This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Vincent Vinatier, lead manager of the AXA Framlington FinTech fund examines the future of the sector.
Much has been made of the threat that fintech poses to traditional financial institutions. The disruption taking place in the sector is seeing technology transform how many of us interact with everything from saving and investing to shopping.
It is little wonder that fintech has exploded in recent years against this backdrop. A global trend, the rise in digital payments, mobile banking and other life-enhancing changes have become ingrained in how we live our daily lives.
On the face of it, fintech presents some clear threats to ‘old school’ financials. As transactions move online, banks, for example, are potentially left with scores of empty branches which no longer have any footfall, while insurers struggle to interact with customers at the instantaneous pace many of us now expect.
However, most understand the imperative need to embrace technology, be that by either acquisitions or, increasingly, by working with these emerging businesses.
Collaboration Not Competition
Financial institutions are increasingly starting to speak fintech themselves and harness its transformative power for their own businesses. However, in many cases, rather than go toe-to-toe with emerging fintech companies, they are seeing the value of partnering with them.
We are already seeing this amongst the very biggest names in both markets, with news emerging last year that Amazon (AMZN) was in talks with JPMorgan to offer its customers bank accounts using the bank as the underlying provider.
Similarly, when Google (GOOGL) decided last year to penetrate the Indian personal loans market, it did not go for it alone but rather decided to partner with a number of local banks, including leading bank HDFC Bank.
Such deals between the world’s biggest names are fraught with consequences, both regulatory and from a competition standpoint, but the trend is clear; businesses are going to be exploring more of these deals, and investors need to keep a close watch on it.
But this is very much a collaborative, rather than competitive, shift. Rather than going after the same business, such is the nature of the shift that the companies are combining with specialists to build a wider ecosystem for them all to operate in.
We are seeing that in areas such as the cloud, which as well being a key market for the largest companies on the planet, needs multiple underlying businesses to enable it to function effectively.
Themes for Investors to Focus On
Some clear themes have emerged which are set to dominate as it develops.
Firstly, the notion of the cashless society is fast becoming a reality not just in the UK and developed economies, but globally. Companies like Visa (V), Paypal (PYPL), and Apple (AAPL) are all at the forefront of this development, and should benefit accordingly from trends such as the growth of eWallets.
These alone are forecast to overtake credit/debit cards as the leading payment method by 2021, according to the World Pay Global Payment Report from 2017.
Another key trend is innovation. In a market which is changing by the day, those who can innovate effectively by improving financial services will emerge as clear winners across the banking, wealth management and insurance sectors.
Indeed, the impact of this on the wealth and asset management sector cannot be overestimated.
The sectors are perfectly poised to benefit from technology, be that via areas such as robo-advice which utilises artificial intelligence, or elsewhere.
Robots and other AI advisers will play a key role in expanding the addressable market for investment advice. As things stand, the industry is struggling to address clients below a certain size of assets with tailor-made advice and solutions, and there are many such clients that require advice in an increasingly complex world.
Robo advisers can more efficiently help to provide a level of advice to this part of the market.
To capture the entire fintech value chain, investors should also be looking at the enablers behind this profound technological shift.
Many investors are growing more familiar with blockchain and AI, but it is these – and other areas such as reg tech – which are enabling the growth of the wider fintech ecosystem by helping to reduce costs, personalise services, or improve security for customers.
Businesses providing this, which include global names such as US-listed software company Intuit, or Q2, a leading US “baas” company, are the nuts and bolts underlying everything fintech. Baas, or “banking as a software”, relates to the turn-key provision of a full digital interface for banks and credit unions that have not been in a position to develop on their own.
Not to be overlooked, there is also significant growth in B2B payments via fintech innovations, and again the trend is very much one where banks are partnering with innovators, rather than vying to outdo one another. These developments are helping to streamline processes such as procurement where there is a clear demand for better solutions, and we expect very strong growth here as well over the next few years.
Key to all of these trends is their longevity. We are only at the start of this fintech revolution, meaning the growth prospects for investors are significant. As they move to collaborate rather than compete, we expect the financial services industry’s profit pool to be redistributed, creating lots of opportunities for investors.
Morningstar Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar.
