Five sure bets for FinTechs to win in a turbulent market

After several years of soaring expectations, the Fintech sector has come down to earth with a bump. Amid rising interest rates and weakening business sentiment, the sector is?grappling with its biggest downturn in a decade.??Average revenue multiples dropped to just four in early 2023, compared with as high as 25 two years ago, while market valuations have widely fallen by more than 50%. (See Exhibit 1). In a challenge to expansion plans, valuation declines have in many cases been accompanied by a tightening of financing conditions. There was an 80% drop in new funds raised across the sector between the third quarter of 2021 and fourth quarter of 2022 (per BCG's Fintech Control Tower).

In a market environment predicated on growth-at-all-costs, Fintechs have struggled to generate substantial operating leverage (See Exhibit 2). Margins are down significantly from a low or negative base pre-crisis, despite rapid revenue growth in the past few years. Often this has been because firms have banked on maintaining growth momentum and have not deliberately designed organizational and operating models to exploit the benefits of scale. The result has been a missed opportunity to build efficiency and resilience into the business. Meanwhile, macro challenges are being exacerbated by a tough consumer environment, characterized by higher borrowing costs, credit losses, and pressure on spending.

Looking ahead, the challenging conditions will intensify pressure on margins—and on decision makers.??Investors will expect leaders to show they can expertly navigate adversity and build more resilient business models in the process. In many cases, this will mean pivoting from a focus on top-line growth to a focus on profitable growth, while embedding economic prudence in decision making. In this article, we discuss five levers that can support the journey. (See Exhibit 3).?

1.????Set a clear strategic direction

Technology is blurring industry boundaries and expanding horizons. Thriving in this environment requires both a strong strategic focus and the ability to translate it into action. Fintechs that have strategic clarity on what matters most will find it easier to double down on critical initiatives and avoid distractions. Setting clear but ambitious goals will help companies align the organization around meaningful but achievable objectives.

2.?????Foster organizational and operational excellence

Now is also the time to reassess operating models and how work is being done to make sure that the firm is growing from an efficient and scalable base. In our experience, here are a few things that leadership can do:

• Build effective and efficient organizational structures, while?building new capabilities to?accelerate delivery against?customer priorities.
• Restructure organizations resulting in bold work reduction through?simplification, elimination, process redesign, digitization, and automation
• Build modularity, and leverage agile ways of operating that allow resources to shift to/from highest strategic priorities.

3.????Organize and aggressively build talent to win

Future-proofing the business model should incorporate no-regret moves to expand capabilities and invest in talent, despite recent industry-wide lay-offs.??

Four proven approaches:

• Clearly define what differentiating capabilities and associated skills should reside in-house.
• Develop demand and supply-based plans to optimize talent and secure future-forward skills.
• Design a competitive employee value proposition to win in critical talent segments.
• Deploy variable staffing models that allow for fluid increases and decreases in capacity

4.????Optimize GTM for profitability

In the era of easier money, Fintechs were heavily focused on growth, often acquiring customers through expensive sales and marketing models. In addition, there was limited sales discipline, amid high levels of demand. Now, the focus must switch to customer life-time value that will drive sustainable unit economics, and a commitment to drastically reduced burn rates. In our experience, the following actions can foster commercial discipline and support more productive sales organizations:

• Segment the customer base to identify and target priority pools.
• Realign sales roles, processes, and enabling capabilities to support GTM motions for priority segments.
• Create simple, transparent incentive structures to encourage buy-in. Ensure the structures are aligned with the firm’s strategic goals.
• Build a separate team or role dedicated to renewals, freeing up sales teams to?win new business.

5.????Ruthlessly prioritize investments?

Finally, Fintechs should concentrate on strengthening investment prioritization muscle. This will help them make more prudent choices and achieve a higher return on investments, while staying better aligned with strategic priorities. For many Fintechs, products and technology are the biggest expense buckets, so?enforcing strong business case discipline will support profitability and returns.

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Fintechs are down but not out.??While the current market environment presents a challenge, it also offers an opportunity to reset and embrace sources of resilience and value creation that will stand market participants in good stead for the future. The priority therefore should be to embrace the five levers and position the business to grow sustainably as the economic cycle turns.

Inderpreet Batra is a Managing Director & Partner in the New York office of The Boston Consulting Group.? Frank Breitling is Managing Director & Partner in the firm’s New York office. Juan Carlos Intriago Velez is a Partner in the firm's Chicago office. Aaron Cormier is a Senior Knowledge Analyst in the firm's Toronto office. Vishal Luniya is a Project Leader in the firm's New York office.