Conversational Alpha®: Fintech revolutionizes money – Benzinga | Jewelry Dukan

The intersection of financial services and technology or fintech is where many people now spend, lend, borrow, invest and trade. And they do this like its second nature. Fintech makes financial services more efficient and adaptable as well as more personal and inclusive. Whether buying a coffee with a credit card stored on a mobile device or splitting a dinner bill with Venmo, fintech applications are transforming the way businesses and consumers interact with their finances.

We expect that as technologies like these mature and become more widely accepted, the importance of the fintech mega-topic in investment portfolios will increase, and with good reason. Compelling opportunities continue to emerge as fintech, including blockchain, increasingly intersects with emerging themes such as the Internet of Things (IoT), cloud computing and video games.

The central theses

  • We expect digital transformation to bring financial services, including mobile payments, online banking and alternative lending platforms, to previously unbankable and underserved populations.
  • The pandemic kicked fintech adoption into high gear, with digital payments transitioning to mass adoption. Key avenues for future growth include Buy Now, Pay Later (BNPL), cloud banking, and blockchain-based segments.
  • Traditional financial services firms continue to invest heavily in fintech as consumer demand for the ease of use and convenience of these technologies increases.

Fintech adoption is gaining momentum and becoming the norm

Fintech adoption has increased dramatically in recent years, and we anticipate innovation in this space will continue to improve access to the global financial ecosystem. Global fintech investment, including through venture capital, private equity and M&A, accelerated to $210 billion in 2021 from $148.6 billion in 2019 and $124.9 billion in 2020.1

For consumers, the ease and convenience of purchasing goods or services with the tap of a device at a point of sale makes digital payments the best known segment of fintech. For businesses, mobile payment technology is a consumer-friendly way to keep ongoing and variable costs low, in addition to the upfront cost of developing the program and infrastructure to complete transactions. As consumers become more savvy and willing to shop online, more integrated shopping ecosystems are evolving. The success of fintech’s fastest growing segment, BNPL, is the result of continued growth in online shopping.

Overall, the share of US consumers using fintech increased from 58% to 88% between 2020 and 2021.2 For comparison, it took the refrigerator 20 years to achieve similar adoption, while the computer took 10 years and the smartphone 5 years.3 Notably, adoption is growing across all user demographics. Millennials lead the way with 95% overall adoption, but baby boomers are the fastest growing group, with usage doubling from 39% to 79%.4 For certain demographics, fintech usage in 2021 is approaching and even surpassing traditional banking usage.

Based on available data, the global adoption rate of fintech solutions reached 64% in 2019.5 Innovations in mobile payments, online banking and alternative lending platforms can bring financial services to previously unbankable and underserved populations in developing and emerging countries. With no existing infrastructure such as traditional bank branches and credit cards, these markets can integrate the latest technology without forcing an old business model into obsolescence. Among emerging markets, China and India have the widest adoption rate so far at 87% in 2019.6

The chart shows the trend of global fintech adoption across different traditional financial services prior to the pandemic. And it’s reasonable to assume that adoption has increased across all categories since the pandemic.

Blockchain can be a gateway to financial inclusion

In its simplest terms, a blockchain is a type of database focused on recording and maintaining data. Its unique properties stem from its decentralized approach. Data is recorded in blocks in a digital ledger. Participants, called nodes, are the computers and devices connected to the network that distribute and validate the ledger in a peer-to-peer (P2P) network. While anyone can create data on public blockchains by creating a new block and chaining it to a previous block, the consensus-based validation approach means that nobody can edit or tamper with the data after receiving a sufficient number of block confirmations. The result is a structure that inspires trust without the need for a third party.

Since participants don’t have to trust any government to back a currency or manage the money supply, it’s conceivable that blockchain networks will eventually become embedded in the financial ecosystem. This technology provides a mechanism for financial inclusion, especially in countries struggling with political instability, corruption or severe inflation.

