Our resident EasyAssetManagement Chief Investment Officer Shaun Krom shares some of the factors that make FinTech, and some key companies in this sector, a compelling consideration for long term investors.
FinTech, or "financial technology," encompasses a broad range of companies leveraging technology to drive innovation in financial services. Beyond disrupting traditional models, FinTech players are creating entirely new categories of financial products and experiences and thus creating a whole new ecosystem.
Last year, 2023, was a tough year for the FinTech sector. While the industry witnessed a continuation of its transformative power, it also faced headwinds from macroeconomic uncertainties and rising interest rates. Global investment in FinTech declined by 36% year-on-year in Q3 2023, according to S&P Global, reflecting a cautious investor sentiment.
There is reason to believe that 2024 could be a better year for FinTech as interest rates seem less likely to be raised further, with many even expecting lower rates, and much of the macro uncertainty seeming less benign.
FinTech: A broad range of innovation
FinTech encompasses a broad range of companies and technologies aimed at revolutionizing financial activities. From payments and lending to wealth management and insurance, FinTech players are remaking how individuals and businesses interact with their finances.
Although we lump many financial led businesses into the FinTech category, it is worthwhile dividing this diverse industry into ten distinct segments:
1. Payments: Digitalizing and streamlining payment processes. Mobile wallets, contactless payments, card processors, and peer-to-peer (P2P) transactions are all examples of this innovative space.
2. Banking: Challenger banks and neo-banks are emerging to offer digital-first banking experiences
3. Lending: Alternative lending platforms are disrupting the traditional lending landscape by utilizing technology to assess creditworthiness and offer faster, more flexible loan options
4. Wealth Management/Trading: Online platforms and algorithmic trading solutions are democratizing access to financial markets and changing the way investors trade (Hello EasyEquities).
5. Insurance: Utilising data analytics and technology to offer personalized insurance products and streamline claims processes.
Investing in the future of finance: Why consider FinTech for your portfolio
While 2023 was a challenging year for FinTech, there are several factors that suggest this sector has long term potential from here.
Industry wide:
• Macroeconomic adjustments: Rising interest rates in 2023 impacted valuations, but potential stabilization or even rate cuts in 2024 could improve the climate for growth oriented FinTech companies.
• Market correction: 2023 saw a correction in valuations, making some FinTech companies more attractive entry points for investors seeking undervalued potential.
• Focus on efficiency: Many FinTechs operate with leaner structures and leverage technology, making them potentially better equipped to navigate rising costs in a tighter economic environment.
Sector-Specific Potential:
• Resilient sub-sectors: Different sub-sectors face different drivers, for example payments and alternative lending saw continued growth in 2023, while recent results from Robinhood indicate that trading platforms may be making a comeback.
• Innovation and adoption: Continuous advancements in AI and cloud computing could fuel further disruption and growth in FinTech.
• Global adoption: Accelerated digital adoption globally continues to drive demand for FinTech solutions as we have seen with NU and Meli in South America.
The FinTech sector remains a dynamic engine for global growth and there are opportunities in this space and in certain sub-sectors that could provide outsized returns for investors.
Below are some FinTech companies we consider when compiling EasyAssetManagement Bundles:
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Sub-layer |
Company |
Description |
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Payments |
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Online payments, money transfers, and merchant services. |
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ShopPay on purchases |
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Payment Rail |
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Payment Rail |
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(Renamed Blok Inc) Mobile payment processing for businesses |
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Banking |
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SoFi started as a student loan refinancing platform but has since expanded into various wealth management services. They offer robo-advisory services (SoFi Invest), automated investing (SoFi Automated Investing), and even personalized financial planning consultations through SoFi Advisors. SOFI caters to younger investors, offering fractional shares and thematic investing options. |
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Welath Management / Trading |
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Commission-free stock trading platform popular with young investors. |
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Known for its powerful trading platform and global reach, IBKR caters to active and sophisticated investors. They offer self-directed brokerage accounts, margin trading, access to international markets, and advanced order types. |
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Lending |
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Buy now pay later point-of-sale financing for purchases. |
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AI-powered personal loans for borrowers with limited credit history. |
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A leading mortgage lender in the US, primarily offering online mortgage origination and servicing. They utilize technology to streamline the process and offer competitive rates. |
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Insurance |
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AI-powered homeowners and renters insurance with faster claims processing. |
FinTech is a dynamic and rapidly evolving space. Understanding its sub-layers and the underlying trends driving its growth is crucial for identifying potential investment opportunities. As the financial sector continues its digital transformation, FinTech is poised to play a central role, making it a compelling sector to consider for long term investors.