wow, I didn't think we were going to be going there, but I'm glad you did — very interesting. Alright, we're getting to the end here. Sophia, any final thoughts about what you're thinking and going to be writing about this year?

Furber: Yeah, absolutely. Just on the fraud theme, we are in a fraud arms race at the moment in the fintech industry because fraudsters are getting more and more sophisticated, ambitious, organized, and tech-savvy in how they defraud people. Whether it's people phoning up and pretending that they're someone's bank in order to get them to transfer vast amounts of money into a different account, whether you've got people trying to defraud e-commerce merchants. You've got deep fakes trying to get around ID verification in banks and online payment apps. It's pretty wild out there. I think it's a bit of a game of whack-a-mole for the fintech and payments industry. The good news is there are some incredibly smart, often very young companies that are coming up with tech solutions to fight fire with fire, especially when it's AI-based fraud. It's both scary and exciting. I'd just say another thing is when you're looking into, I think, especially the EMEA region, we're seeing more and more that a lot of fintechs that are very successful have got something that is very specific to the local market or the kind of neighboring countries that they operate in. I think a lot of us have grown up in a world of globalization. I feel like we may be seeing a little bit of de-globalization in payments, actually. Maybe that's a topic for another podcast.

Reynolds: Okay. Alright. Iuri, what are you going to be delving into in the fintech space this year?

Struta: Yeah, I'll be looking at how VC and M&A activity is evolving this year. My expectation is that there's going to be robust M&A activity and less robust VC activity this year. Already, the numbers for the first two months of 2025 show VC activity is down compared to the same period in 2024. It's pretty rough out there.

Reynolds: We'll see if that continues over the course of the year. That concludes this episode of "MediaTalk." I wanted to thank our guests, Sophia Furber and Iuri Struta, for joining us this week all the way across the pond. We do appreciate that and appreciate you guys talking to us about fintechs.

Furber and Struta: Thank you very much.

Reynolds: This is Mike Reynolds. Thanks to all of you for listening. We'll catch up soon on the next edition of "MediaTalk."