A February 2021 survey found that the top 10 countries with the highest frequency of cryptocurrency use among their populations were all emerging markets. Nigeria topped the list with 32% of respondents saying they use bitcoin or cryptocurrencies more, followed by Vietnam at 21% and the Philippines at 20%.7 In the US, an estimated 16% of adults own cryptocurrency.8th We expect this number to increase over time, but investors need to be cautious in the crypto space as regulation remains light and illegal activity is rampant. Consumer risk is likely a headwind for adoption. Fraud, theft and volatility are risks. In 2021, $7.8 billion was scammed and $3.2 billion worth of cryptocurrencies stolen.9.10

Beyond financial use cases, blockchain technology applications are vast, touching on supply chains, health tracking, and smart contracts.

Fintech is a crossroads for thematic disruption

A key advantage for fintech platforms compared to their more traditional financial peers is their ability and willingness to embrace new approaches at scale and change their business models as new technologies emerge. The merging of blockchain and fintech into decentralized finance (DeFi) is a prime example. As a result, fintech is a natural crossroads for disruptive themes including the Internet of Things (IoT), cloud computing, and video games.

Fintech platforms paired with IoT technologies can transform everyday services. For example, insurance companies typically work with incomplete information, which increases the cost of property and casualty insurance policies. However, if they could use telematics sensors to track GPS and onboard diagnostic information, they could get more accurate information for insurers, potentially reducing costs and speeding resolution.

Cloud technology can streamline previously cumbersome processes for banks, such as B. Onboarding new clients, opening accounts and managing regulatory compliance. Globally, IT cloud spending by the banking industry is forecast to grow at a CAGR of 16.2% between 2019 and 2024, representing an increase to approximately 25% of IT budgets.11

Another new frontier for fintech is play-to-earn games with non-fungible tokens (NFTs). By one estimate, as of October 2021, more than 1 million digital wallets were connected to decentralized gaming apps every day, accounting for 55% of total blockchain industry activity.12 These blockchain games allow ownership of playable items and with it the ability to sell, trade, use, and lend those tokens.

Putting the fintech and blockchain topics in a portfolio context

Fintech will continue to make financial services more digital and scalable. The transformation is easily recognizable, but also offers significant scope for global adoption, with no single use case exceeding 70% penetration.13 As blockchain technology comes of age, we expect the scope of end-user and institutional applications to grow exponentially, potentially upending traditional finance.

In our view, thematic stocks should be targeted, using screenings to ensure the underlying companies offer the desired exposure. This pure-play focus minimizes overlap between themes while differentiating the exposure the theme offers compared to broad beta products.

The companies operating in the fintech and blockchain space are global and positioned to benefit from the increasing thematic adoption around the world. We believe there is plenty of innovation outside of the US and that limiting exposure to the US will lock out key players, to the detriment of investors over the long term. The charts below show the geographic exposure of the largest thematic fintech and blockchain ETF products.



Note: Includes the five broad fintech ETFs and the five largest blockchain ETFs according to our thematic classification. All thematic ETFs are equally weighted.

Since the blockchain is in the innovation phase, the number of pure blockchain companies is limited. As such, many ETFs feature large semiconductor manufacturers designing and building crypto mining infrastructure. These companies are also included at relatively high levels in cap-weighted broad beta and technology sector ETFs. Over time, we expect overlap rates to decrease as the space matures and the number of pure-play companies grows.

Conclusion: Fintech revolution in full swing

Actual fiat money transfers may be approaching relic status as fintech transforms the way the world accesses and interacts with money. As development continues and adoption increases, we believe that blockchain-based digital ledgers will likely become the predominant way people send, manage, invest and lend. The rise of the digital payments segment to mass adoption levels shows the willingness of consumers to embrace these new technologies. Given the enormous growth potential for fintech applications, we see a risk for investors in not engaging with the fintech mega-topic and the many related investment themes.

Image source from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and is not intended as investment advice.

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