Near-term macro weakness has created historically attractive entry points for many fintech opportunities, in our view. We believe the secular growth tailwinds driving the industry’s future will persist even in the event of further recessionary pressures. In fact, technology’s disruption of financial services continues to thrive in the wake of COVID-19. We think the pandemic has accelerated many of the driving forces behind our most compelling fintech themes. This crisis has forced consumers to embrace digital technology in order to adjust to the “new normal,” driving the adoption of mobile wallets, branchless banking, and “do-it-yourself” financial services. Financial institutions with more modern technology have been able to respond better to an increasingly digital customer and a more remote workforce.
The shift to digital is still in its early stages, with developments in areas such as data analytics, artificial intelligence (AI), cloud computing, and machine learning just beginning to transform the sector. While industries like e-commerce and music changed rapidly and had only a few winners, we believe fintech will evolve differently. The industry’s greater complexity, regulatory influence, and geographical diversity drive our expectation of multiple leaders emerging gradually over a longer time horizon. We estimate that companies with a combined market capitalization of US$7 trillion in the banking sector and US$14 trillion in broader financial services are set to be disrupted.1 In our view, fintech innovation and the resulting disruption present a vast multi-decade opportunity.
In this paper, we explore why fintech merits a pure-play approach, discuss the importance of an investment team with deep industry expertise in both financial services and technology, and highlight the long-term nature of this disruption.
A pure-play approach to fintech
Despite the scale of the universe, many available fintech approaches invest in companies that do not have financial technology as the core of their business.
In our view, this secular growth story — with a universe of over 500 companies — is best accessed through a pure-play strategy, which offers more direct exposure to the disruption. Our approach to fintech focuses on companies where at least 80% of revenues are driven by financial technology sources. With such a large investable public market, we believe investors do not need to stray from the core of the opportunity. In fact, our team has identified a universe of approximately 250 companies that pass our percentage-of-revenue threshold.