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Four McKinsey & Co charts that should make anyone bullish about Fintech companies
McKinsey & Co are famous for its insightful research and beautifully looking charts. I have selected four charts from various McKinsey and Co studies that illustrate the size of the business opportunity for Fintech companies in payments, wealth management, neobanking, and insurance. I hope these charts will help you better understand why Fintechs are getting so much attention from entrepreneurs and investors around the globe (spoiler: every corner of the financial services industry is a massive opportunity!). Enjoy!
McKinsey & Co estimates the global payments revenue to reach $2.6 trillion globally by 2025 (implying annual growth of 7% from 2020). In their estimations, McKinsey & Co includes revenue from all types of payments, including card and non-card, commercial and retail, as well as domestic and cross-border payments.
Paypal, Square, and Stripe are the first Fintech companies that come to my mind when thinking about payments and the massive opportunity it presents. However, “Buy Now Pay Later” players, such as Affirm and Klarna, are also payment companies, as their solutions replace credit cards in online payments. Moreover, Venmo and Cash App started as payment wallets providing consumers with more convenient and cheaper ways to pay. Finally, one should not forget the new generation of payment processors, such as Adyen and Marqeta, that might not be visible to the end consumers, but are in the same race of disrupting incumbents in the payments space.
In short, the payments industry is already a massive opportunity and continues to grow globally. Thus, I expect more and more Fintech companies to attack the space with innovative solutions.
One of the investment theses for Robinhood is that at some point the "baby boomer" generation (people born in 1946 - 1964) will start retiring and passing their wealth to their kids, Millennials (people born in 1981 - 1996) and Gen Z (people born in 1997 - 2012). It is highly unlikely that these "kids" will go to the Goldmans and the Schwabs of this world, and will stay with the brokerage that they started their investment journey with...Robinhood.
McKinsey & Co estimate that 2014-2020 was a turning point period during which baby boomers stopped being the dominating force in terms of accumulated wealth and passed a sizeable portion of it to the next generation, Gen X. Millennials still represent just over 10%, but the chart illustrates the inevitability of the trend.
Moreover, some analysts believe that Gen Z might skip investing in the stock market altogether and invest solely in crypto, which would make Coinbase one of the key beneficiaries of such wealth transfer. The thesis is not that crypto will replace public markets, but that the younger generation of investors is not keen on reading 10Ks and listening to the earnings calls, and instead discover their investment ideas on Discord channels, Reddit, and Twitter.
McKinsey & Co estimates total banking revenue in North America to be more than $1.6 trillion annually, of which $604 billion is attributed to Retail banking and $245 billion to Payments. Not surprisingly, many Fintechs, such as Block’s Cash App, Chime, SoFi and MoneyLion, attack the opportunity from different angles.
Thus, Cash App started its journey as a peer-to-peer payments wallet, but since then has expanded its offering into cards, investments, crypto, and (allegedly) is working on a lending product. SoFi started its journey as a student lender, but over the last few years has added personal loans, mortgages, and investments, essentially, becoming a universal consumer bank (they even got a national banking charter to get access to cheap deposits).
Cash App generated revenue of $12.3 billion last year, of which $10.0 billion came from Bitcoin trading. Comparing this to McKinsey’s revenue estimates in Retail Banking and Payments segments illustrates the enormous potential for the Fintech companies in this space.
McKinsey & Co estimates almost $6 trillion in gross insurance premiums written in 2021. In addition, the company estimates that the insurers earned $360 billion in after-tax profits globally. The same study (follow the link below), estimates $2.76 trillion in gross written premiums, and $142 billion in after-tax profit in the markets of North and South America.
Most of the insurtechs (think Lemonade, Root Insurance, Oscar Health) got completely destroyed in the public markets (i.e. Root Insurance and Oscar Health shares are down 93% and 75% respectively since their IPOs), as they struggled to achieve profitable underwriting and had to scale down their growth to preserve cash. Some bears are even claiming that the Direct-to-Consumer model that all these insurtechs pursued, is not viable at all.
Nevertheless, the data from McKinsey & Co suggests a huge (and fragmented) market, so if the first generation of insurtechs, such as Root Insurance, won’t make it eventually, I would expect more challengers to pursue opportunities in this space.
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Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.