Today, most people in developed countries rarely ever visit local banks to do their banking. Instead, they do it online, regardless of their location. The ease of making person-to-person payments and online purchases on websites, sending payment requests through mobile apps like Tikkie, and using phones to pay at cashiers (through Apple pay) all confirm that there is increasing involvement of technology in the financial sector. In this part of the “trends investing series”, we focus on financial technology (FinTech), which is a new financial industry that applies technology to improve financial activities. FinTech applications range from simple to the complex, including:

·      Online and mobile banking platforms          

·      Person-to-Person payments apps

·      Peer-lending platforms

·      Mobile payments

·      Digital financial service advice

·      Budgeting apps

·      Blockchain technology and cryptocurrencies

·      Crowdsourcing platforms

·      Mobile brokerage apps

·      Accounting software

These activities show that FinTech ranges over a number of different services. However, most FinTech applications aim for the same two things: to make financial activities more efficient through applying technology to the service, and financial inclusion. They make consumers, financial institutions, and merchants handle their own payments in a very efficient way. Considering consumers, FinTech is partly responsible for the shrinking of unbanked or underbanked number of people in the world. Some Blockchain and cryptocurrencies even aim to replace the existing banking system, so that consumers will completely handle their own finances.

FinTech Performance

Having a look at the performance of the FinTech index and some relevant companies will give a clear view of how some have benefited from the FinTech trend. The FinTech index price (FINX) shows a typical Gartner Hype Cycle (explained in part 1 of this "trends investing series"). In figure 1 you can see a hype period, followed by a decline in stock price and a steady growth from the start of 2019 until June, followed by a little downfall at the end of the year.

Fiserv is a financial service that offers efficient processing of electronic payments, including both B2B and P2P transfers. Figure 2 presents its stock price chart:

Global Payments Inc offers payment and digital commerce solutions. Figure 3 presents its stock price chart:

PayPal, the well-known payment platform that facilitates the process of payment for P2P, B2B and P2B transactions. Figure 4 presents its stock price chart:

1.     There exists large potential for digital finance in many parts of the world. In most developed countries, like those in Western Europe, banking is done on smartphone or computer applications. Salaries, rent, purchases, and even groceries are usually all paid digitally. However, almost half of the world's population does not have a bank account, with some countries having less than 15% of the people covered with a bank account. The number of underbanked people has been shrinking in the last five years, but there is still lots of potential to continue this trend.

A challenge for the FinTech trend might be its safety. As all processes are digital, each firm will need to make sure that no one else can see their private financial details to abuse them. However, this creates huge potential for cybersecurity companies. They could benefit from this trend by making sure that all those FinTech applications are safe. Another limitation is access to technology. It would not be unsurprising if most of the people that aren’t covered with a bank account also do not have easy access to the technology required to run FinTech applications.

Cyber-Ark Software is a provider of security solutions that protects companies from cyber-attacks and -threats. When looking at its stock price chart below (Figure 5), you can see that they strongly benefitted from the FinTech trend in 2019 but experienced a fallback at the end of summer 2019. This downfall may be a great investment opportunity as you can buy the stock for a cheaper price than you could have in the past six months, while we expect demand for its services to increase in the future as digitalization continues.

Investing in FinTech

If interested in FinTech investing, it is important to look for metrics such as revenue growth rates, gross and operating margins, and the company's total addressable market. Also, as in any trend, focus on what strategies the company implements that you believe will improve the efficiency of financial services in the world. Also, it is always important to keep regulation in mind. Examples are the use of Facebook's Libra or the Robinhood trading platform not being allowed in certain countries, which could impact the value of your investment.

To conclude, FinTech is a very interesting trend that brings many great investment opportunities. Certain stocks have already benefitted immensely from this trend in 2019, but we believe that there is even more potential. The trend is challenged by security concerns, which provides opportunities for the cybersecurity industry.