New disruptors of legacy financial service companies have been enabled by the evolution of the internet over the past few decades, but Covid-19 could be set to push the fintech sector's growth even further
Technology and data are key drivers of success for many financial companies today, and this, combined with the fact that the fintech sector remains early in its growth, means it represents an obvious long-term investment proposition. It was with this in mind that Wellington Management launched the Wellington FinTech Fund in October 2018.
The Fund is a way to directly invest in high-growth companies that leverage technology to enhance or disrupt traditional financial services.
In particular, the secular growth characteristics and low penetration rates for new services in the sector position the industry well to exhibit less cyclicality than the broad market, which has been important in 2020 as global markets felt the wave of economic weakness caused by the coronavirus pandemic.
Yet whilst the impact of Covid-19 on businesses will surely be felt over the short term, the pandemic could actually be a catalyst that accelerates a number of fintech trends already in place, according to Glazer.
"Covid-19 is driving severe economic weakness globally and the fintech industry is not immune; we expect financial results to suffer over the short term, particularly for those companies with consumer end markets". However, there is a clear shift from physical shopping to e-commerce, which lends itself well to the increased adoption globally of contactless payments. Consumers have become more engaged with technology during the crisis, driving an increased usage of mobile wallets (peer to peer/P2P), branchless banking and ‘do-it-yourself' services.
"The crisis is forcing consumers to embrace technology to adjust to the new normal", says Glazer. "Additionally, it has highlighted the ease of managing and updating cloud-based infrastructure versus legacy on-premise technology. As such, we believe the recent weakness in the sector has created an attractive entry point in valuation based on normalised earnings that have come in quite a bit from what we saw at the end of 2019".