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Nothing can stop progress. Not even the large financial institutions that direct the flow of capital around the world. Fintech, or technological developments that take advantage of the increasingly digitalized way of conducting business and socially interacting are paining the financial services’ landscape with new colours. They are turning the abstract Picassos into clearer and less obscure Rembrandts: they make it easier and more transparent for clients and investors to access financial services. In the following series I will look at what Fintech is, how it impacts the financial services industry and I will give you an overview of the biggest players in this new and exciting market.
Part 1: Zeus’ wrath – the arrival of Fintech
We have all heard of Uber, Apple Pay and Alibaba’s financial affiliate internet bank (MYBank). However, there appears to be an entire uprising across the world of Fintech Startups that target all layers of the financial system: lending, payment processing, transaction costs, money transfer, trading and fund raising platforms, new currencies and funding methods.
However, in looking at some of these amazing new technologies we should always keep in mind this question: ‘Is this a the ‘new hot thing’ or is this a sustainable market sector that does indeed have a future?’. The difference is this: ‘hot new’ trends, like the dot.com bubble, come and go – they are built on excitement, usually of something new such as technology with a certain potential to disrupt and transform industries. However! Because the technologies are new their valuations, i.e. the monetized value attributed to the impact they make (to their potential) is over-valued. When this happens, bubbles (economic cycles that are not sustained by supply and demand but by imagination) appear and cause future crisis.
On the other hand, if this is something a sustainable, well valued, investment opportunity then Fintech companies’ valuations will be able to be justified based on risk-return balance. Goldman Sachs recently has estimated the emerging fintech industry could take away more than USD 4.7tn in revenue and USD 470bn in profit from traditional financial services firms. Furthermore, according to The Market Mogul, these sums required a total of USD 25bn of yearly investments.
The reason why the profits are so large, i.e. why the Return on Assets is so big, is because digital-based businesses require a lot less capital than any other company: they rarely need to invest in PP&E and they have less tangible assets as a result. Because they have less tangible assets, as Warren Buffett noted, inflation will require them to invest lower sums than companies with larger bases of tangibles. The majority of costs for these fintech firms are going towards R&D and marketing which are not as costly as it used to be as many of them do these processes in-house rather than outsourcing.
Next: Part 2: The New Titans – in this part I will start looking at specific companies that are using digital technology to revolutionize the financial services industry.
Next Part 3: The Final Frontier – in this part I will conclude on the impact of digital technologies on the financial world and how investors can profit from it.
