Fintech (financial technology) is one of the UK’s most thriving sectors, delivering financial services in fresh, innovative ways that compete with – and often “disrupt” – more traditional players and ways of doing business. The core of fintech is to improve the speed, ease, delivery and costs – often by using specialised algorithms and software built on PCs, smartphones and other portable devices. In this industry report, our team at Bure Valley Group outlines some of the latest trends and opportunities within fintech in 2022. We include some notable rising stars who are challenging the existing key players.
The fintech landscape in 2022
In comparison to other sectors, fintech has a relatively small global marketing capitalisation. Yet the rate of growth is impressive. Between 2010-18, the global market cap of financial services as a whole rose from $2,500bn USD to $3,300bn USD. In the same period, big tech increased from $2,100bn USD to $5,900bn USD (nearly triple growth). Fintech exhibited a sixfold growth rate, however, rising from $60bn to $360bn. Looking ahead, moreover, global fintech should reach a compound annual growth rate (CAGR) of 13.9% between 2022-2028.
The region expected to see the highest increase in fintech market penetration is Asia-Pacific, where the CAGR could reach 22.1% between 2021-2030. Regulators in this region – as well as Europe and the U.S. – still appear inclined to collaborate with rising fintech companies to help ensure that these new technologies have the maximum beneficial impact on their economies. The Global Financial Innovative Network (GFIN), for instance, was set up in 2019 by regulators and other bodies to help coordinate the efforts of over 70 organisations towards this goal.
Developing economies present especially significant opportunities for fintech growth. Countries like China, South Korea and India boast rapidly-improving infrastructure and rising middle classes – lending themselves to the digital transformation potential of fintech. One obstacle to this is the varied laws, standards and cultural norms across jurisdictions that can inhibit fintech market growth. Whilst there are positive signs of steps towards global inter-regulation e.g. GDPR and MiFID II), regulatory conflicts still hold back fintech growth potential. In the U.S., for example, the Dodd-Frank Act largely governs big U.S. banks whilst EU companies are subject to MiFID II. Whilst the two are related, they are still highly distinct.
Notable fintech segments
Fintech companies can, of course, be segmented geographically. Yet the word “fintech” is an umbrella term covering a range of solutions, technologies and potential customers. One notable segment is product type which can be split, at minimum, into API (Application Programming Interface – allowing integration with other, non-fintech products/services), AI (artificial intelligence), cryptography, distributed computing and blockchain. The latter, for instance, could be highly transformative in the coming years by eliminating third parties from financial processes and transactions – allowing for faster and cheaper operations.
Fintech can also be segmented by application. Payment is a common category, often involving the use of mobile phone apps to pay friends or merchants rapidly, using just a few taps on a screen. Stripe, for example, is an Irish-American fintech providing a suite of payment products for businesses. Asset management is another application type rising in global importance. 60% of traditional asset managers have expressed fear of losing part of their business to these rising tech stars (particularly due to competition on fees). Considerable opportunities still exist for these fintechs given that 34% of asset managers are yet to engage with one, and 69% of those that do anticipate a reduction in their own costs – which can then be passed down to the client.
Key players, opportunities & risks for investors
New fintech companies are entering the space all the time. Top manufacturers include Ant Financial, Adyen, Qudian, Xero, Sofi, Lufax, Avant, ZhongAn and Klarna. The first on the list – Ant Group – did not even exist eight years ago. Yet now it can claim to be the largest fintech in the world, offering its Alipay payments platform to over 700m users and completing $8tn transactions in one year alone (equivalent to nearly 65% of China’s GDP at the time). Klarna, on the other hand, recently gained the Fintech Germany Award for its development from a payment provider into a fully-fledged online shopping ecosystem.
Fintech offers investors the opportunity to access exciting companies with high growth potential. Many exist in “blue ocean” marketplaces where the competition is low (due to the huge range of niches available, which keep expanding as new technologies emerge). This allows investors to diversify their portfolios within both the financial and tech sectors – across multiple countries. Yet there are still risks to consider, despite the positive outlook ahead for fintech as a whole.
Tech failures, in particular, can make or break a fintech startup. Investors will need to conduct due diligence to ensure that the code is robust, unique and can maintain a sustainable competitive advantage. Fintech companies also rely on automation and machine learning to deliver services and make decisions (e.g. service eligibility). These can make mistakes, potentially even leading to unfair or discriminatory outcomes. Frequent, thorough internal audits of the software and algorithms will be necessary to help protect against this. Finally, investors should be especially mindful of fintechs that rely on cross-border transactions. Technology that works effectively in one country (e.g. the UK) may not necessarily work well in other places.
If you are interested in expanding your portfolio into these kinds of exciting spheres of investing, then we invite you to get in touch with us here at Bure Valley and to consider joining our exclusive investor network:
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