The difficult funding conditions that hit fintechs last year will continue in 2024, a new McKinsey report on the sector says. According to McKinsey, capital raised by the global fintech industry grew from US$19.4 billion to US$33.3 billion between 2015 and 2020, at a compound annual growth rate of 17 per cent.  In 2021, the acceleration in digitisation triggered by COVID prompted a fintech funding increase of 177 per cent to US$92.3 billion. Funding levels returned to the long-term average in 2022 and fell again in 2023. The correction caused fintech valuations to plummet.  McKinsey said that with the macro environment likely to remain uncertain this year, it is shaping up as another year of difficult funding conditions for the sector. Since the end of the funding boom, fintechs have had to find ways to make cash last longer and to move more quickly to profitability. “When funding was readily available fintechs were encouraged to experiment with their business models and take risks in the pursuit of growth,” the report said. “A challenged funding environment means fintechs can no longer afford a ‘growth at all costs’ approach.” McKinsey interviewed more than 100 founders, investors and bank executives. Cost savings have become a priority, along with a focus on home markets rather than overseas expansion, and divestment of underperforming business units. The good news is that technology developments are generating value creation opportunities and revenue in the fintech industry will grow almost three times faster than in the traditional banking industry over the next few years. McKinsey estimates fintechs accounted for 5 per cent of global banking industry revenue of US$6.5 trillion in 2022. That share will increase. Fintechs that will do well include those offering B2B services, which is being fuelled by the increase in banks and other financial institutions adopting off-the-shelf solutions provided by fintechs. This includes payments, open banking and core banking technology. “Many businesses continue to rely on legacy banking infrastructure that limits flexibility and speed and can often be more costly. To address these challenges, businesses are using off-the-self solutions provided by digital natives,” the report said.