Over the past few years, I have discussed at length the potentially compelling long-term investment opportunity in financial technology (“fintech”) — which we define as companies creating or leveraging technology to disrupt traditional financial services. While much of our internal dialogue has focused specifically on the fast-growing digital payments space, I’d also like to share my thoughts on the fintech industry more broadly and what the increasing relevance of its products means for traditional financial services.
In future blog posts, I will explore some of the below points in more detail for investors who want a deeper dive. For now, the main takeaways I want to leave you with are as follows:
- There have been (and will continue to be) massive amounts of capital pouring into the fintech market. For example, in 2020, there were 21 fintech IPOs totaling more than US$14 billion. During the week of 16 January 2021 alone, fintech startup firms raised an impressive US$2.7 billion. SPACs, many of them focused on fintech, have risen in popularity. The hordes of capital entering the industry are likely to result in a flurry of IPOs over the next few years (dozens, if not 100+). There will be numerous public-market opportunities to invest in attractive fintechs, along with some folks trying to take advantage of the market froth by unloading overhyped businesses that are unlikely to emerge as industry winners.
- The capital making its way into the fintech market is striking not only for its sheer volume, but also because it crosses virtually every vertical and every geography. Core payments opportunities get a great deal of (well-deserved) attention, including from our investors here at Wellington, but make no mistake about it: The fintech tsunami is going to impact every segment of financial services in most regions around the globe.
- The flood of new fintech entrants creates questions about the growth trajectory of existing public financial services companies. Some may find ways to adapt and thrive, while others may be left behind. I believe that having a view on the nuanced opportunities and risks associated with the looming fintech wave — the titular “tsunami” — will be critical to successfully investing in the financial services sector for the foreseeable future.
Opportunities amid disruption
With those nuances in mind, we can classify this wave of VC-backed fintech businesses into two broad categories: infrastructure companies that use modern technology to solve the business/technology orchestrations typically done by banks; and product companies that leverage the new infrastructure firms to rethink traditional financial services products. How existing financial services companies leverage these new infrastructure providers and respond to competitive threats from emerging-product companies will go a long way toward determining their growth opportunities long term.
Within payments specifically, technology-led payments companies are poised to take significant market share over the next decade, most of which I expect to come at the expense of traditional banks. Banks still dominate the global payments market and are easier targets for tech disruptors to go after than large-scale public payment processors. In fact, as shown in Figure 1, banks could lose around half their current market share to tech disruptors in the decade ahead, while scale processors maintain or slightly grow their share over that timeframe.