Financial technology or ‘fintech’ companies are paving the way for rapid change in the financial services and banking industries.
According to a recent report by KPMG, the biggest Australian fintech transaction and the third biggest deal in Asia recorded in the first half of 2019 was US$100 million, achieved by Australia’s fastest-grown fintech unicorn, Airwallex.
Given the amount of money transacted in these industries, it is no wonder that fintech companies can make a compelling investment proposition.
Here are six reasons why fintech companies can be attractive investments:
1. Cash is turning digital
If you think about how your spending habits have changed over the past decade and you will immediately identify the fact that more and more transactions are done without cash. Whether it is using PayPass to pay for a coffee or online banking to send money to family or friends, cash is quickly becoming a thing of the past.
Fintech companies thrive on this shift as it means more transaction volume through their platforms.
2. Data is the new oil
Fintech companies collect an enormous amount of data on customer spending behaviour. Used properly, this data can be analysed to automatically detect likely future purchases including mortgages, car loans, weddings, etc. based on prior behaviour.
This data is immensely valuable, and for many fintech companies, their data is worth more than the transactions they undertake, with giants like Facebook and Google buying data on a regular basis to improve their advertising algorithms.
3. Your mobile is your wallet
Once upon a time we all kept a physical book listing the contact details of friends and family. Now that is entirely kept on your mobile phone.
The same change is happening with your wallet – you already don’t need it. You can store your credit cards in your phone and simply tap your phone to pay for items at almost any Australian retailer.
Fintech companies are at the forefront of this shift towards a cashless and wallet-less economy. They provide technology that makes payments more efficient and give users better experiences, which is exactly what innovation is designed to do.
4. The big impact
Fintech companies can service literally millions of people without needing lots of office locations or thousands of staff. They provide services that genuinely change the way people do business for the better. They can and have reduced the black money market, helped governments collect taxes, facilitated credit to businesses and individuals in underprivileged countries, and provided a raft of services and technology that have had a global impact on the way we transact.
Few other sectors can have such far-reaching social impact as has been achieved with fintech companies.
5. Banks have a limited life in their current form
Australian banks such as Commonwealth Bank, NAB, ANZ and St George are among the most valuable companies listed on the Australian Stock Exchange, but they certainly won’t be forever.
Their customers are moving away and either banking with fintechs or non-bank alternatives, and even engaging with financial service providers for services that were previously provided by banks.
This generational shift represents an enormous opportunity for fintechs to capture a new market of customers that are fed up with slow-moving, traditional alternatives.
6. Potential acquirers have deep pockets
A key characteristic of the fintech industry is that competitors to fintech companies typically have deep pockets. These competitors are typically banks who need to acquire fintech companies in order to maintain their market share, or could be payments companies like Visa or Mastercard who are both listed companies with track records for investing in and acquiring companies.
The access to readily-available capital in the fintech space from such competitors makes it a popular industry for merger and acquisition activity.
Like all investments, the sector alone does not necessarily make it a good investment, and many other factors must be considered including management expertise, financial performance, competitors, stage of growth, exit strategy, etc. However, providing these areas are addressed, fintech companies are truly revolutionising the world and can be great asset in any investment portfolio.
James Mawhinney is Founder and Managing Director of Mayfair 101, a family-owned investment conglomerate with interests in 10 countries. Mayfair 101 has significant shareholders in various fintech companies including India’s largest B2B payments company which processed over USD5 billion of payments in FY19 and has processed over USD300m of small business loans via its platform. Mayfair 101’s wholly owned subsidiaries include its investor-facing brands Mayfair Platinum and M12 Global, a London-based company specialising in the issuance of retail bonds. Its brands have been established to attract investment from low interest rate regions that can be redeployed through the group to facilitate the growth of selected assets.