Growth over profit has long been considered the go-to business strategy in the fintech space. The approach seeks to drive rapid user acquisition, which builds brand recognition and increases the value of platforms in the eyes of users. Rapid growth also has the potential to increase the value of platforms in the eyes of investors.
However, some experts believe it’s time for a new paradigm in the fintech space, with a recent report by McKinsey and Company saying that the era of hypergrowth in fintech is passing. The new normal, it suggests, is a focus on “sustainable, profitable growth.”
To excel in this new era, fintech firms will need to learn how to shift their focus from innovation to evolution.
“For years, the companies that have thrived in the fintech space have prioritized growth over profit, innovation over evolution,” says Justin Leto, Co-founder and CEO of Idea Financial. “That strategy works when businesses balance it with discipline and an eye toward profitability, but the strategy of prioritizing growth over everything else took a major hit in 2022 when credit began to tighten and rates started climbing.”
Idea Financial is a fintech company that provides business growth financing to small businesses through working capital lines of credit. It offers products and services that empower businesses to improve cash flow, mitigate business risk, and invest with a low cost of capital.
“When the financial landscape started to change in 2022, suddenly capital markets and the public markets became bearish on unprofitable growth companies,” Leto explains. “As debt became more expensive, the hypergrowth model ceased to be sustainable. Investors went searching for companies that were proving they could turn a profit and not just attract a user base.”
Embracing a Season of Evolution
The McKinsey report on fintech growth cites a decline in funding and deal activity in the sector. Consequently, fintechs have been forced to rethink value creation. Rather than risking growth at all costs, fintechs now must adopt strategies that prioritize cost management and measured growth.
“Fintech companies need to adopt a balanced approach to ensure success,” Leto offers. “Growth is still critical, but it needs to be responsible growth. Innovation can’t sacrifice financials, so the new focus needs to be on profitability combined with growth. Those who neglect the former will find it harder to generate financing for the latter.”
Being Disciplined in Developing the Core Business
An innovation mindset prioritizes the pursuit of new products, services, and business models. It seeks to gain a competitive advantage by creating disruptive change in the market or by establishing completely new markets.
Businesses driven by an evolution mindset are more disciplined at improving and adapting their existing products and services because they compete by focusing on optimizing rather than innovating. Streamlining internal operations to enhance efficiency is a component of the evolution mindset.
In the new era, innovation must take a back seat to evolving the company’s core business. The McKinsey reports quotes fintech execs who describe it as a season of “back to basics.” In the new fintech economy, expansion must follow, building a strong core.
“A disciplined attitude will be essential for fintechs moving forward,” says Larry Bassuk, Co-founder and President of Idea Financial. “Discipline is not only for misbehaving children. In the business world, it keeps companies focused on the fundamentals necessary for achieving their goals.”
Bassuk provides financial leadership for entrepreneurs through Idea Financial and its wholly-owned subsidiary LevelEsq, which assists law firms in financing their case expenses by providing lines of credit.
In the new fintech era, discipline can be the key to navigating a landscape where resources are limited. McKinsey calls the new financial environment “challenging and uncertain,” citing a decline in IPOs, special purpose acquisition companies, and new unicorn creation. Other reports show a 42 percent year-over-year decline in venture capital investment in fintech companies during 2023.
“Discipline may take the form of creating a comprehensive budget, monitoring that budget, and holding your team accountable for adhering to it,” Bassuk advises. “You see discipline in a team that keeps commitments. Discipline empowers team members to stay organized and follow procedures. Essentially, it is a guiding principle that allows an organization to methodically and intentionally perform at its peak, measure its progress, and achieve success.”
Finding a Balance Between Profit and Growth
The challenge for fintech companies in the new era will be resisting the urge to swing the pendulum too far away from growth and toward pursuing profit. Innovation will always be the lifeblood of tech companies. Tempering innovation with a disciplined approach to evolution is the key to sustainable growth and long-term success.
