Fintech - has really taken the market by surprise these past few months. Whether it be the creation of a new brokerage house, new financial service or a spin on traditional retail banking - in my mind the banks do not face a bigger threat than fintech related companies. This is one of the reason why I believe we can see a spur of acquisitions and big private equity deals emerging in the near future. By definition, fintech comprises many terms but usually includes technological innovations in the financial services and banking industry - some people even include bitcoin in this category.
The problem with banks?
The problem with banks and this was put well by a column in the Globe and Mail is that banks love process. They are not necessarily concerned with innovation. When was the last time the banks came up with a great idea besides mortgage backed securities (you’ll get that answer next week :)
Banks are interested in getting new clients, opening new accounts, getting new loans as these are techniques that have an immediate pay-off. When it comes to innovation however, they rather spend money acquiring a firm. This happened a few years back when Scotia acquired Tangerine for 2billion dollars. The transaction netted them over 1 million clients over night and this way they can slowly develop synergies, cut costs, raise fees and slowly boost the bottom-line for years to come. While I do not anticipate the banks going anywhere sometime soon (especially the big ones) taking a look Fintech does seem quite appealing. Online brokers like Questrade and WealthSimple have really taken off through their state of the art online interfaces and are taking away clients. Fintech reminds me of those developmental drug companies they strike gold with a great product and are scooped up for a hefty premium by the big dogs.
Investing in Fintech?
One of the problems I see with Fintech from the standpoint of retail investors is the fact that majority of the investments need to be sizeable and come from venture capital funds or institutional investors. A way around this is looking at companies that have their foot in the door in fintech based companies. An example of this would be PowerCorp run by the Desmarais family which actually has a 30billion dollar plus stake in WealthSimple. Another problem with fintech is differentiation. The majority of these firms invest in ETF’s only which are low cost investment products that are easy to purchase and offer tremendous diversification. They are a handful of services offering similar to products to a market in some cases that is already tapped. It will be interesting going forward if these new companies can differentiate themselves from the norm and develop a unique business model. The problem with people and money is that they are reluctant to change service providers – it takes a real idea to get people moving.
The reason why Fintech is very promising is because it its to use and navigate, takes a short time to set up and is relatively inexpensive. People are exhausted of getting burned by fees and this is one of the reasons why this field is going to grow.
Is this the future?
One of the things I see as a roadblock for the fintech industry is the rigorous security measures in place to keep data secure. With all the data hacks happening from Home Depot to Target - I think people are still hesitant to make the switch over. Traditional models will never be abandoned and when it comes to people’s money it seems we all have a small risk averse side to us no matter how bold we are. While fintech is just getting started - will it still be around in the future?