Technology's disruption of financial services continues to thrive in the wake of the COVID-19 pandemic. We think the crisis has made the digitisation of financial services even more relevant, forcing consumers to embrace technologies like mobile wallets, branchless banking and other ‘do-it-yourself' services. In addition, we believe many fintech investments are now available at historically attractive valuations.
Importantly, we think fintech presents a multi-decade opportunity. This shift is still in its early stages, with innovations in data analytics, cloud computing, artificial intelligence and machine learning just beginning to transform the sector. We estimate that companies with a combined market cap of US$8 trillion in the banking sector and US$16 trillion in broader financial services are set to be disrupted.1
A long-term, pure-play approach to fintech's complexity
In our view, this vast opportunity set is best accessed through a pure-play strategy. We focus on firms with at least 80% of revenues driven by fintech sources - a universe of approximately 150 companies. Furthermore, we believe the enduring nature of the fintech story is best served by a low turnover approach with a similarly long-term view. We think the pace of disruption will be moderated by the inertia of consumer financial behaviour, strong incumbents and complex markets and regulations. In our view, this complexity also demands a breadth of investor expertise across the financial services and technology sectors. We leverage deep research resources in both industries to navigate fintech's key growth areas.
Secular trends: Payments, digitisation and tech infrastructure
The world economy continues to enjoy a long runway on its steady transition from cash to digital payments, as 75% of global transactions still take place in cash.2 The rise of e-commerce has been a driving force behind the adoption of digital payments by consumers. We believe digitisation has the potential to drive further opportunities in software-enabled payments and other verticals like peer-to-peer, government-to-consumer and business-to-business payments, which are still ripe for disruption.
We think the digital transformation of processes that used to be done manually offers another rapidly expanding opportunity set in financial services. Along with fintech's potential to make these processes cheaper and more efficient, it can also help to provide financial services solutions for new markets and underserved populations, including the roughly two billion adults worldwide without access to a bank account.
Finally, most banks' IT systems were built in the 1980s and are long overdue for improvements. We believe this space has reached an inflection point as banks turn from defensive regulatory spending to offensive investment in growth, offering new opportunities for fintech firms as banks begin to upgrade systems and adopt cloud offerings.
We believe the current crisis has strengthened the case for technology's disruption of financial services. In our view, fintech continues to offer a massive, long-term growth story fuelled by enduring secular trends.
For more information visit https://www.wellingtonfunds.com/gb/en/intermediary/investment-ideas/fintech-investing/
1,2Wellington Management combined estimates, 31 December 2019.
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