"The global fintech industry is at an inflection point and set to drive a major digital transformation in the financial services industry"
In just a few years, the fintech (i.e. the confluence of financial and technological innovation that facilitates banking and financial services) sector has gone from being virtually non-existent to a USD 120bn industry (in 2017). It's now poised to triple the global financial sector's average annual growth rate over the next eight years, with revenues reaching USD 265bn by 2025, according to our estimates.
This rapid expansion has been, and will continue to be, made possible by favorable supply and demand factors. On the supply side, the need for cost savings and the increased efficiency of fintech services are forcing incumbent financials to launch fintech services. This, coupled with strong interest from technology companies and a proven ecosystem, should increase the availability of fintech services.
On the demand side, we believe rapid urbanization and the need for financial inclusion will drive demand for fintech services that are centered around digital areas like mobility, cloud, analytics, social and emerging technologies such as blockchain and artificial intelligence (AI). Stronger demand from millennials, who are set to control an even greater share ofglobal wealth in the future, and favorable regulations, such as policies that aim to encourage financial inclusion, are other supportive factors.
Against the backdrop of strong demand and supply drivers, we believe the global fintech industry is at an inflection point, with industry adoption expected to take off. With more fintech public listings expected in the next 12–18 months, we believe fintech should gain more investor traction. In fact, our estimates of rising fintech penetration from low single digits to mid-single digits by 2025 may be very conservative, given the potential upside risk of a strong uptake in emerging markets.
With more than 10% revenue growth annually and moderate margin expansion due to rising scale benefits, we expect our fintech Long Term Investment theme to report low-double-digit earnings growth over the next few years (see chart). Such earnings growth would make it one of the fastest-growing industries globally.
Investors, in our view, will be best rewarded by investing in a diversified way in our theme of fintech companies, with a focus on payment industry leaders, technology companies launching disruptive fintech services and incumbent financial corporations with a clear fintech strategy. Additionally, companies that are able to create platforms with network effects around emerging technologies like AI, blockchain and analytics are also possible winners. Areas of particular potential include digital payments, insurtech (insurance), wealthtech (wealth management), capital markets tech and online landing.
At present, however, with fintech companies still mostly in the startup stage, private investing through venture capital (VC) funds remains the purest way to invest in the sector. Such funds are best equipped to identify promising companies and provide the necessary capital to help fintechs 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 lifecycle, 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, with the potential for high returns. But such investments naturally come with risk. For example, VC is essentially an opaque and illiquid market, in which the same amount of information is not available to everyone. Securing access to the best fund managers to mitigate these risks is paramount to maximizing the chances of success.
