Investing in fintech's potential
The financial sector is facing major changes, with innovations in financial technology taking us into a new era of disruption. In an ever-more competitive environment, identifying tomorrow’s winners and losers will be key to capitalising on the potential growth of the fintech industry.
In recent years, the number of daily financial transactions has risen steadily, and digital payments are being increasingly embedded into routine activities. Shopping on social media platforms, transferring money through messaging apps, and making payments in the car using voice control is now a reality, not a vision of the future. The pace of innovation is accelerating, and customers want to make secure financial transactions anywhere, anytime, on any platform.
Financial companies are also acutely aware of how quickly consumer behaviour is changing. Around the world, companies are expanding their digital offering and capturing the potential of fintech to disrupt their markets, serve their customers more efficiently, and win a larger market share than their peers.
"Whether a financial services provider is one of tomorrow’s winners or losers will depend largely on a willingness to embrace these technological advancements and keep pace with customers’ increasing expectations."
Vincent Vinatier, Portfolio Manager, AXA IM Framlington Equities
What is fintech?
Fintech describes companies that can identify and leverage technological innovation such as mobile technology and artificial intelligence to disrupt or improve the financial services industry. These companies can be existing financial or technology companies that are developing in this area, or companies specifically created to focus on financial technologies.
While major cities look to position themselves as leading ‘fintech hubs’, China already boasts an advanced fintech ecosystem. The scale of development from dominant technology firms, a supportive regulatory environment and easy access to capital has helped China to make significant advances in this space.
Playing the long game in the west
With China’s emergence at the forefront of fintech innovation and adoption, companies in the west are playing catch-up. While the regulatory environment in Europe offers fewer opportunities to try out new models in the short term, this could be a different story over the long term.
Having experience in data ownership, data protection, artificial intelligence and its control from the outset could potentially allow fintech firms to offer industry-leading safeguards to their potential customers, while ensuring such companies are able to compete with larger financial firms on security.
The future of the financial industry does not lie in disruptive technology, but in identifying the real needs of customers and offering them cost-effective solutions – this is where fintech comes in.
Collaboration is key
It is important that financial firms show a willingness to enter into partnerships and see new players not as competitors, but as opportunities to develop one’s own business. While there are less growth opportunities for small players entering the market, financial institutions are beginning to speak ‘fintech’, and are becoming increasingly aware of how innovation can transform their businesses.
Meanwhile, established technology companies are seeing the value of partnering with fintechs as they tackle the complexity of entering the financial industry – for example, local regulation, capital requirements and reputational risk.
Investing in the leaders of the future
Whether a financial services provider is one of tomorrow’s winners or losers will depend largely on a willingness to embrace these technological advancements and keep pace with customers’ increasing expectations.
We have identified three themes as being multi-year trends for the fintech industry under which we believe companies are poised to experience rapid growth:
- Cashless society: people around the world are increasingly making digital payments, taking us towards a cashless society.
- Innovative leaders: many established companies are disrupting or improving the financial services industry by using technology to serve their large, existing client base.
- Technology enablers: technological ‘enablers’ provide the crucial technology to support and develop fintech companies’ digital presence via various channels and devices.
We also see the business-to-business (B2B) fintech space as an area with high-growth potential, where such firms look to fill the gap left by banks’ withdrawal from small- and medium-sized enterprise (SME) lending, while also providing solutions in payment processing and workflow streamlining.
All investment involves risks, including the loss of capital.
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