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Fintech (financial technology) is a relatively new industry sector that has grown enormously in recent years but still has a huge amount of potential. Encompassing a full range of financial services from payment processing to banking and peer-to-peer (P2P) lending, plus the leading edge of financial software, fintech is riding the wave of the ongoing digitization of the financial sector. It’s little wonder, then, that fintech companies are increasingly considered a natural fit for the trading portfolios of both retail and corporate investors.
The slow death of money
Money as we know it is going through a period of radical transformation, possibly the most disruptive since financial systems were first developed. Although changes have begun to happen, right now we are still very much at the beginning of this process, which could be summarized as the gradual shift from traditional money and payment systems – primarily cash – towards digital processing and payment solutions such as credit and debit cards, e-wallets, online shopping, and alternative ways to instantly transfer credit – for instance, via one’s phone.
The endgame for cash has arguably been accelerated by the 2020 global pandemic, which saw millions of businesses and individuals spurning notes and coins for contact-free payments, both in person and, increasingly, online. Although the coronavirus situation was sudden and unexpected, in this regard it merely sped up a phenomenon that was already underway. Nevertheless, in 2021, the vast majority of transactions around the world are still conducted using cash, meaning that there is still so much room for fintech to grow in importance and reach.
A growth industry
Fintech was still hit by the pandemic, as like almost every other sector, it was affected by the general decline in consumer spending and business investment, due to overall economic uncertainty. In 2019, global investment in fintech totaled $168bn. In 2020, this dropped to $105bn, which is a significant decline but still a very impressive figure. More important for the long-term investor is the forecast of around 20% compound annual growth in fintech over the 2020-2025 period, predicted to reach an overall market value of $350bn.
It’s also worth noting that 2019 would have been an exceptional year even without a pandemic on the horizon. Several major deals went through, such as the $3.5bn acquisition of Blackhawk Network by P2 Capital Partners and Silver Lake, and financial data and infrastructure firm Refinitiv being bought by the London Stock Exchange Group for $27bn. For obvious reasons, 2020 saw a pullback on such mega deals, but we have definitely not seen the last of them.
Adding fintech to your portfolio
Do your research and find out as much as you can about the leading fintech companies and promising newcomers. If you’re wondering ‘Why do share prices change?’, then go to the latest market analysis reports to look at underlying factors and trends. At the time of writing, digital banks are doing particularly well, while many big companies in other industries are investing in fintech capabilities to improve their business prospects.
As a fairly young industry, fintech can be volatile. It is not a field for investors with low risk tolerance, but it is an excellent prospect for long-term investors who are prepared to ride out the ups and downs. Stocks tend to be cyclical, moving in correlation with the wider economy, but this is not always the case. Some fintech businesses, such as those focusing on insurance, are less vulnerable to market forces than others.
Current and future trends
Even as multinational corporations look to invest in fintech solutions for their businesses, so specialist fintech providers are moving into new areas. These include real estate, general lending and cross-border payment services. Blockchain technology and cryptocurrency are moving even closer to the fintech mainstream, while the possibilities of artificial intelligence continue to be explored. AI, quantum computing and advanced analytics are expected to define the future directions in which fintech may grow.
We’re also increasingly seeing traditional banks and credit companies such as Mastercard and Visa reinventing themselves through fintech acquisitions as they realize that this may make the difference between survival and extinction. Big high-street names that ignore the fintech revolution will start to look like dinosaurs compared to the more agile and adaptable payment solution providers springing up around them.
A massive shift in how we conduct and manage our finances is already underway and is irreversible. However, it is only just beginning and still has a long way to go. Investing in fintech now means getting in on the ground floor. There is still volatility and there will be winners and losers. Buy wisely across a few companies, big and small, and you stand a good chance of coming out ahead.