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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
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.
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.
We believe the opportunity set in public markets has reached critical mass, becoming more broad-based across regions. In our view, public fintech provides significantly greater transparency and liquidity relative to private fintech. We have uncovered what we believe to be quality public fintech companies with sustainable competitive advantages and durable business models growing at attractive rates around the world. Moreover, as private fintechs go public in the years to come, our universe will continue to expand.
The areas of the fintech market driving our interest in a pure-play approach are payments, the digitization of financial services, and technology infrastructure (see Figure 1). In payments, more than 50% of total consumer payments globally are still cash-based, leaving huge potential for further digitization. Similarly, in the digitization of financial services, roughly 1.4 billion adults worldwide do not yet have access to a bank account, and the digitization of financial services is just beginning to address the insurance and capital markets. Financial technology infrastructure offers the longest runway for growth, as most banks’ IT systems were built in the 1980s and are ripe for improvements and upgrades. This space has also reached an inflection point as banks turn from defensive regulatory spending to offensive investment in growth.
The complexity and depth of the fintech ecosystem demands a breadth of investor specializations. In creating our approach to fintech, we brought together industry experts from our global finance and global technology teams — who have fintech experience dating back to the inception of the industry — and combined them with the broad research resources of Wellington Management. Together, these investors have thousands of financial and technology company meetings each year, developing proprietary research independent from the sell side. We believe the key to success amid this disruption is deep collaboration to fully leverage both the capabilities and access to company managements of multiple research teams.
In our view, as the fintech industry continues its disruption, the opportunity set requires both research experience and long-term company relationships cutting across industries, regions, and market caps, including late-stage pre-IPO and other private investments. Our ability to collaborate with our private market colleagues provides critical insight into the durability of public market fintech companies. We estimate that our analysts and investors have more meetings with both public and private fintech companies than any other financial institution.
Additional portfolio management team members
The enduring nature of the fintech story is, in our view, best served by an approach with a similarly long-term perspective. We think the pace of disruption will be moderated by the inertia created by the distinct characteristics of the financial services industry shown in Figure 2. In spite of this, many approaches to fintech have high turnover. Instead of continually chasing the companies in the latest headlines and news reports, our team aims to identify the public market disrupters, enablers, and incumbents who we believe are positioned to win in this space over the long term. Our approach has lower turnover (approximately 20% – 30% annually) and a long-term mindset focused on key secular themes (Figure 3). We believe this approach has the potential to better capitalize on the sector’s multi-decade growth and, thus, compound returns over time.
In our view, a pure-play, public market fintech approach is a compelling way to access this industry’s innovation and the valuable disruption it creates. We believe fintech’s complexity further warrants an investment team with specialization stretching across the subsectors of financial services and technology — importantly, with deep collaboration across those research resources.
We continue to have conviction that, regardless of the near-term macro environment, legacy financial service firms will persistently react to a more digital consumer and new fintech competitors by prioritizing technology upgrades, benefiting this opportunity set. Finally, though it may have been accelerated by the pandemic, we believe the evolution of this industry is likely to be gradual and enduring. We therefore think the secular growth themes driving the fintech revolution merit a long-term approach.
1Wellington Management estimates, August 2022. | 2Figure 1 terms: Omni-channel – Combining offline/traditional retail experiences with online/e-commerce.