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How to Invest in The Fintech Era

Fintech, or financial technology that powers banking and financial services through the application of technology and innovation, has gone from virtually non-existent to a US$120 billion (S$160 billion) industry last year – all in just a few years. And UBS estimates that explosive growth still awaits, with global fintech revenues poised to rise three times as fast as traditional banking, reaching US$265 billion by 2025.

As with storied industries like media, retail and automobiles, technology is now threatening to reshape the competitive landscape and upend market shares in global banking and finance. In the coming decade, fintech is set to touch all areas of finance, stirring the next major stage of disruption throughout much of the banking value chain.

In today’s world of smartphones, big data analytics and blockchain, fintech’s rising ubiquity will fast extend beyond the early application of Internet banking. The rise of cashless technology in our day-to-day lives, for example, is a sign of the times. Cash’s reign as a medium of exchange looks set to dwindle as consumers, especially in Asia, increasingly choose to replace their wallets with digital modes of payments. In China, payments via mobile phones topped 82.2 trillion yuan (S$17 trillion) last year, over 60 per cent year-on-year increase, according to the Payment & Clearing Association of China. Singaporeans too are making less use of old-fashioned cash. According to Euromonitor Passport, cash transactions accounted for a little over 40 per cent in Singapore last year, down from nearly 60 per cent in 2007.

With its nascence and growth potential, the time is right for investors to begin positioning for the digital disruption that the fintech era is now ushering in.

FINTECH’S DRIVING FORCES

The rapid rise in fintech adoption will continue to be driven by favourable supply and demand factors.

On the supply side, financial institutions are being pushed to innovate due to the pressing need for cost savings and the obvious efficiency gains accorded by technological innovations. This, coupled with a strong pipeline of ideas from technology start-ups and an eager ecosystem of venture capital (VC) financiers, should drive the rapid accessibility of fintech services.

Still, tech companies are only just starting to scratch the surface of potential fintech solutions.

The rate of disruption in financial services should continue to surge as more financial technology solution providers enter the market. Over the past five years alone, fintech firms have received around US$60 billion in cumulative investments, with Asian companies accounting for one-third.

On the demand side, rapid urbanisation and the quest for financial inclusion is expected to drive the uptick of fintech services centred on digital areas like mobility, cloud, analytics and social as well as emerging technologies, such as blockchain and artificial intelligence (AI). The rising economic power of millennials, who are set to control an even greater share of global wealth, and favourable regulations, such as policies aimed at encouraging financial inclusion, are other supportive factors.

Singapore is particularly well placed to become a regional hub for fintech development thanks to its advanced digital and financial infrastructure, and its progressive policy framework and priorities.

The city’s Smart Nation vision, for example, should have a wide-ranging impact on its ability to produce fintech-related innovation, with notable emphasis on cashless payment solutions.

Against this promising backdrop, UBS estimates of rising fintech penetration from low single digits currently to mid-single digits by 2025 may in fact be conservative, especially considering the potential for rapid adoption among emerging markets.

INVESTING IN THE FINTECH WAVE

A rising number of fintech public listings is expected in the next 12 to 18 months, with the sector and related companies gaining greater investor traction as fintech services become more mainstream.

Investors will likely be best rewarded by investing in a diversified way in fintech champions, with a focus on payment industry leaders, technology companies launching disruptive fintech services and incumbent financial corporations with a clear fintech strategy.

In our six-month tactical asset allocation, for example, we are overweight Singapore equities, with a preference for Singapore banks whose fintech strategies are clearly ahead of their Asean peers.

Additionally, companies that are able to create platforms with network effects around emerging technologies like AI, blockchain and analytics are also likely winners. Areas of particular potential include digital payments, insurtech (insurance), wealthtech (wealth management), capital markets tech and online lending.

That being said, with fintech companies still mostly in the start-up stage, at present, private investing through VC funds remains the purest way to gain exposure. Such funds are best equipped to identify promising companies and provide the necessary capital to help fintech firms grow revenues and achieve profitability, before exiting their investments via an IPO or a sale at higher valuations. They also offer access points to a company’s technology life cycle, with the flexibility to invest at an early, mid or late stage.

Using VC investments to gain direct exposure to fintech can provide access to high growth potential companies across all stages of their development. But such investments naturally come with risk. After all, VC is essentially an opaque and illiquid market with asymmetric information flows and long gestation periods for investments.

Securing access to the best fund managers to mitigate these risks remains paramount to maximising the chances of success. For investors, UBS continues to advocate that around 20 per cent of one’s long-term investments should be allocated to alternatives, which encompass private markets and hedge funds.

 

• The writer is the Asia-Pacific regional head at the chief investment office of UBS Wealth Management.

 

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