Fintech is Big. And it’s getting even bigger
Innovative. Disruptive. Big. These are the common words thrown around to describe Fintech companies in the start-up scene.
But why is Fintech big?
The answer is two-fold; firstly, the financial services are one of the largest industries in the world. Its omnipresent nature is due to the ever growing need for financial services. These include transferring money, paying bills, making investments in the developed world and securing micro-financing in emerging markets. Secondly, while financial services are a necessity, the traditional providers of these services are rather opaque about pricing, bureaucratic in processing and in some cases, outright fraudulent (the latest being HSBC’s executive front running a client’s trade). These twin engines of high demand and a gap in quality of supply created a vacuum for Fintech.
Just last year, US$19 billion was poured into Fintech start-ups, up from US$2 billon five years ago. Such explosive growth in funding also means strong returns for investors who have since exited their investments. However, these Fintech investments were typically exclusive to Accredited Investors – defined as having more than S$2 million in net worth or S$200,000 in annual income. With reference to the “high risk, high return” rule of thumb, Accredited Investors, unlike retail investors, are deemed to have deeper pockets to take on investments with relatively more risk, as well as the corresponding exposure to the investment’s potential rewards.
Investing in Fintech for everyone
We are witnessing a stratospheric rise in Fintech investments in the private equity space, as well as huge excitement in the public markets. In response to this, NASDAQ and KBW, an investment bank, have created a Fintech index that will track publicly-listed Fintech companies, known as the KBW NASDAQ Financial Technology Index.
This will serve two purposes. First, setting a benchmark index will result in greater transparency of Fintech performance for investment analysis. This helps institutional investors to benchmark private investments, comparing them with the growth, valuations and expectations of public Fintech companies.
Next, there is an expectation that major asset management firms like BlackRock will create an ETF that tracks Fintech indexes. This will enable retail investors to benefit from the growth of these publicly listed Fintech companies. The advantages of investing in an ETF include its low cost and the diversification. For instance, the KBW NASDAQ Fintech Index consists of 49 Fintech companies, ranging from well-known payment Fintech firms like Visa to upstart credit marketplaces like LendingClub Corp.
Reminiscent of the Dutch Tulip Mania?
With so much hype and money being poured into Fintech, one can see similar parallels in the Dutch Tulip Mania of 1637, where one tulip bulb cost more than an entire house. With that in mind, the hottest Fintech companies with expensive P/E ratios will set off alarm bells for cautious investors. One pertinent example is LendingClub, which currently maintains an expensive P/E ratio of 371x.
That said, not all is doom and gloom. There are definitely some companies that may deserve the premium price tag. It will be interesting to see how far the Fintech industry will go, and how the world will evolve with it – will it replace banks? Or is it just a period of momentary hype much like the Dot Com bubble? While the ultimate success of Fintech remains to be seen, one thing is certain – financial services are here to stay.