Banking Startups Reset: Profit Paths, Regulation, and the Next Wave of Growth

Banking startups enter a new phase of sober growth

In the Banking sector, After the frothy peaks of 2021, banking startups are navigating a more disciplined market. Global fintech funding rebounded modestly in 2024 but remains well below the 2021 summit, with investors concentrating capital in late-stage leaders and infrastructure plays. The sector raised roughly the low-$50 billions in 2023, a near-halving from the prior year, and early 2024 showed stabilization rather than a surge, according to recent research.

Deal flow has shifted toward profitability, regulatory readiness, and payments or core banking infrastructure—areas perceived as essential in a higher-rate environment. Digital banks with sticky deposits, card economics, and growing fee income have found a more receptive audience than those reliant on unsustainably subsidized growth. Founders report longer diligence cycles as investors probe balance sheet risks, compliance posture, and funding runway.

This reset is pushing teams to prioritize durable revenue over breakneck customer acquisition. The emerging consensus: land a bank partner early, keep cost of funds low, diversify income streams, and automate back office and risk. The new playbook favors fewer product bets executed deeper, not a broad feature race.

Profitability, scale, and the shape of winners

A handful of digital banks are breaking through on both growth and profitability, while many peers consolidate or pivot. Latin America’s Nubank, for instance, has become a scale outlier as it races past mass-market adoption and broadens into credit, investments, and insurance; its customer base cracked the nine-figure mark in 2024, validating a low-cost, mobile-first model in underbanked markets. Meanwhile in the UK, challengers like Starling and Monzo reported sustained operating profits on the back of higher net interest income, interchange, and business banking fees; in the US, SoFi’s bank charter has underpinned a shift to positive GAAP earnings and steadier deposits.

Despite these standouts, the profit picture across the category remains uneven. Only a small fraction of neobanks achieved profitability as of 2023, with many still struggling to drive primary-account behavior and monetize beyond cards. Roughly one in twenty players were in the black, industry reports show, underscoring how essential scale, cross-sell, and disciplined risk are to the model.

Unit economics are improving as rate-driven net interest margins normalize and credit losses remain contained in prime segments. The leaders are increasingly bifurcated: mass-market platforms monetizing engagement density via lending and wealth, and niche specialists dominating underserved verticals—SMB, freelancers, or cross-border workers—with tailored workflows and ecosystem partnerships.

Business models under the microscope: BaaS, compliance, and unit economics

Banking-as-a-service (BaaS) boomed during zero-rate years, letting startups launch quickly on sponsor-bank rails. In the past 18 months, however, scrutiny has intensified. US regulators finalized interagency guidance on third-party risk management that elevates monitoring expectations for sponsor banks, effectively tightening the aperture for fintech partnerships, data from regulators shows.

High-profile operational failures and disputes have further cooled the most aggressive BaaS models and exposed reconciliation, ledger, and funds-flow weaknesses. The result: fewer, deeper bank-fintech relationships; more direct integrations; and a premium on startups that can meet bank-grade compliance, fraud, and liquidity standards. Founders are also revisiting product scope—focusing on core deposits, card spend, and secured credit—where loss rates and funding costs are more controllable.

For startups with lending ambitions, the cost of capital and access to stable deposits remain decisive. Many are rebalancing toward fee-generating lines—payments, subscriptions, wealth—and adopting more granular risk-pricing and collection strategies. In parallel, infrastructure providers are winning share by standardizing onboarding, KYB/KYC, transaction monitoring, and dispute workflows, which compresses time-to-compliance and de-risks scale.

Regulation and technology: Open banking meets generative AI

Regulatory momentum is reshaping rails and data access. In Europe, the PSD3/PSR package and DORA enforcement timelines are pushing banks and fintechs to harden resilience and expand secure data portability, while the UK’s next phase of Open Banking aims to move beyond read-only data into safer, high-consent payments. In the US, the CFPB’s proposed Section 1033 open banking rule is expected to standardize consumer-permissioned data sharing, lowering switching costs and intensifying competition for primary relationships.

At the same time, AI is moving from pilot to production in onboarding, fraud, credit underwriting, and customer operations. Banks and fintechs are deploying foundational models to triage service, extract insights from unstructured data, and accelerate model development. The economic stakes are significant: generative AI could unlock hundreds of billions in annual value in financial services globally, according to analysts.

For startups, the edge comes from proprietary data flywheels and tight human-in-the-loop controls. Those that can combine real-time behavioral signals with explainable models stand to lower fraud losses and approval friction simultaneously—translating into better conversion, higher lifetime value, and lower operating cost per account.

Outlook: Consolidation, IPO windows, and where the next wave will build

As the rate cycle stabilizes, dealmakers expect a steadier IPO and M&A cadence. Large platforms with bank charters, durable deposits, and diversified fee income are best positioned to test public markets when windows reopen. Infrastructure players that sell into both incumbents and fintechs—risk, core, cross-border payments—remain likely acquisition targets as incumbents compress vendor sprawl and modernize stacks.

Regionally, Latin America and Southeast Asia continue to offer outsized growth where incumbents are fragmented and credit penetration is low. At the same time, the next cohort in mature markets is skewing toward B2B: working-capital platforms, treasury for SMBs and mid-market, and verticalized financial OS offerings that embed finance within software workflows. The revenue headroom remains large: fintech revenues could reach roughly $1.5 trillion by 2030, led by lending, payments, and wealth, according to industry analysts.

Expect more pragmatic builds: fewer moonshots, more resilience. The startups that pair strong compliance muscle with clear unit economics—and leverage AI to shrink cost-to-serve—will define the category’s next decade. Scale is still king, but in this cycle, so is solvency.